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International Fund —
International shares fell in Q3, with all sectors declining
3rd Quarter, 2015
"In contrast with Industrials, consumer-based franchises may still grow in emerging markets because, on the consumer side, these countries still have a long way to go. "
– Northern Cross, LLC

International markets declined, driven by concerns about global economic strength. Equities in developed markets outside the U.S., as measured by the MSCI EAFE (ND) Index returned -10.23% for the three months ended September 30, 2015, with all sectors posting negative returns. Consumer Staples and Utilities were the index's best performing sectors.
The Harbor International Fund returned -12.97% for the quarter, lagging the index. Fund performance relative to the benchmark was hurt by stock selection in the Consumer Discretionary and Industrials sectors, but the portfolio's Health Care and Financials stocks outperformed those in the index. The Fund's sector weightings had little effect on performance relative to the benchmark. 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 underperformed the index for the latest five year period, but outperformed it for the latest ten year period and since its inception in 1987.
Dutch brewer Heineken, British consumer goods company Reckitt Benckiser, French commercial real estate company Unibail-Rodamco, and Swiss food company Nestlé were among the Fund's top individual performers and its top contributors relative to the benchmark in the quarter. Eyeglasses manufacturer Essilor International was also a top contributor relative to the benchmark. Holdings that detracted from returns included U.S.-based hotel and casino companies Wynn Resorts and Las Vegas Sands, German automaker Volkswagen, British bank Standard Chartered, and Japanese industrial robotics company Fanuc.
Portfolio Manager James LaTorre's comments were made in an October 13, 2015 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended September 30, 2015, unless otherwise indicated. All year-to-date references are for the period January 1, 2015 through September 30, 2015.

Interview Highlights

Global Economy is Fragile
We faced slow growth everywhere in the world. We still have faith in the U.S. economy. It is strong; but everywhere else is a bit fragile. Europe is underpinned by low interest rates that are likely to remain low for an extended period to help countries such as Italy. The Chinese economy slowed. Emerging markets began to show fragility. The situation there is fairly severe, in part because emerging markets have big debts. Once interest rates rise to the levels that emerging market debtors deserve, this could wreak some havoc. All of this made for a difficult market environment throughout the world.
Multinationals Affected by Emerging Markets
Many of the blue chip multinationals that we own have a presence in emerging markets. All of these companies, even the spirits companies, have taken substantial hits, due to emerging market currency declines and economic slowness. When the multinationals translate profits back to their European home currencies, that lowers profits. Even in local currency terms, things are slowing down. Sometimes even margins are compressing, although it helps if products are priced in Dollars instead of local currencies. These companies must deal with a new, lower baseline for emerging market profits.
Consumer Stocks May Hold Up Better in Emerging Markets
In contrast with Industrials, consumer-based franchises may still grow in emerging markets because, on the consumer side, these countries still have a long way to go. We believe companies such as cosmetics company L’Oréal, liquor company Diageo, and streaming media company Netflix may continue to thrive. However, they may take a temporary hit from a lower baseline for emerging markets. Then, we believe they will grow off that new base.
Industrials Await Cyclical Recovery
It’s not an easy environment for Industrials, which are cyclical. Normally, a cycle happens at least once in every ten year period; but we’re still waiting for a cyclical recovery. We continue to hold some Industrials that have cut their breakevens substantially. So at the hint of pricing power, margin expectations will rise and that will help. We're looking for better capacity utilization around the world. When that excess capacity or output gap tightens globally, all of these industrial cyclicals should thrive.
Opportunities in Health Care
There has been a dramatic increase in pharmaceutical research productivity over the last two years. Computer analysis of drugs is bringing an era of specialized, personalized medicine. We believe some of the companies we hold are at the frontier of oncology research. The first-mover advantage will count for a lot in this industry where we believe prices will remain high. We see growth in this industry. The price that investors will pay for growth is going up now that growth is difficult to come by. So when we can find what we think is reasonably predictable growth, we’re attracted to that. Health Care is one of the more significant areas in which we see this kind of opportunity.

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.