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Small Cap Value Fund —
Fourth Quarter 2018 Manager Commentary
2nd Quarter, 2019
"We continue to position the Harbor Small Cap Value Fund based on the underlying fundamentals of individual companies and the growth prospects relative to what is currently reflected in the stock price. We will continue to manage the Fund in this fashion into the back half of 2019. "

Market in Review
During the quarter, the U.S. Federal Reserve (Fed) hinted at the possibility of rate cuts in the near-term and dismissed the possibility of any near-term rate hikes. While the Fed noted that the labor market remained strong, with near record low unemployment, it also noted that business fixed investment has been “soft” and that inflation is running below the Fed’s 2% annual target. In June, the Fed voted to maintain the federal funds rate in the range of 2.25% to 2.50%, but noted that uncertainties regarding its outlook have increased. Following the Fed’s comments, markets reacted and bond yields fell.
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 2.1% this year and 2.0% next year. Additionally, the Fed is calling for unemployment to fall to 3.6% this year, just below its March estimate of 3.7%. First-quarter 2019 GDP growth remained at 3.1%, and the unemployment rate ticked down to 3.7% in June from 3.8% in February, as the U.S. jobless rate held near a 50-year low. The U.S. 10-year treasury rate fell by about 0.4% to 2.00%, while the 30-year fell by 0.3%, as the inversion of the yield curve deepened slightly, indicating that that the market is concerned about future economic growth and believes inflation will continue to remain low over the long-term.
The U.S. small cap equity market, as represented by the Russell 2000® Value Index, added to its strong first quarter returns. Mixed economic news during the period led to dispersion across economic sectors. During the quarter, Industrials was the best performing sector within the index, while Energy was the weakest performer.
Portfolio Performance
In the second quarter of 2019, the Harbor Small Cap Value Fund (Institutional Class) returned 5.73%, outperforming its benchmark, the Russell 2000® Value Index, which returned 1.37%. Stock selection for the strategy was the primary driver of outperformance during the quarter, particularly in Health Care, Information Technology, and Materials.
Contributors and Detractors
Hexcel, a global leader in manufacturing advanced composite materials and structural parts for the commercial aerospace, space, defense, and industrial markets, was a notable contributor during the quarter. Shares rose approximately 17% on the back of a strong earnings report. In our view, Hexcel is likely to continue to deliver solid earnings growth over the next couple of years, driven by higher commercial aerospace sales, as large backlogs of more than $10 billion at Boeing and Airbus convert to revenue. Newer aircraft models have increased consumption of carbon fiber, which could further increase revenue and expand margins for Hexcel. In our view, the company’s primary markets – commercial and military aerospace and wind energy – are growing much faster than the overall economy. As a result, we believe Hexcel is likely to benefit as a market supplier and primary partner of the industry leaders.
Relative detractors during the quarter included Medical Properties Trust, a real estate investment trust (REIT) specializing in acute-care, community, and rehabilitation hospitals. The company provides long-term net leases to hospital operators. The stock was subsequently sold in the quarter.
Buys and Sells
We established a new position in STAG Industrial during the quarter. STAG is a REIT focused on the acquisition and operation of single-tenant, industrial properties throughout the U.S. We believe the market is not giving the company enough credit for growth opportunities in the medium term, and that STAG represents an attractive risk/reward trade-off.

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.