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International Fund —
International shares post solid gains in Q4, with all sectors advancing
4th Quarter, 2013
"We are trying to find businesses that will continue to succeed almost whatever happens with the currency. That is why we have always had a strong focus on higher-margin, globally-oriented companies. "
– Howard Appleby

International equities turned in a solid performance in the fourth quarter of 2013, with the MSCI EAFE (ND) Index of stocks in developed overseas markets recording a return of 5.71%. The advance was broad based, with all 10 economic sectors in the index posting positive returns. For the calendar year, the index returned 22.78%.
In this environment, the Harbor International Fund registered returns of 4.76% for the fourth quarter and 16.84% for the 12 months ended December 31, 2013. Portfolio Manager Howard Appleby reports that stock selection in the Financials sector boosted Fund performance relative to the MSCI EAFE (ND) benchmark in the fourth quarter, but this was offset by selection in the Consumer Staples sector. From a longer term perspective, Harbor International outperformed the benchmark for the 5-year and 10-year periods ended December 31, as well as from the Fund's inception in 1987.
Financials sector holdings AXA, Intesa Sanpaolo, Allianz, and Banco Bilbao Vizcaya Argentaria were among the biggest contributors to absolute returns for the Fund in the fourth quarter, along with aircraft engine manufacturer Rolls-Royce, and German software maker SAP. Detractors included Volvo, Japan Tobacco, and Pernod Ricard.
The comments by Howard Appleby were made in a January 14, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2013, unless otherwise indicated. All references to year-to-date are for the period January 1 through December 31, 2013.

Interview Highlights

Higher-margin global enterprises
We have had a tough time finding quality companies, and by that I mean companies that can sustain high levels of profit growth. We are trying to find businesses that will continue to succeed almost whatever happens with the currency. That is why we have always had a strong focus on higher-margin, globally-oriented companies.
Wealth creation
China may be slowing down. It may not be at an 11% growth rate anymore, it may not even be at 7%. But it is still growing and more middle-class and upper-middle-class wealth is being created. We think that will continue to drive a strong demand for luxury goods.
Focus on Turkey and Mexico
In the developing world, there are two countries that we think could warrant attention over a 5-to-10-year horizon. One is Turkey, the other is Mexico. We're looking for opportunities to gain exposure in those areas because of favorable demographics and because both have had relatively low levels of development thus far.
Emerging markets exposure
We continue to look for emerging market exposure through the big western companies. That's one of the reasons why we bought Pirelli, for example. It's one of the reasons why we maintain investments in companies like Richemont and Pernod Ricard. We think investments like these can be an effective way to gain exposure to developing-market growth.
Improving productivity
In terms of industrial companies in general, we think we are very much leaders in the automation/robotics theme. We continue to look for leaders in the development of technologies to replace labor with capital or to improve productivity in general. Examples in the portfolio include SMC, Fanuc, ABB, and Schneider.
Long-term perspective
We tend not to step aside from positions if they're going through a bad year or two. We tend to stay with them and take some of the pain with the expectation that we'll get it right in the long run. We have had some short-term disappointments in the portfolio, but these are companies that we think ultimately could prove to be winners.

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.