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Mid Cap Value Fund —
Stocks continue to rally, but value lags growth
3rd Quarter, 2018
"Value stocks are trading at significant discounts to their growth counterparts. Given current valuations, the Fund is well positioned, if and when the value style returns to favor. "
– LSV Asset Management

U.S. equity markets rallied in the third quarter of 2018, bolstered by record corporate earnings, continued economic growth and progress on trade negotiations. Second quarter corporate earnings increased 27% year-over-year, while second quarter Gross Domestic Product (GDP) growth recorded a 4.2% annual gain. Unemployment remained at historic lows, and consumer and business spending increased in the quarter. The S&P 500 Index advanced 7.71%, its best quarterly gain in four-plus years. Large cap stocks outpaced mid cap and small cap equities, and value stocks continued to lag across all market cap segments.
During the third quarter of 2018, the Harbor Mid Cap Value Fund advanced 1.08%, underperforming the Fund’s benchmark, the Russell Midcap® Value Index, which advanced 3.30%. Stock selection drove relative underperformance, and sector allocation also detracted. Stock choices in Information Technology were the largest drivers of relative underperformance, though favorable above-benchmark exposure to the sector lessened its negative impact. The Fund’s sector weightings are purely a residual outcome of the bottom-up stock selection process.
Stock selection and an overweight in Consumer Discretionary weighed substantially on relative results, along with stock selection and an underweight in Industrials. Health Care also hindered relative performance, due to both stock choices and an unfavorable underweight. Conversely, stock selection in Financials benefited relative results substantially.
LSV Asset 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

A Difficult 2018 for Mid Cap Value Stocks
Mid cap value stocks continued to struggle, ending the period trailing mid cap growth stocks by more than 4%, and more than 10% year-to-date, as measured by various Russell indexes. This had a negative impact on the Fund, given our deep value bias. Many of our highest ranked companies have been punished over the past six months, despite the fact that, in our view, their fundamentals, forward earnings and cash flow estimates remain intact. For example, stock choices in the Information Technology sector dragged on returns during the third quarter. Within the sector, we find semiconductor equipment and semiconductor stocks to be attractive. However, just as they did in the second quarter, the Fund’s holdings in the semiconductor equipment industry struggled, as concerns about a down cycle in the chip industry had a negative impact. Based on our valuation indicators, these companies remain attractive as long-term investments.
Following Our Formula to Find Value
We rely heavily on cash flow and earnings indicators in evaluating a stock, and we initiated a position in Allison Transmission, which ranked highly by both measures, during the quarter. The company, which designs and manufactures transmissions for commercial and defense vehicles, does not necessarily appear cheap by book value, and does not pay a notably large dividend. However, its earnings and cash flow are attractive to us, and its price momentum appears very strong, with improving margins and strong growth in both sales and earnings. The company is also aggressively buying back shares, which we see as a very positive indicator.
Consumer Discretionary and Financials at the Forefront
We do not position the Fund based on macroeconomic factors, but seek individual stocks that are undervalued. That said, throughout the year, we have increased the Fund’s overweight to Consumer Discretionary. We have found attractive stocks across the sector, including auto parts, department stores, apparel retail and automotive retail companies. The Fund’s overweight to Financials has also increased since the beginning of the year, primarily because the benchmark was rebalanced. The Fund is now near its maximum overweight to Financials.
Well Positioned for the Long-Term
It has been a difficult 2018 for value investors. The companies we hold in the Fund have generated strong cash flow and earnings, and in general, there has been no deterioration in their fundamentals. Yet, many have struggled in this environment. While it is difficult to time growth and value cycles, value stocks are trading at significant discounts to their growth counterparts. Given current valuations, we believe the Fund is well positioned, if and when the value style returns to favor.

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.