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International Fund —
International stocks finish the quarter down
3rd Quarter, 2016
"European stocks recovered from their post-Brexit lows, but we are still concerned about additional risks ahead. "
– Northern Cross, LLC

During the third quarter of 2016, European stocks made a comeback from the lows they saw following the British referendum vote in June to leave the European Union. The Harbor International Fund advanced during the quarter, posting a return of 5.96%, underperforming its benchmark, the MSCI EAFE (ND) Index, which returned 6.43%. The benchmark is a measure of equities in developed markets outside the United States. The Fund’s underperformance was due mostly to an overweight allocation to the Health Care sector relative to its benchmark. Stock selection in the Consumer Discretionary sector boosted relative returns.
Northern Cross’ comments were made in an October, 2016 report. Highlights adapted from the report appear below. All comments relate to the quarter ended September 30, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through September 30, 2016.

Interview Highlights

Emerging Consumers Provide Long-Term Opportunity
The stocks we own in the Health Care sector are industry leaders in research, which we believe should demonstrate sustainable growth despite overall pricing headwinds. Our global staples have strong exposure to emerging consumers, which are a source of long-term growth while also providing solid dividend growth. During the period, our overweight position in the Consumer Discretionary sector was specifically driven by our investments in two large casino operators, Las Vegas Sands and Wynn. We think the Macau market is starting to turn, which should drive solid growth at both operators.
Our largest underweights were to Telecom Services, Utilities, and Industrials. Telecom Services and Utilities are long-term underweights due to their weak pricing power, which in our view didn’t change during the quarter. Our Industrials weighting has been reduced over the last six quarters as we are concerned that global growth and rising emerging market competition will reduce growth and cap operating margins.
Keeping a Watchful Eye on Financials
The Fund continues to remain unhedged, as we do not feel we can add significant value over the longer term from currency trading. Following its recent post-Brexit drop, we currently view the British Pound as undervalued. We believe the United Kingdom's departure from the European Union will be a drawn out process, which represents as large a risk to long-term growth in Europe as it does to the United Kingdom, in our view. We are still concerned about additional risks ahead, most notably the Italian referendum in December. We believe that a larger share of advances for the markets will have to come from valuation expansion and idiosyncratic ideas. Though this may be beneficial to the Fund and the market, there may be significant stress to the Financials sector, especially in Italy. Our research indicates that it may be controlled, but this is a significant area of concern.

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.