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International Fund —
International shares continue downward in Q4, posting negative return for 2014
4th Quarter, 2014
"On balance, we really like our European holdings and we think any positive turn in Europe would have a dramatic impact on operating leverage for these companies. "
– Northern Cross, LLC

Following a third quarter decline, international equities fell again in the fourth quarter of 2014, ending the year in negative territory. The MSCI EAFE (ND) Index, a measure of equities in developed overseas markets, posted returns of -3.57% for the fourth quarter and -4.90% for the full year. Consumer Discretionary, up 3%, was the only sector to register a positive return for the fourth quarter. Energy was the weakest performing sector, posting a return of -19%.
The Harbor International Fund recorded returns of -4.05% for the fourth quarter and -6.81% for the year, trailing the index. From a longer term perspective, the Fund outperformed the index for the latest 5-year and 10-year periods and from its inception in 1987. In the fourth quarter, a below-benchmark exposure to Energy stocks boosted Fund returns relative to the index, as did investment choices in the Health Care sector. Stock selection in the Industrials sector hurt relative performance. Sector positioning generally is a byproduct of individual stock selection decisions rather than an active element of the Fund's investment strategy. Weakness in the Energy sector may eventually create investment opportunities but share prices would need to fall farther to reach attractive levels, in the view of Portfolio Manager Jim LaTorre.
The portfolio's top individual performers in the fourth quarter included a number of Consumer Discretionary stocks, including luxury goods marketers Richemont and LVMH Moet Hennessy Louis Vuitton, auto makers Daimler and Volkswagen, and Toyko-based advertising firm Dentsu. Among the biggest detractors from returns in the quarter were Spanish bank Banco Bilbao Vizcaya Argentaria, global oil and gas company BG Group, mining and energy company Freeport-McMoRan, Danish insulin maker Novo Nordisk, and global power systems provider Rolls-Royce.
Jim LaTorre's comments were made in a January 13, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through December 31, 2014.

Interview Highlights

Energy opportunities
For the past six months we’ve been looking hard at global suppliers to the oil industry. A lot of these suppliers are already down a bit but not enough in our view. We’re watching and waiting as we normally would do, trying to buy these franchises when they are out of favor. The oil price fell very rapidly, and our view is that it hasn’t fully worked its way through to expectations for the suppliers or the economy at large.
Cheaper valuations
European valuations are cheaper than those in the U.S., so when you look ahead to the possible effect of a recovery on the overall bottom line of our stocks, there should be good operating leverage there. In addition, the vast majority of our holdings are exporter-type companies that should benefit from a weaker Euro. Having said that, many of these companies have some of their sales and profits in Europe, and that has been a drag on their returns for the past few years. We’re trying to buy these quality franchises and wait it out, but it hasn’t been easy in this slow recovery. On balance, we really like our European holdings and we think any positive turn in Europe would have a dramatic impact on operating leverage for these companies.
Automotive exposure
We recently moved into a position in Volkswagen. They have very profitable luxury car brands in Audi and Porsche. They have mass-market brands, which are not as profitable but they’ve improved the model mix. And they have a very interesting position in trucks. You put it all together and we think the stock is very cheap at current levels. We don’t love the mass-market automobile industry, but we do like the higher-end automobile segment and we do like trucks.
Market dislocations
We love to buy things when they are out of favor, and the market in general is not out of favor. We like it when you can find dislocations, as we’re starting to see in the Energy sector. We try hard to get to know each of these sectors and the leading companies in these sectors. When we can find dislocations, our philosophy is that we will move to take advantage of them.
Emerging markets
Some of our Consumer Staples names have taken hits, not necessarily because of their developed-market positions but more so because emerging market currencies have weakened and demand has fallen. Many of the companies that we buy have a third or more of their revenues exposed to emerging markets. We’re still happy with these stocks but they’re in a pause mode that might require some signs of healthy economic growth outside the U.S.

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.