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Small Cap Growth Opportunities Fund —
Fourth Quarter Manager Commentary
2nd Quarter, 2019
"We remain committed to our longstanding process that focuses on identifying individual companies with attractive fundamentals. "

Market in Review
The domestic equity markets experienced wild swings during the second quarter of 2019, and at the end of the period, most indices posted solid gains, with larger stocks performing better than smaller stocks. April returns were broadly positive, and corporate earnings were generally favorable. Investors responded well to earnings reports as stock prices continued their advance. As earnings season concluded, daily news from individual companies gave way to macro-related headlines, and investors’ moods soured. The month of May proved to be a difficult period for equities as the downdraft in prices took away the favorable gains generated during the month of April. As we have been discussing for several letters going back to last year, worries over trade negotiations with China dominated headlines and significantly contributed to deteriorating sentiment. Further, when President Trump added Mexico to his tariff rhetoric, investors reacted negatively, fearing that a policy mistake could potentially trigger a global recession.
Many market pundits seem to expect a slowdown in global growth rates, and the fundamental news in June did not provide many counterpoints to that view. Nonetheless, equities rallied sharply in June, retracing and surpassing May’s losses. During this time, the view toward U.S. Federal Reserve (Fed) policy shifted, with many now expecting a dovish tilt at the Fed regarding monetary policy. We believe that this perception change was the primary force behind the equity rally that, in our opinion, was robust for a relatively narrow group of stocks.
Portfolio Performance
In the second quarter of 2019, the Harbor Small Cap Growth Opportunities Fund (Institutional Class) returned 1.09%, underperforming its benchmark, the Russell 2000® Growth Index, which returned 2.75%.
It was a discouraging finish to the quarter for our strategy because as of May 15th, the Harbor Small Cap Growth Opportunities Fund ("Fund") was outperforming the benchmark for both the quarter and year-to-date periods. During the final six weeks of the second quarter, the relative underperformance had little to do with news or fundamental developments regarding the Fund’s holdings. Having observed markets for quite some time, we would point out that the relative intraday volatility versus our benchmark was historically high during this time; often, we saw daily swings of 30 to 50 basis points versus the benchmark. From our historical perspective, it is unusual to see such large relative intraday swings consistently without corresponding fundamental developments, which tells us that many market participants were actively trading positions based on non-fundamental factors.
Contributors and Detractors
Invacare, a manufacturer and distributor of medical equipment, was a weak stock, despite the company’s reporting results that were essentially in line with analysts’ estimates. The company displayed excellent operating cost control, in our view, and as a result, operating income was stronger than modeled. While Invacare sources some components overseas, we believe that investors’ concerns regarding margin pressure from new tariffs are misplaced as the company has some ability to pass along those costs, should higher tariffs actually become effective. We added modestly to this position on weakness. Evolent Health, a leading provider of health care solutions to hospitals and health systems, was another weak stock, despite the company’s reporting operating results that were slightly better than anticipated. The company made an immediately accretive acquisition in late May that investors disapproved of, and the shares sold off over the balance of the quarter. We think the transaction rationale is logical, and we believe that this rather small acquisition has overly influenced investors’ valuation of the company. We added to our position on price weakness as we continue to believe that the company’s fundamentals are intact.
Conversely, Synchronoss Technologies, a software company focused on applications including cloud management solutions for telecommunications carriers, was a positive stock for the Fund during the quarter. The company has continued to grow revenues ahead of expectations, and the company’s Openwave acquisition is beginning to contribute materially to revenues. Sales initiatives to new clients have been successful, recently landing Amazon as a new relationship. At the company’s analyst day in June, management unveiled a rich product offering that we believe could accelerate the company’s growth prospects. We added to this position during the quarter. Electronics for Imaging, a leading manufacturer of digital printers, was another contributor to relative performance during the quarter. The company accepted a private equity merger offer, and we reduced our position following that news. Maxar Technologies, an integrated satellite manufacturer and service provider, was also a strong stock for Fund. The company reported better operating results, led by its imaging division, and later in the quarter, Maxar was awarded part of the National Aeronautics and Space Administration’s Lunar Gateway program, which we believe could contribute nicely to results beginning this year. We continue to hold our position in these shares.
Buys and Sells
We initiated a position in Verra Mobility, which is an outsource provider in the U.S. and Europe for smart mobility services, for both local municipalities and commercial providers. Verra’s government services include cameras for red light and school zone compliance, and the company recently won a New York school contract that we believe materially accelerates this segment’s revenue growth. The commercial segment is primarily tolling compliance for rental cars, commercial fleets, and trucking companies. We believe new client wins in Europe are lifting this segment’s growth opportunities.
R1 RCM, which provides revenue cycle management for health care providers in the U.S., was trimmed at the end of the quarter as it hit our target price and was fully valued based on 2020 estimates.
Our investment process does not select investment opportunities based upon top-down macro events/themes; rather, we remain committed to our longstanding process that focuses on identifying individual companies with attractive fundamentals, and we look forward to the weeks ahead when earnings reports differentiate investors’ perception of our holdings.

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.