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International Fund —
International shares rebound in Q1, with most sectors moving higher
1st Quarter, 2015
"Even though equity valuations are relatively high on a historical basis, they are low on a relative basis when you compare equities to bonds. "
– Northern Cross, LLC

After posting a negative return for 2014, international equities rebounded in the first quarter of 2015. Equities in developed overseas markets, as measured by the MSCI EAFE (ND) Index, returned 4.88% for the three months ended March 31, 2015, with most sectors posting positive results. The Health Care and Consumer Discretionary sectors were the best performing areas of the index. The first quarter advance followed a -4.90% return by the index for calendar 2014.
The Harbor International Fund returned 5.77% for the quarter, outpacing the index. Fund performance relative to the benchmark was helped by the portfolio's smaller-than-index exposures to Energy and Utilities, which were the only sectors to lose ground. Stock selection in the Industrials and Health Care sectors also aided relative performance but the portfolio's Consumer Discretionary and Financials stocks underperformed those in the index. Sector positioning generally is a byproduct of individual stock selection decisions rather than an active element of the Fund's investment strategy. 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.
Portfolio Manager Jean-Francois Ducrest notes that Japanese industrial robotics company Fanuc and Danish insulin maker Novo Nordisk were among the Fund's top individual performers in the latest quarter. Others included German auto makers Daimler and Volkswagen, and Sweden-based industrial group Atlas Copco. Holdings that detracted from returns included mining and energy company Freeport McMoRan, Swiss luxury goods marketer Richemont, Spanish bank Banco Santander, Singapore's United Overseas Bank, and Colombia-based Bancolombia.
Jean-Francois Ducrest's comments were made in an April 14, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2015.

Interview Highlights

Strong move
At the end of last year we were making the case that, although the market looked skittish and was going down, everything was in place for a strong move in international markets, and this is what we have seen. Why have we seen it? Weaker currencies, better economies, weaker oil, very low interest rates. All of that is stimulative.
Boosting performance
Our performance usually is driven by buying the right kinds of stocks and riding them for a long time. From time to time, however, we have a quarter where stocks that we don't own have a big impact and help us substantially; this was such a quarter. We had little or no exposure to Energy, Utilities, and Telecommunication Services, and that combination proved to be a big booster of performance. In the category of good contributions were two sectors that historically have been important hunting grounds for our team and for the philosophy we apply in managing the Fund: Health Care and Industrials.
Low rates
Interest rates are low and they are probably going to stay reasonably low for quite a long time in the markets that are important to us. In the U.S. they will go up but we think this will be very gradual. Even though equity valuations are relatively high on a historical basis, they are low on a relative basis when you compare equities to bonds. In our view that is encouraging for our asset class in general and for the types of companies we hold in the Fund.
Favorable pricing
In the last six to nine months we have started to see a lot of stocks going our way – companies that we wanted to own but were a bit expensive going down and giving us the price we wanted. We find this very encouraging. Not only did we perform well in the last quarter, but we also have been able to bring on board some new positions and add to some existing positions at what we consider to be attractive prices.
Currency outlook
The Dollar is not going to weaken drastically but in our view it is not going to strengthen drastically from current levels. The strength of the Dollar is already, to some degree, slowing the economy in the U.S. That means that interest rates do not have to go up sharply in the U.S., which would make the dollar somewhat less attractive than it is now.

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.