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Emerging Markets Equity Fund —
Weak results last year could make emerging markets equities more attractive in 2014
4th Quarter, 2013
"We emphasize bottom-up idea generation when we are putting the portfolio together, rather than trying to pick countries that we think are exciting. "
– Tim Jensen

Following a year of weak performance, stocks of companies operating in developing markets appear to be trading at attractive valuation levels, in the view of Tim Jensen, Portfolio Manager of the Harbor Emerging Markets Equity Fund. Based on metrics such as price-to-book-value and price-to-earnings, emerging market equities trade below their historical averages and also are trading at a discount to stocks in developed markets, Jensen notes.
Stock markets in developing economies encountered a variety of headwinds in 2013, Jensen says, including concerns about U.S. Federal Reserve tapering, economic transition in China, weakening demand for commodities, and an uncertain outlook for economic growth in parts of the developed world. As a result, he notes, equities of emerging market companies recorded their worst performance relative to developed markets since 1998.
The Harbor Emerging Markets Equity Fund began operations November 1, 2013. In the two-month period from its inception through December 31, 2013, the Fund recorded a return of -0.50%, outpacing the -2.89% return of its benchmark, the MSCI Emerging Markets (ND) Index. Stock selection, country weights, and economic sector allocations all aided Fund performance relative to the index. Tim Jensen co-manages the Fund with Frank Carroll. Both are Managing Directors of Oaktree Capital Management, L.P., where they have co-managed an emerging markets equity group since 2000.
Jensen reports that the investment team employs a bottom-up stock selection process, driven by detailed and thorough research of individual companies operating in emerging markets. Country and economic sector exposures are primarily a result of this stock-by-stock portfolio construction process, he notes.
The Fund ended the year with stocks of approximately 60 companies in its portfolio, a quantity that allows appropriate diversification while also enabling the managers to focus on their highest-conviction ideas, Jensen says. Major country allocations in the portfolio included China, Brazil, Mexico, and Russia, each of which represented an overweighted position relative to the benchmark.
Tim Jensen'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


Portfolio construction
We emphasize bottom-up idea generation when we are putting the portfolio together, rather than trying to pick countries that we think are exciting. We'll accept a bigger exposure in a country where we are seeing more individual buy ideas. Operating in emerging markets, we also have to be aware of macro issues such as trade deficits, currency valuations, and political risks. But bottom-up idea generation is really where portfolio construction starts, while analyzing macro issues is primarily a function of managing risk.
Market opportunity
We started managing the portfolio effective November 1 and we're off to a good start relative to the benchmark. Unfortunately, emerging markets are coming off of the worst year they've had relative to developed markets since 1998, which was a crisis year. In terms of opportunity, however, we think that sets up a potentially favorable entry point.
Extensive travel
We and our analysts travel extensively to meet company managements in their home countries. We build our own models for companies we're interested in and compare our views with where Wall Street consensus might be. We look for situations where we are more optimistic than the Street is about key factors such as cash flow generation and future growth opportunities.
Commodity pricing
People are fairly convinced that oil and metals prices are likely to fall over the next few year. We have built that into our models when we look at energy and metals companies. At the same time, however, about half of our economies import significant amounts of oil and metals – and we would expect lower prices to have a favorable impact on those markets.
Currency analysis
We do not hedge specific currencies. However, we do consider the value of currencies as we select stocks and it can be a factor in how much exposure we have to a particular country. And if we think a currency has sold off in a panic and not for good reasons, we may use that as an opportunity to buy stocks in those markets.

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.