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Large Cap Value Fund —
First Quarter Manager Commentary
1st Quarter, 2019
"We focus our intellectual capital on understanding long-term business values independent of market conditions. "

Economic Overview
Financial markets rallied in the first quarter of 2019, with performance for most indices more closely resembling annual returns. A more dovish Federal Reserve and optimism over the potential for a U.S.-China trade deal helped offset concerns about slowing economic growth. Overall, the S&P 500 gained 13.65%, its best quarter in nearly 10 years. Gains were broad-based, with all 11 sectors in the S&P 500 advancing at least 6%.
The latest economic data provided a mixed picture. Fourth quarter U.S. Gross Domestic Product (GDP) slowed to an annual rate of 2.2%. Rising consumer spending and business investment were partly offset by weaker housing data. February nonfarm payrolls came in below expectations, although the labor market remained quite healthy overall, in our opinion, with the unemployment rate at 3.8% and wage growth above 3%.
Portfolio Review
In the first quarter of 2019, the Harbor Large Cap Value Fund (Institutional Class) returned 12.09%, outperforming its benchmark, the Russell 1000® Value Index, which returned 11.93%.
Our process is not dependent on a specific market condition. We focus our intellectual capital on understanding long-term business values independent of market conditions. With that said, market conditions created a tailwind for short-term performance during the first quarter.
The Fund’s outperformance relative to the benchmark was due to both security selection and allocation. Stock selection in Financials and Health Care added relative value. An overweight in Information Technology also aided relative returns. Stock selection was weakest in Consumer Staples and an underweight in Energy also detracted from relative return. (Relative weights are the result of bottom-up security selection.)
We started 2019 with large overweights in Information Technology and Consumer Staples and large underweights in Communication Services and Utilities. Our sector weights generally change very little over the short run, as our selection criteria are more long-term in nature.
ANSYS, a leader in engineering simulation software, was a primary contributor to the Fund’s relative return. The company reported strong results for the quarter and full fiscal year, consistent with its 2020 objective of achieving sustained, double-digit revenue growth at industry-leading margins. During the quarter, ANSYS also acquired Granta Design, a company that enables customers to explore the impact different materials will have on the behavior of their products (e.g., metals, plastics, composites, and additives). This acquisition brings ANSYS into the adjacent vertical of materials simulation, an area that we believe will be increasingly important in manufacturing as products become more complex. We believe adding Granta technology to the ANSYS portfolio is a good example of a company enhancing its core technology while investing in next-generation innovation, which we view as a unique characteristic of the Pennsylvania-based company.
Diversified health care-oriented company Danaher was also one of the main contributors during the quarter. The company announced that it plans to acquire GE Biopharma, a leading provider of instruments, consumables, and software involved in the development and manufacturing workflows of biopharmaceutical drugs. Danaher expects the transaction to close at the end of 2019 and to be accretive in the first full year after acquisition. Since spinning off Fortive in 2016, and with the anticipated spin-off of its dental unit later this year, we believe Danaher has transformed itself into a major player in the life science and diagnostic market, along with a meaningful position in water filtration. For years, we have particularly admired the firm’s ability to acquire businesses, integrate them, and take them to new heights. Capital allocation decisions, coupled with the Danaher Business System (DBS), which aims to improve operating performance, remain key sources of sustainable competitive advantages for years to come in our opinion.
Sony, the maker of the PlayStation videogame console, was the primary detractor during the quarter. Shares of Sony declined after Google unveiled Stadia, a gaming service that allows players to bypass consoles and stream video games from the cloud into portable devices and smart TVs. As part of our continuous research of existing holdings, we spend time understanding competitors, customers, suppliers, and industry dynamics. As such, we will be closely studying how – and if – Stadia’s user base and business model have the potential to change the videogame industry over the years to come. However, we believe it is too soon to form any type of conclusion or to quantify a potential impact on PlayStation’s loyal base of more than 90 million users, as they continue their transition toward the subscription services and digital download options currently offered by Sony.
Walgreens Boots Alliance, the largest retail pharmacy destination across the U.S. and Europe, was one of the Fund’s main detractors. Walgreens has over 9,000 stores and processes over 20% of all prescription drugs in the U.S. Despite this scale, shares declined, as the pharmacy industry is encountering headwinds. While prices that pharmacies like Walgreens pay for generic drugs have been falling, the rates at which insurers reimburse them have been falling even faster. These headwinds have caused profit margins to decline in the near-term. The U.S. cough, cold, and flu season was relatively mild, which also hurt near-term results. Walgreens’ strategy of cultivating strategic partnerships (with AmerisourceBergen, LabCorp, FedEx, and Microsoft, to name a few) rather than a vertical integration approach, we believe, uniquely positions the company to thrive over the long-term in the shifting health care value chain.
Outlook
Although broad economic factors are taken into consideration as part of our analysis, we spend the vast majority of our efforts focusing on individual companies, seeking to identify businesses that, in our opinion, possess a combination of qualities that are both sustainable and difficult to reproduce.

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 harborfunds.com.

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.