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International Fund —
U.S. Dollar was strong closing out the year
4th Quarter, 2016
"The Brexit vote impacted the Fund midway through the year. The market appears to have factored in this uncertainty and we don't believe it will change the fundamentals of many European companies. "
– Northern Cross, LLC

During the fourth quarter of 2016, U.S. equity markets climbed and the U.S. Dollar grew stronger following the surprising election of Donald Trump. The Harbor International Fund pulled back during the quarter, posting a return of -4.29%, underperforming its benchmark, the MSCI EAFE (ND) Index, which returned -0.71%. The benchmark is a measure of equities in developed markets outside the United States. The Fund’s underperformance relative to its benchmark was due largely to stock selection within the Consumer Discretionary and Financials sectors. Having no exposure to the Telecommunication Services and Utilities sectors boosted relative returns.
Northern Cross’s comments were made in a January, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended December 31, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through December 31, 2016.

Interview Highlights

Global Equities Higher Following U.S. Elections
The unexpected election of Donald Trump substantially impacted world stock, bond and currency markets. Markets reacted to the anticipated fiscal stimulus from infrastructure spending and lower corporate and individual tax rates along with potential deregulation across many industries. The result was higher U.S. equity markets, higher interest rates and a stronger U.S. Dollar. The U.S. elections may have triggered what will be seen in time as the end of the bond secular bull market and potential acceleration of U.S. Gross Domestic Product (GDP) growth. It is worth noting that when macro-level events are the reasons for volatility in the world stock markets, it becomes more difficult for our investment approach to outperform the benchmark, since stock prices are then reacting not to company-specific information but rather to geopolitical volatility.
Risk to Long-Term Growth in Europe and the United Kingdom
The Brexit referendum vote was another macro-level event that affected the Fund midway through the year, though the market appears to have already factored in this uncertainty and we don’t believe it will change the fundamentals of many European companies. We expect that London will remain a hub of finance, and that new trade agreements are likely to be made that benefit both importers and exporters in the United Kingdom. We think that the U.K.'s departure will be a drawn-out process that represents as large a risk to long-term growth in Europe as in the United Kingdom.
Discounts in the United Kingdom Are Attractive
We believe that Lloyds is well-positioned to weather the short-term economic impact as the leader in the U.K.’s consolidated retail banking sector. Further, regardless of the outcome, we expect that London will maintain its position as a leading city for education, commerce, and entertainment. As such, we have taken advantage of what we see as excessive discounts in U.K. property developers. We believe that these companies have solid balance sheets and that they now have an opportunity to build up their development assets to create significant value for patient shareholders. Further, we think the currency has sufficiently sold off and offers considerable upside on a multi-year view. The U.S. election and concurrent European GDP improvement leave us with a guardedly optimistic view.

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.