Download Harbor Mid Cap Value Fund

Harbor Mid
Cap Value Fund
1st Quarter, 2017 Commentary
Josef Lakonishok, Ph.D.
"After finishing strong in 2016, value stocks lagged in the first quarter of
2017 across all market cap ranges in the U.S. This had a negative impact
on the Fund given our deep value bias." -LSV Asset Management
Markets hit all-time highs amid shift toward growth
Menno Vermeulen, CFA
Puneet Mansharamani, CFA
Greg Sleight
Guy Lakonishok, CFA
U.S. equities started the year strong, with the S&P 500 Index reaching all time highs during the
first quarter of 2017. The S&P 500 advanced 6.07% for the period. Markets were supported by
positive macroeconomic data, including strong employment numbers, as unemployment fell
to 4.7%. Despite the Trump administration’s failure to pass health care legislation, investors
appeared to remain optimistic regarding the administration’s ability to implement plans to
lower taxes, decrease regulatory burdens and increase domestic spending. Given the positive
macroeconomic outlook, the Federal Reserve raised rates by 25 basis points in March, with the
expectation of additional rate increases this year.
There was a shift in market sentiment during the period, as stocks that initially benefited
following the election reversed course. Value stocks, small caps and financials lagged in favor
of growth, large caps and technology names. The Harbor Mid Cap Value Fund advanced 3.02%
during the first quarter, underperforming its benchmark. The Fund’s benchmark, the Russell
Midcap® Value Index, advanced 3.76% in the first quarter, while the Russell Midcap® Growth
Index returned 6.89%.
The Consumer Discretionary sector was the primary driver of relative underperformance,
due to stock selection, which had a negative impact overall. Utilities also weighed on relative
returns, again due to stock selection. Conversely, sector allocation added value during the
period, as an underweight in Energy, by far the weakest performing sector in the benchmark,
bolstered relative results. An overweight allocation in Information Technology also aided relative
performance, though those gains were reduced somewhat by stock selection in the sector.
LSV Asset Management’s comments were made in an April, 2017 report. Highlights adapted
from the report appear below. All comments relate to the quarter ended March 31, 2017, unless
otherwise indicated. All references to the year-to-date are for the period January 1 through
March 31, 2017.
HIGHLIGHTS
Sentiment Shift Impacts Results
The shift toward more growth-oriented sectors of the market during the quarter had a negative
impact on results, given our deep value bias. After finishing strong in 2016, value stocks lagged
across all market cap ranges in the U.S. during the first quarter.
Model Investment
While we are overweight technology relative to the benchmark, we continue to find attractive
investments in the sector, driven by our stock ranking model. During the quarter, we initiated
a position in HP, which was a particularly attractive investment based on our cash flow and
earnings measures. Long-term past performance has been poor, which is also a positive in our
stock-ranking model, but the stock has shown recent signs of improvement. Finally, the company
has been buying back shares, another positive sign in our model.
Trading at a Discount
We neither develop an outlook nor use macro forecasts in our investing process, though we do
track the portfolio’s valuation relative to the benchmark. While benchmark valuations are above
historical averages, the Fund continues to trade at a significant discount, not only to the value
benchmark, but also to the overall market.
MCH.23.MCV
Harbor Mid
Cap Value Fund
Total Returns
As of 03/31/2017
Harbor Mid Cap Value Fund - INST
Russell Midcap® Value Index
Three
Months
One
Year
3.02%
3.76%
19.37%
19.82%
Three
Years
8.08%
8.94%
Five
Years
14.92%
14.07%
Ten
Years
7.61%
7.47%
Expense Ratios
Net
Gross
0.86%
0.87%
Sectors: As of 03/31/2017, the Harbor Mid Cap Value Fund had invested the following percentages of its assets in the sectors
listed: Financials, 21.79%; Information Technology, 13.80%; Industrials, 13.38%; Consumer Discretionary, 11.54%; Real
Estate, 9.95%; Utilities, 7.37%; Materials, 6.51%; Energy, 6.19%; Health Care, 5.42%; Consumer Staples, 2.87%; Performance data shown represents past performance and is no guarantee of future results. Past performance is net of
management fees and expenses and reflects reinvested dividends and distributions. Past performance reflects the beneficial
effect of any expense waivers or reimbursements, without which returns would have been lower. Investment returns and
principal value will fluctuate and when redeemed may be worth more or less than their original cost. Returns for periods less
than one year are not annualized. Current performance may be higher or lower and is available through the most recent month
end at www.harborfunds.com or by calling 800-422-1050.
Performance figures discussed in any of the Manager Commentaries reflect that of the Institutional Class shares.
This information should not be considered as a recommendation to purchase or sell a particular security. The holdings or sectors
mentioned may change at any time and may not represent current or future investments. As of 3/31/2017, the Harbor Mid Cap
Value Fund held the following positions referenced as a percentage of the Fund's total net assets: HP Inc. - 0.46%.
Expense ratio information is as of the Fund's current prospectus, as supplemented. Gross expenses are the Fund’s total annual
operating expenses. The net expense ratios for this fund reflect a contractual management fee waiver through 2/28/2018.
The Russell Midcap® Value Index is an unmanaged index generally representative of the U.S. market for medium capitalization
value stocks. This unmanaged index does not reflect fees and expenses and is not available for direct investment. The Russell
Midcap® Value Index and Russell® are trademarks of Frank Russell Company.
Stocks of mid cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger,
more established companies.
At times, a value investing style may be out of favor with investors which could cause value securities to underperform growth or
other equity securities.
Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market
and economic conditions..
Forward Earnings (Price to Earnings) is the industry analysts' consensus earnings forecast for the coming year divided by current
price. Cash Flow (Price to Cash Flow) is defined as net income plus depreciation and amortization divided by current price. Book
Value is company's total assets minus intangible assets and liabilities, such as debt.
The views expressed herein are those of the subadviser, LSV Asset Management, and may not be reflective of their current
opinions or future actions. These views are not necessarily those of Harbor Funds and should not be construed as such.
Investors should carefully consider the investment objectives, risks, charges and expenses of a Harbor fund before investing.
A summary prospectus or prospectus for this and other information is available at www.harborfunds.com or by calling
800-422-1050. Read it carefully before investing.
Harbor Funds is distributed by Harbor Funds Distributors, Inc.
HARBOR FUNDS and the Lighthouse Design are Reg. U.S. Pat. & Tm. Off.
MCH.23.MCV