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International Fund —
International stocks rebounded in Q4, with all sectors gaining
4th Quarter, 2015
"We don't expect that there's going to be an explosion of consumption in China. However, we do believe there are good ways to take advantage of Chinese consumer spending, namely through luxury goods and internet consumption. "
– Northern Cross, LLC

For the fourth quarter of 2015, Fund performance relative to the benchmark was hurt by stock selection in the Financials and Health Care sectors, but the Fund’s Information Technology and Consumer Staples stocks outperformed those in the index. The Harbor International Fund returned 2.86%, lagging the MSCI EAFE (ND) Index which returned 4.71%.
The Fund’s top individual contributors relative to the benchmark in the quarter included Chinese e-commerce provider Alibaba, Germany software maker SAP, Swiss agriculture and biotechnology company Syngenta, and two U.S.-based hotel and casino operators, Las Vegas Sands and Wynn Resorts. Holdings that detracted on a relative basis included British aerospace and defense company Rolls-Royce, banking stocks Banco Bilbao Vizcaya Argentaria (BBVA) of Spain and Standard Chartered of the U.K., and Germany industrial gas supplier Linde.
Portfolio Manager Jean-Francois Ducrest's comments were made in a January 13, 2016 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2015, unless otherwise indicated. All references to the year-to-date are for the period January 1, 2015, through December 31, 2015.

Interview Highlights


A Bounce for Casino Stocks
The Fund benefited from improved performance in casino stocks. We view our holdings in the industry, Wynn Resorts and Las Vegas Sands, as solid franchises with room to grow. A lot of investors are betting against the stocks, and their valuations have dropped significantly. One factor we’re uncertain about is how big of an impact the decline in China’s currency will have on their businesses. However, we believe that they are currently undervalued, and we will be watching their progress closely as both have large new properties set to open later this year.
Mixed Results in Financials
In the Financials sector, two stocks that hurt us relative to the benchmark were British bank Standard Chartered and Spanish bank BBVA. Standard Chartered is, for us, a case of being too early in a stock. We believe the stock is inexpensive and has a lot of upside potential. With BBVA, current political turmoil in Spain has created anxiety around asset and liability management, which we believe is temporary, and exposure to Latin American markets with currencies that have eroded in value recently has not helped. Among the things that have gone well for us is our exposure to the insurance sector. We believe the sector is inexpensively valued, with solid earnings, albeit slow earnings growth. And the last few months have provided evidence that these companies are well capitalized.
Waiting for Value in Emerging Markets
Our view on emerging markets is that there is going to be more pain before there is gain. We are expecting that Brazil and Russia may experience more suffering, and we’re not ready to move into Indonesia yet. In addition, we consider stock prices in India to be too expensive. But we are monitoring stocks that we believe may represent good values at some point, though they are not yet cheap enough in our view. Our approach to emerging markets has been to gain access to them via global multinationals. We have found a few opportunities for direct investment, however, notably in Alibaba in China.
A Niche Approach to the Chinese Consumer
The Chinese consumer has a good balance sheet, with a lot of savings. We don’t expect that there’s going to be an explosion of consumption in China. However, we do believe there are good ways to take advantage of Chinese consumer spending, namely through luxury goods and internet consumption. We believe that Alibaba is the leader in the internet space. It’s a rare opportunity to find a company with the kind of growth potential we believe Alibaba has, valued at what we consider a reasonable level, especially given its strong cash generation and dominant market share.
Proliferation of Mergers
Several of our holdings are involved in recent or ongoing mergers or acquisitions. In Health Care, Shire has been mired in a drawn-out process of buying Baxalta; both are biopharmaceutical companies. While the market didn’t like the deal, we believe that it’s acceptable in the context of very low interest rates and for its potential to diversify and reinforce Shire’s rare disease drug business. We feel less favorably about our holding Air Liquide acquiring competitor Airgas. While it means more concentration in the industrial gas business, which we believe is good, we see a lack of growth opportunity for Air Liquide. In the beverage industry, our holding Anheuser-Busch InBev is attempting to merge with fellow giant SABMiller. Together they would form a massively dominant player with very strong experience at cost-cutting, controlling a good deal of the global beer market.

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 www.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.