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Strategic Growth Fund —
A strong quarter for U.S. equities
2nd Quarter, 2018
"While it may be unnerving to some investors, market volatility may provide opportunities to increase the Fund's return potential. "
– Mar Vista Investment Partners, LLC

The combination of healthy labor markets, improving corporate earnings and tax reform benefits drove strong equity market performance during the second quarter of 2018. Energy companies and investments in trendy areas of the market such as high-beta technology stocks significantly outperformed, while Industrials declined over trade concerns. As the bull market enters its 10th year, capital continues to crowd into a select group of dearly valued Information Technology companies.
The Harbor Strategic Growth Fund returned 2.22% in the second quarter, underperforming its benchmark, the Russell 1000® Growth Index, which returned 5.76%. The Financials sector was the largest detractor from relative performance, due to an overweight and stock selection. Information Technology also weighed on relative returns, due to stock selection and an underweight. Energy made the greatest contribution to relative performance, due to a favorable overweight. The Fund’s sector weightings, however, are purely a residual outcome of the bottom-up stock selection process.
Mar Vista’s comments were made in a July, 2018 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2018, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2018.

Interview Highlights


Market Conditions Were Unfavorable for Our Strategy
The market conditions in the second quarter were less favorable to our investment approach as the concentration of the Russell 1000® Growth Index in Information Technology and Consumer Discretionary is at extreme levels that we have not seen since the tech bubble of the early 2000s. Valuations and better long-term risk-reward opportunities outside of these two sectors have led to our materially different portfolio composition for the Fund compared to the growth-oriented benchmarks. In addition, as a narrowing group of high-growth, dearly valued stocks have generated investor enthusiasm, other steady, cash-compounding enterprises trading at favorable discounts have been cast aside.
Sector Exposures Remained Steady
The Fund’s largest underweight and overweight sector exposures versus the benchmark remained the same from the beginning to the end of the quarter. The largest overweights were Financials and Industrials, while the largest underweights were in the traditional growth sectors of Information Technology, Consumer Discretionary and Health Care. Our 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.
Volatility May Translate to Opportunity
The Fund’s average discount to intrinsic value declined slightly in the second quarter, to 9%. 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. Elevated volatility will likely continue, in our view, due to the headwinds from tighter monetary policy and global trade tensions. While it may be unnerving to some investors, market volatility may provide opportunities to increase the Fund’s return potential.

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.