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International Fund —
Japan shares boost international equity markets
1st Quarter, 2013
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"We will own great franchises if we can buy them cheap. "
– Jean-Francois Ducrest

Foreign stocks opened 2013 with an upward move as the MSCI EAFE (ND) Index of equities in developed overseas markets recorded a return of 5.15% for the three months ended March 31. A solid advance by shares of Japanese companies, which make up 20% of the index, was the biggest contributor. Seven of the 10 economic sectors in the index gained ground, led by Health Care and Consumer Staples.
The Harbor International Fund also advanced in the first quarter although its 2.09% return lagged that of the MSCI EAFE benchmark. Stock selection and a below-index exposure to Japan both detracted from the Fund's performance relative to the benchmark. From a longer term perspective, the Fund outperformed the benchmark for the 5-year and 10-year periods ended March 31.
Health Care holdings Roche and Novartis were the leading contributors to Fund returns in the first quarter, along with Anheuser-Busch InBev, Rolls-Royce, and Japan Tobacco. Among the major detractors were Fanuc and BHP Billiton.
Looking ahead, Portfolio Manager Jean-Francois Ducrest reports that the investment team is cautiously optimistic. However, he notes that the portfolio may well maintain its smaller-than-index allocations to Japan and to Financials names as valuations in those areas do not appear to be especially attractive.
The comments by Jean-Francois Ducrest were made in an April 11, 2013, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2013, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2013.

Interview Highlights

Focus on quality names
We've never bought things just because they were going up. I want to be able to come back next quarter or a year from now and say we bought this and it worked or that we bought this and it hasn't worked yet but it's still a great company and we are confident that it's going to come back. A lot of what is going up in Japan at the moment has nothing to do with buying a good company; it just has to do with a panic trade.
Wary of Financials
We are still of the broad view that Financials are difficult to own. Things have been changing to some degree but we still don't want to own a lot of banks at high multiples. We will own great franchises if we can buy them cheap. But it's not easy.
Attractive price
We see industrial gases as a business with high barriers to entry and good long-term growth, and their business model was thoroughly battle tested during the global financial crisis. We decided during the quarter that the time had come to be invested in Air Liquide. We had wanted to own it for a long time. It was just a matter of price and we were lucky that the stock came to us.
New Health Care holding
We think Sanofi is a lot more interesting than the market is giving it credit for. It has a strong diabetes franchise and is strong in vaccines, which is a dominant global business with good margins. It also has a lot of business in emerging markets.
Positive outlook
We are reasonably optimistic. The next couple of quarters are probably going to be tough in Europe but everybody already seems to expect that. It seems to me that the Cyprus scare was way overblown. It is a unique situation and Europeans are not thinking about Cyprus as a canary in a coal mine. So I think we should be constructive. The markets have gone up quite a bit but it's probably justified.

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.