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Small Cap Value Fund —
Fourth Quarter 2018 Manager Commentary
1st Quarter, 2019
"Following the sell-off in December of 2018, investors tended to be more focused on fundamentals and earnings coming into 2019. That tends to be a favorable environment for the Fund. "

Economic Overview
The U.S small-cap equity market bounced back from negative returns at the end of last year to advance during the first quarter of 2019. The U.S. Federal Reserve (Fed) abruptly changed the near-term outlook for interest rates. In response to a slowing global economy, it signaled early in the quarter that it would pause its recent string of interest rate increases. In March, the Fed followed through and unanimously voted to maintain the federal funds rate in the range of 2.25% to 2.50%, noting that it will be “patient” as it considers future rate changes. Further, the Fed stated that it will reduce the pace at which it sells off its Treasury holdings, also in an effort to keep interest rates from rising too quickly. Whereas the Fed was projected in December 2018 to raise interest rates twice in 2019, it signaled that there will likely be no rate hikes for the rest of 2019, and the market took it a step further by pricing in at least one rate cut in 2019 in response to slowing economic indicators. Fed officials continued to maintain a generally optimistic stance on the U.S. economy, but cautioned that growth may be slowing, and noted that they expect U.S. Gross Domestic Product (GDP) to expand by 2.3% in 2019 and 2.0% in 2020. The U.S. 10-year Treasury rate briefly fell below the three-month rate for the first time since 2007. This inversion of the yield curve indicates that the market is concerned about future economic growth and believes inflation will remain low over the long-term.
Portfolio Review
In the first quarter of 2019, the Harbor Small Cap Value Fund (Institutional Class) returned 13.18%, outperforming its benchmark, the Russell 2000® Value Index, which returned 11.93%.
Following the sell-off in December of 2018, investors tended to be more focused on fundamentals and earnings coming into 2019. That tends to be a favorable environment for the Fund. Within the benchmark, there was a wide dispersion of performance between economic sectors in the quarter. Information Technology was the best performer, amid the announcement of positive trade developments. Consumer Staples was the worst-performing sector. Stock selection was positive in the majority of the sectors over the quarter, particularly in Industrials—the largest contributor on a relative basis—as well as Health Care and Consumer Discretionary. A favorable underweight to Consumer Discretionary also bolstered relative returns. In contrast, an underweight to Real Estate was a substantial detractor from relative performance, along with a combination of stock choices and positioning in Materials. Macro level events had little impact on the Fund’s performance during the quarter.
A position in Sanmina was a contributor to relative performance. A global electronics manufacturing services provider that serves original equipment manufacturers (OEMs) in technology-driven industries such as communication networks and computer hardware and storage, Sanmina has nearly 80 manufacturing facilities and is one of the largest independent manufacturers of printed circuit boards and backplanes. During the first quarter, investors rewarded Sanmina for delivering robust results across several of its business segments. The company reported a year-over-year 25% increase in revenue, exceeding the high end of market expectations. Sanmina’s continued efforts to improve component lead times and meet consumer demand helped drive shares up approximately 19%. As the market for more complex and integrated component solutions expands, we believe Sanmina is well positioned to continue benefiting from OEMs outsourcing their advanced product requirements. Given what we view as the firm’s operating discipline and strong customer base, we believe Sanmina has further potential to improve margins and drive earnings.
Conversely, shares of Darling Ingredients weighed on relative results. A developer and producer of sustainable natural ingredients sourced from both edible and inedible bio-nutrients, the company offers customized specialty solutions for customers across several industries, including pharmaceuticals, food, pet food, and fertilizer. Operating worldwide, Darling Ingredients converts animal by-product streams into specialty ingredients such as collagen, edible fats, and animal proteins. The company finished a strong year despite facing unfavorable currency changes and a fuel production halt within its Diamond Green Diesel (DGB) initiative. During the first quarter, Darling Ingredients reported flat earnings and a 3.3% year-over-year increase in raw material volumes, and shares advanced approximately 12%. In our view, recent expansion projects have given the company the opportunity to meet rising global demand for the firm’s specialty collagen product, Peptan. Additionally, we believe that in creating a unique raw-material supply chain for its DGB partnership, Darling Ingredients has further potential to generate record amounts of renewable energy and improve earnings.
Among the largest detractors in the quarter was property and casualty insurer, United Fire Group, Inc., which declined over an increase in commercial auto related claims. Going forward, the company is well positioned across its various insurance business lines. Additionally, the manager added to the position over the quarter.
Relative to the benchmark, the Fund was overweight to the Industrials and Information Technology sectors. The portfolio is positioned this way as we have found more attractive individual opportunities there, compared to other sectors. Our views on the names in the portfolio remain consistent, and the portfolio continues to maintain healthy overweights, reflecting our conviction in the holdings.
We initiated a position in South State Bank, the largest bank based in South Carolina and a subsidiary of South State Corp. It had $14.5 Billion in assets and 165 branches. Meanwhile, we sold shares of Sterling Bancorp, the New York-based bank holding company for Sterling National Bank, which provides various banking products and services to commercial, consumer, and municipal clients in the U.S. We sold the stock due to market-cap appreciation.
EARNEST Partners does not have a formal outlook on the market and is always optimistic about the prospects of the individual opportunities in the portfolio over a full market cycle. As a bottom-up, fundamental manager, EARNEST does not have a formal view on the U.S. economic environment, nor do we have a view on short-term expected returns for U.S. equities. There were no new themes or trends introduced into the portfolio during the first quarter. We continue to position the portfolio based on the underlying fundamentals of individual companies, and their growth prospects relative to what is currently reflected in the stock price. We will continue to manage the portfolio in this fashion in 2019.

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.