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International Fund —
Fund advanced despite a backdrop of losses for developed international stocks
1st Quarter, 2016
"Some of the seeds we have planted, and the way we have positioned the portfolio, started to work during the first quarter of 2016. It is nice to see the positive momentum. "
– Northern Cross, LLC

International markets fell in the first quarter of 2016 after bouncing back in the previous quarter from earlier steep declines. Equities in developed markets outside the United States, as measured by the MSCI EAFE (ND) Index, returned -3.01% for the three months ended March 31, 2016, with mixed results among sectors. Energy and Consumer Staples were the MSCI index's best performing sectors.
The Harbor International Fund returned 0.50% for the quarter, beating its MSCI EAFE (ND) index. The Fund’s relative outperformance was mostly due to exceptionally strong stock selection in the Consumer Discretionary sector. Holdings in Financials and Materials contributed as well. The Fund was hurt by weak stock selection and an overweight in the Health Care segment, as well as an underweight in Energy and a lack of exposure to Telecommunication Services.
The Fund’s top individual contributors relative to the benchmark included U.S.-based hotel and casino operators Wynn Resorts and Las Vegas Sands, British aerospace and defense company Rolls-Royce, and Bancolombia, one of Latin America’s largest commercial banks. Key detractors during the period included global specialty biopharmaceutical company Shire and two Switzerland-based holdings, financial services firm UBS and pharmaceutical company Novartis.
Portfolio Manager James LaTorre’s comments were made in an April 11, 2016 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through March 31, 2016.

Interview Highlights

Environment and Macroeconomic Factors
What we have today globally is basically no growth. We're not in full-on deflation, and we're not really in recession. But we're teetering around zero growth. China is slowing, but we do not believe that the Chinese slowdown is accelerating. But I think on balance, China is not collapsing, and that’s a very good thing. In Japan, we are trying to define what's happening. We believe that there is currently no inflation and that there never was. We do see Japan as still deflating, and it looks to us that Abenomics isn’t really panning out. For the longer term, until the Japanese become more directly involved in leading-edge industries, where new value and new innovation can be created, it's going to be a tough haul for them.
Casino Stocks Outperformed Again
Much of the Fund’s outperformance was due to casino stocks. As the new properties for both Wynn Resorts and Las Vegas Sands move closer to completion, we remain optimistic that the industry will not only survive but also that it will thrive. The recent price increase on Wynn Resorts was rapid and is approaching our in-house target price, but we view these holdings as adding value over the long-term, and do not focus too closely on targets.
Opportunities in Emerging Markets
In the past, many emerging markets were attractive because they held no debt and there was a gap between their production capacities and those of the developed world. After 30 years, that gap is not that differentiated anymore. However, we believe there is room for growth in Colombia following 50 years of civil war there, which held back industrial growth. Moreover, Colombia carries little debt and holds much opportunity for growth. So, while other emerging areas are already overexploited, Colombia remains attractive to us. Colombia got hit because of oil recently, but that now seems to be stabilizing. In Brazil, we believe prices in the banking segment look attractive. However, the current complex political and economic environment there has given us pause. At the moment, we are watching for new opportunities in Mexico in media, cement and banking.

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.