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Emerging Markets Debt Fund —
EM debt markets end 2013 in negative territory
4th Quarter, 2013
"It is very difficult to time a rebound, but we do believe a rebound is coming in emerging markets debt. "
– John DiSpigno

Bonds from emerging markets countries posted generally flat returns for the fourth quarter of 2013. Emerging markets debt securities, as measured by a blended index composed of 50% each of the JPMorgan Emerging Markets Bond Index—Global Diversified Index, and the JPMorgan Government Bond Index—Emerging Markets Global Diversified, recorded a return of 0.00% for the three months ended December 31, 2013.
Emerging markets debt lost ground for the calendar year, with the blended index posting a return of -7.08%. Most of the decline occurred in the second quarter, with a -6.32% return by the blended index reflecting concerns over U.S. Federal Reserve tapering and the possibility of slowing growth in developing regions.
In this environment, the Harbor Emerging Markets Debt Fund returned -1.61% for the fourth quarter and -9.95% for the full year, lagging the index. A larger-than-benchmark exposure to bonds denominated in local currencies hurt Fund performance relative to the blended index in the fourth quarter, as local-currency debt generally underperformed the broader market, reports John DiSpigno of Stone Harbor Investment Partners, subadviser for the Harbor Emerging Markets Debt Fund.
Looking ahead, the investment team believes that valuations in emerging market debt securities are at attractive levels and that improving growth in the U.S. and other developed markets should benefit the export performance of emerging economies. Based on its assessment of the macroeconomic environment and on assumptions of slowly rising U.S. Treasury yields in the months ahead, the investment team believes that U.S. Dollar-denominated debt could be the strongest performer in the emerging markets debt universe in 2014. Longer term, the team's expectation for strong returns from local currency markets remains in place.
John DiSpigno's comments were made in a January 15, 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

Expecting a rebound
We positioned the portfolio at the beginning of the fourth quarter for what we thought would have been a stronger rebound. That just did not come. It is very difficult to time a rebound, but we do believe a rebound is coming in emerging markets debt.
Economic policy
Concerns over social unrest in the early summer were a key factor, in our view, in a significant underperformance by debt securities in Brazil. In response to this, macroeconomic policy has taken more of an orthodox line – and one that we think should be much more favorable for both the currency and the securities.
Rising rates
Given the volatility that we've seen, we think a lot of the market has already priced in a rate rise here in the U.S. and in a number of these countries in the developing world. Many of these countries are starting to raise their rates to fight inflation.
Credit fundamentals
Some of the countries that did well in the hard currency portion of the benchmark are rated below investment grade like Belarus, Honduras, Ukraine and even Argentina, possibly heading toward default. These countries traded on momentum as opposed to their credit fundamentals, which, in our view, are very weak.

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.