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Mid Cap Growth Fund —
U.S. mid cap equity markets prospered once again
3rd Quarter, 2018
"Macro events can affect short-term performance, but typically we believe that security selection should drive performance over the longer term. "
– Wellington Management Company LLP

U.S. mid cap equities rose in the third quarter of 2018, driven by exceptionally robust earnings growth and broad-based strength in the economy. The U.S. outperformed all other developed markets, as its stock market recorded the longest bull market in history after the S&P 500 Index capped nine and a half years without a decline of 20% or more. Earnings growth for the S&P 500 Index in the second quarter was 25% — the highest since the third quarter of 2010. Eighty percent of companies in the index reported actual earnings that exceeded estimates.
Growth stocks generally outperformed value stocks during the third quarter of 2018. The Harbor Mid Cap Growth Fund returned 7.42%, performing in line with its benchmark, the Russell Midcap® Growth Index, which returned 7.57% during the quarter. That compared to a 3.30% return for the Russell Midcap® Value Index. Stock selection in Health Care benefited relative performance. In Information Technology, security selection also contributed to relative results. In contrast, stock selection and an overweight in Consumer Discretionary had a negative impact on relative performance. The Fund’s sector weightings, however, are purely a residual outcome of the bottom-up stock selection process.
Wellington Management’s comments were made in an October, 2018 report. Highlights adapted from the report appear below. All comments relate to the quarter ended September 30, 2018, unless otherwise indicated. All references to the year-to-date are for the period January 1 through September 30, 2018.

Interview Highlights


Interest Rates Raised in Response to Upbeat Assessment of U.S. Economy
U.S. mid cap equities advanced during the third quarter, while mid cap growth equities posted their 12th consecutive quarterly gain. The Federal Reserve presented an upbeat assessment of the U.S. economy in its semiannual Monetary Policy Report, downplaying the risks to economic growth from trade disputes and reaffirming expectations for gradual increases in interest rates. The U.S. Federal Reserve raised its real Gross Domestic Product (GDP) growth forecast to 3.1% for 2018, up from its prior forecast of 2.8% in June, and raised short-term interest rates by 0.25%. The Fund’s investment style, including an overweight exposure to growth, was a tailwind during the third quarter.
Investment Style Remained Beneficial Facing Macro Events
During the period, we eliminated positions in the Fund where our level of confidence in the company’s growth trajectory had waned. In particular, we focused on reducing our weight in companies that had significant revenue exposure to China that we believed would be negatively impacted by impending trade tariffs. China’s proposed tariffs on jewelry imported from the U.S. have us concerned, and our internal risk/reward analyses of some firms are not looking as attractive they had prior to the start of the third quarter. While it is always difficult to measure exactly how much macro level events affect the Fund given our fundamental process, we focus our investments on companies that we believe can provide growth in various macro environments and that are insulated (to a certain degree), in our view, from potential trade tensions. Macro events can affect short-term performance, but typically we believe that security selection should drive performance over the longer term.
Outlook Remains Cautiously Optimistic
We have not made any wholesale changes to the Fund based on our current macro outlook, which we continue to be positive on. We view our current opportunity set as broad and are finding compelling ideas across sectors of the market. We are selling companies whose earnings are more fully reflected in prices to fund new stock purchases, and doubling down on investment themes where we are most differentiated. If anything, we are a bit more cautious on rising trade tensions between the U.S., China and various other countries, and the impact an increase in trade rhetoric could have on global equity markets. We are remaining vigilant on this front. We trimmed positions with high revenue exposure, where we may not have had as much differentiation relative to consensus expectations compared to other positions in the Fund.

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.