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Small Cap Growth Fund —
The U.S. equity market rose in the third quarter despite global trade tensions
3rd Quarter, 2018
"We are taking the opportunity on any pullback to add to our highest quality companies. "
– Westfield Capital Management Company, L.P.

Equity markets continued their advance in the third quarter, rising in the face of increasingly loud political rhetoric concerning matters of trade between the U.S. and its biggest trading partners. Aside from select industries, the domestic economy at large and broad U.S. equity indices digested the rising tensions with relative ease as the fundamental underpinnings of both economic and market activity remained resilient. However, the current U.S. economic growth trajectory is not without risk as rising interest rates and inflationary pressures mount within the economy, but evidence of stress in the system remained largely absent during the quarter.
The Harbor Small Cap Growth Fund returned 7.46% during the third quarter of 2018, outperforming its benchmark, the Russell 2000® Growth Index, which returned 5.52%. Stock selection in Industrials, Consumer Discretionary and Energy contributed to relative performance. In contrast, security selection in Health Care detracted from relative results.
Westfield Capital Management Company’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


Stock Selection Drove Outperformance Despite Style Headwinds
Similar to the market conditions in the second quarter of 2018 and year-to-date, fundamental leadership for the third quarter was driven by companies that we consider to be relatively expensive and lower quality. We are typically underweight these "expensive" and "low-quality" groups. Additionally, momentum has been the top-performing factor year-to-date, which is also a headwind to our growth at a reasonable price (GARP) style. These factor headwinds were most pronounced in August, when the Fund was unable to keep up with the benchmark despite delivering a positive absolute return. Nevertheless, positive stock selection drove the Fund’s relative outperformance during the quarter. Importantly, the majority of the Fund’s relative outperformance was in September when the market corrected.
We Remain Focused on High-Quality Domestic Companies
We continue to believe the U.S. is the best place to invest, and domestic economic data remains encouraging. Given this view, we believe that U.S. companies with a greater domestic orientation and less debt are, on the margin, more attractive. Within the small cap universe, we continue to look for companies with the best earnings growth rates, improving operating margins and misunderstood franchises where we project meaningful improvement in free cash flow growth. We are taking the opportunity on any pullback to add to our highest quality companies.
We Are Closely Monitoring Global Risks
We are closely monitoring a China slowdown as it relates to global automobile weakness, trade, cybersecurity and a potential military threat. We continue to see signs of global growth slowing and are carefully watching a potential emerging market contagion given a strong dollar, rising interest rates and oil prices.
Strong U.S. Economy Balances Market Uncertainty
Risks currently appear balanced, with strong domestic economic activity offsetting policy uncertainty, mid-term elections and fears about slowing global growth. U.S. consumers remain on solid footing, supported by a robust employment picture and slowly rising wages. Corporations also look healthy as profit margins and corporate earnings growth exceed expectations. We believe interest rates will continue to grind higher and that inflation will likely rise faster than market participants currently project. Despite these risks, we maintain conviction in our ability to add value in this type of market environment.

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.