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International Fund —
International shares flat in Q2, with most sectors moving higher
2nd Quarter, 2015
"The Chinese government has plenty of room to bring down interest rates and reserve & pricing requirements to stimulate the economy. China is the world's second biggest economy with the world's largest population. We can't ignore it. "
– Northern Cross, LLC

International markets were volatile, particularly at the end of the quarter, driven by the Greek debt crisis and a sharp decline in some Chinese stocks. Equities in developed markets outside the U.S., as measured by the MSCI EAFE (ND) Index, returned 0.62% for the three months ended June 30, 2015, with most sectors posting positive returns. Telecommunication Services and Energy were the index's best performing sectors. The second quarter advance for the index followed a –4.22% return for the preceding twelve-month period.
The Harbor International Fund returned 1.58% for the quarter, outpacing the index. Fund performance relative to the benchmark was helped by stock selection in the Health Care and Energy sectors, but the portfolio's Industrials and Consumer Discretionary stocks underperformed those in the index. The Fund's sector weightings had little effect on performance relative to the benchmark, with the exception of the Fund's lack of exposure to the Telecommunication Services sector, the index's best performer and one of its two smallest sectors. Sector positioning generally is a byproduct of individual stock selection decisions rather than an active element of the Fund's investment strategy. From a longer-term perspective, the Fund outperformed the index for the latest 5-year and 10-year periods and from its inception in 1987.
French advertising services company JCDecaux and British pharmaceutical company Indivior were among the Fund's top individual performers in the quarter. Top contributors for the quarter included British oil and gas company BG Group, Britain's Lloyds Banking Group, and Swiss agribusiness Syngenta. Holdings that detracted from returns included France's Schneider Electric, automaker Volkswagen, Swedish industrial company Atlas Copco, Japanese industrial robotics company Fanuc, and French commercial real estate company Unibail-Rodamco.
Portfolio Manager Howard Appleby’s comments were made in a July 14, 2015 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended June 30, 2015. All year-to-date references are for the period January 1 through June 30, 2015.

Interview Highlights

Globally Exposed Franchises
We try to find good companies that are addressing big global themes. We look for globally exposed franchises, thinking that these companies can navigate through current sea changes and have access to more markets. This gives us a healthy exposure to Europe. However, this exposure is a function of the way the companies are, rather than where they are domiciled. If more of these companies were in Japan, we'd have a higher-than-benchmark percentage of our portfolio in Japan instead of in Europe.
Greek Problem Continues
Greece’s economy is collapsing, there's no money in the banks, nothing’s working and they're going to do a bailout that kicks the can down the road for another 12 to 18 months until something else happens. This problem isn't going away. However, Greece is likely to stay in the European Union because most of the EU wants it there. It's a political decision. It probably means more European Central Bank support for the markets and some pressure on the Euro.
Chinese Market Decline Hits Small and Mid Cap Stocks
It is mainly small and mid cap stocks – not the main index of stocks that people like us might own – that have been hammered in the recent Chinese stock market drop. The drop is the result of retail buying and retail panic. We believe that if there were going to be a massive crisis in China in terms of non-performing bank loans or gross domestic product, it would have shown up in Chinese bank stocks by now. The Chinese government has plenty of room to bring down interest rates and reserve & pricing requirements to stimulate the economy. China is the world’s second biggest economy with the world’s largest population. We can't ignore it.
Potential in Colombia
The issue with Colombia has been its exposure to oil prices as a big producer and exporter. However, Colombia is in the sweet spot of an economy that is about to start emerging as a real consumer economy while trying to fix its political problems. Over a ten year period, we think a lot of these companies and this country are going to see some tremendous growth. Colombia has been underexposed to debt from a consumer point of view. It has a huge infrastructure program. We're in the two main banks, Bancolombia and Grupo Aval, which we believe are well managed and have very good margins, very good returns on equity, and relatively inexpensive valuations, but lots of growth ahead of them.
Health Care Opportunity
One of the biggest contributors to outperformance was Health Care, which makes up a bigger percentage of the Fund than of the benchmark. We like the long-term fundamentals and the demographics that work in favor of Health Care stocks.

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.