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Strategic Growth Fund —
A strong bull market and records achieved in the third quarter of 2018
3rd Quarter, 2018
"Our investment emphasis on owning compounding business models is well suited for volatile political environments. "
– Mar Vista Investment Partners, LLC

Although the 10-year Treasury climbed above 3% and oil prices exceeded $70 per barrel, strong corporate earnings growth and low interest rates have helped fuel the longest running bull market in modern financial history. Several equity market records were achieved this quarter, including Apple’s and Amazon.com’s eclipsing of the $1 trillion market capitalization milestone for the first time. Corporate profit growth of more than 20% in the first half of 2018 has kept equity valuations in line with historical averages.
In the third quarter of 2018, the Harbor Strategic Growth Fund returned 6.96%, underperforming its benchmark, the Russell 1000® Growth Index, which returned 9.17%. Energy was the largest detractor from relative performance, due to an overweight position and stock selection. The Fund’s sector weightings, however, are purely a residual outcome of the bottom-up stock selection process. Conversely, the Fund’s relative performance benefited from stock selection in Consumer Discretionary.
Mar Vista’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


Trade Concerns Triggered a Decline in Industrials
Based on the Russell 1000® Growth Index and the S&P 500 Index, Energy companies and investments in trendy areas of the market such as high beta Information Technology stocks significantly outperformed during the period, while Industrials declined over trade concerns. As the bull market entered its 10th year, capital continued to crowd into a select group of dearly valued technology companies. The strengthening U.S. economy and unprecedented fiscal stimulus have been key factors underpinning the market’s ascent. As we head into the final quarter of the year, trade tensions with China and rising interest rates will be important risks to monitor.
Sector Allocation Independent of Benchmark Weighting
The Fund’s largest overweights versus the benchmark at the end of the third quarter were in Financials and Industrials. The largest underweights continued to be in the traditional growth sectors of Information Technology, Consumer Discretionary and Health Care. The Fund’s portfolio construction process focuses on bottom-up factors independent of benchmark weights. The resulting sector exposures represent the areas in which we are finding skewed risk/reward opportunities in serial compounders, and are not an expressed opinion on the sectors from a macro level.
The Fund’s Investment Emphasis Well Suited for Political Volatility
The Fund’s average discount to intrinsic value declined to 6% this past quarter. This is lower than the typical discount we receive when investing in new companies. As a result, we believe that future returns should closely correlate with our companies’ abilities to compound their intrinsic values. Our investment emphasis on owning compounding business models is well suited for volatile political environments. We will continue to allocate capital to these businesses that we believe to be competitively advantaged when they trade below our estimates of intrinsic value.

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.