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Capital Appreciation Fund —
U.S. equity markets advanced in the second quarter
2nd Quarter, 2017
"Although stock prices of many large holdings have appreciated strongly this year, we believe their valuations remain attractive. "
– Jennison Associates LLC

U.S. equity markets advanced in the second quarter of the year, as corporate earnings continued to grow against a backdrop of moderate U.S. economic growth. Inflation remained benign, with oil prices again falling on higher inventories despite the onset of the summer driving season. With unemployment low, wage gains steady, and the overall U.S. economy healthy, the Federal Reserve raised the federal funds rate another 25 basis points, to a target of 1.00%–1.25%. Longer term interest rates declined modestly, reflecting the likelihood that fiscal stimulus would be longer in coming than markets anticipated at the beginning of the year and that longer term inflationary prospects appeared to be contained.
The Harbor Capital Appreciation Fund returned 6.00% during the second quarter of 2017, outperforming its benchmark, the Russell 1000® Growth Index, a measure of larger, growth-oriented U.S. companies, which had a return of 4.67%. The S&P 500 posted a return of 3.09%. Overall, stock selection contributed to relative performance. From a sector perspective, security selection in the Information Technology sector benefited relative results, as did stock selection in the Consumer Discretionary sector. In contrast, stock selection and an underweight position in Health Care detracted from relative performance. An overweight position in the Energy sector and stock selection in the Financials sector also hindered relative results.
Jennison Associates’ comments were made in a July, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2017, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2017.

Interview Highlights

Economic Growth in the U.S. Looks Durable to Us
Economic growth in the U.S. looks durable to us at its present rate through the rest of the year, although declining automobile production, a weaker U.S. Dollar, and limits to further job growth could pose risks. The positive outlook for corporate profits continues to reflect stable demand patterns, with little near-term inflationary pressures. Washington remains a significant uncertainty. Health care reform, a continuing funding resolution, raising the debt ceiling, and a budget resolution are hefty issues to be addressed before October’s fiscal year end and necessary precursors to progress on tax reform or fiscal stimulus.
We Examine Company and Industry Prospects Over the Intermediate and Long-Term
As fundamental, bottom-up investors, we examine company and industry prospects over the intermediate and long-term. Numerous factors, including company fundamentals, macroeconomic conditions, and market risk tolerance, cause variability in the way equity markets price securities in the short-term. We constantly assess if and how these factors affect our investment thesis and company long-term value. We believe macro level events in the quarter did not materially impact the underlying fundamentals of companies held in the Fund. During the period, the market’s increased focus on company fundamentals favored our investment approach.
We Believe Valuations Remain Attractive
Companies held in the portfolio have posted well above-average earnings growth through the halfway mark of 2017, and we believe they can continue to perform well fundamentally through the rest of this year and next. Although stock prices of many large holdings have appreciated strongly this year, we believe their valuations remain attractive. As the price gains of many of these companies failed to keep up with their underlying growth last year, they began 2017 with above-average valuation expansion potential, in our view.

Performance data shown represents past performance, which is no guarantee of future results. Current performance may be higher or lower than the past performance data shown. Investment returns and the value of an investment will fluctuate, and an investor's shares, when sold, may be worth more or less than their original cost. You can obtain performance data current to the most recent month-end (available within seven business days after the most recent month-end) by calling 800-422-1050 or visiting

Performance figures discussed reflect that of the institutional class shares.

The views expressed herein are those of the portfolio manager at the time of the interview and may not be reflective of their current opinions or future actions.  These views are not necessarily those of the fund company and should not be construed as such.

This information should not be considered as a recommendation to purchase or sell a particular security and the holdings or sectors mentioned may change at any time and may not represent current or future investments.