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Small Cap Growth Opportunities Fund —
Fund outperforms as U.S. stocks rally through concerns about trade
3rd Quarter, 2018
"In this potentially volatile environment, it is important to reiterate that we continue to stay disciplined and committed to our longstanding investment style and process. "
– Elk Creek Partners, LLC

Once again, U.S. equity markets performed well during the third quarter of 2018. Macroeconomic data continued to be robust, and the strength of economic activity continued to be broad-based, benefiting multiple sectors. Corporate earnings reports were strong and, broadly speaking, greeted favorably by investors. The Manager believes revenue results for many companies were better than expected, and that lower tax rates continued to benefit results compared to the year prior. With a strong U.S. Dollar, foreign currency translation was a frequent topic on recent earnings calls, and recognized as a headwind to results from overseas. With Congressional midterm elections to be held in November, 2018, the Manager believes they could become a source of investor anxiety. Within the U.S. small cap growth universe, as measured by the Fund’s benchmark, the Russell 2000® Growth Index, nearly all sectors advanced.
Against this backdrop, the Harbor Small Cap Growth Opportunities Fund returned 7.99% during the third quarter, outperforming the benchmark, which posted a return of 5.52%. In sector terms, stock selection in Health Care was the key driver of outperformance. Stock choices in Consumer Staples, Telecommunication Services and Energy contributed substantially to relative results. An overweight to Telecommunication Services, the benchmark’s strongest sector during the quarter, was also beneficial. In contrast, security selection in Industrials and, to a lesser extent, Information Technology, weighed on relative performance.
Elk Creek Partners’ 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

Sticking to Growth Opportunities
Volatility returned to U.S. markets in early 2018, and continued through the end of the third quarter, so market conditions remained favorable for fundamental active growth managers, which helped the Fund outperform. During the reporting period, we reduced some positions due to price appreciation, and we exited some positions entirely upon achieving price targets. That is consistent with our typical behavior. The Fund’s sector weightings are purely a residual outcome of our bottom-up stock selection process, but our sector weightings have not dramatically changed in 2018. Approximately 80% of the portfolio is invested in the four sectors: Information Technology, Health Care, Industrials and Consumer Discretionary. In our view, those groups represent a majority of the growth in the benchmark.
Trade Spat Continues to Escalate, but Investor Worries Dissipate
During the third quarter, international trade tensions remained a market theme, as both the U.S. and Chinese governments enacted more tariffs. When tariffs were initially raised earlier this year, markets were quite volatile, and investors seemed nervous about potential negative consequences of higher barriers to global trade. In our view, while those concerns linger, investors are not as anxious about potential economic contraction from rising trade barriers. We believe that while tariffs are broadly considered a headwind to growth, the perceived magnitude of that headwind—and its ability to disrupt current growth—has changed.
Looking Ahead With Optimism Despite Some Concerns
As the final quarter of the year begins, equities have performed well year-to-date, providing investors with a boost of optimism. Even with that positive backdrop, investors are definitely treating sectors differently. Some areas of the market, such as transportation stocks, seem to have made investors more anxious, and concerned about continued earnings growth. In other areas with underlying cyclicality, within Information Technology for example, valuations are near all-time highs, and investors do not seem as anxious about the potential deceleration of earnings growth. In this potentially volatile environment, it is important to reiterate that we continue to stay disciplined and committed to our longstanding investment style and process. We remain optimistic about the fundamentals of the holdings in the portfolio, and we look forward to upcoming earnings reports.

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.