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Emerging Markets Equity Fund —
Unsettled quarter for emerging markets
2nd Quarter, 2015
"We continue to believe that the China H Share market offers significant opportunities going forward. "
– Oaktree Capital Management, L.P.

After a good start to the year for emerging markets equities, the second quarter of 2015 was characterized by heightened volatility due to uncertainty surrounding a Greek exit from the Euro, and significant volatility in Chinese equity markets. As described by Portfolio Manager, Tim Jensen, the second quarter was analogous to a “roller coaster” ride that saw the index surge in the first half of the quarter only to fall dramatically thereafter. The MSCI Emerging Markets (ND) Index eked out a small gain of 0.69% for the quarter.
The Harbor Emerging Markets Equity Fund returned 0.00% for the quarter, trailing the index by 0.69%. While the Fund had no direct exposure to Greece, the broader implications of a Greek exit in regards to the eurozone had a tempering effect on investors' risk appetites which affected the emerging markets. Tim Jensen and Co-Portfolio Manager, Frank Carroll, reported that the contributions from stock selection, and country and sector allocation, were mixed during the quarter. An overweight to China and underweights to Malaysia and Korea benefitted the portfolio. Stock selection in India, Brazil, and Mexico was also positive, while stock selection in China, Korea, Taiwan, and Russia detracted from performance.
Top contributors to performance included China Shipping Container Lines, which surged after investors sought to purchase shares in the company on the China H Share (Hong Kong listed) market trading at a significant discount to shares listed on the China A Share (Shanghai listed) market; and the Brazilian energy company Petrobras. Some of the larger detractors to performance were Samsung Electronics and Korean auto manufacturer Hyundai Motor.
The comments by Tim Jensen and Frank Carroll were made in a July 15, 2015 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended June 30, 2015 unless otherwise indicated. All references to year-to-date are for the period January 1 through June 30, 2015.

Interview Highlights

Turbulent Quarter
The second quarter witnessed a sharp rally in April and May, led by China and Brazil, turn into a broader global selloff in June, as China and Greece dominated headlines. The Shanghai Stock Exchange Composite Index (representative of the China A Share market) reached a peak of over 5000 before plummeting over 25% to below 4000. When markets become more volatile, as we saw in the second quarter, it can lead to non-fundamental stock price movements. One example of such a move was China Shipping Container Lines. We sold the Fund’s position after a run-up of approximately 75% within the first few weeks of the quarter. The timing of the sale was positive as the stock subsequently ended the quarter significantly lower than its peak price.
China in the Spotlight
Chinese equity markets experienced significant volatility in the second quarter and the Chinese government undertook measures, some sensible and some of them aggressive, to stem the panic of precipitously declining equity markets which began in June. The selloff was fueled by the unwinding of leveraged equity bets by local investors who primarily invest in the China A Share market. While the Hong Kong listed shares were significantly less overvalued compared to their A Share counterparts, they traded lower nonetheless. We continue to believe that the China H Share market offers significant opportunities going forward. Almost all of the stocks on the Hong Kong exchange trade at a significant discount to the same company stocks listed on the A Share market. That discount today averages approximately 40%.
Investment Outlook for Various Emerging Markets
We remain cautiously optimistic on the prospects for emerging markets generally, and are favorable on the companies the Fund owns. In India, we will be looking for opportunities to add to the Fund’s position. Many of the companies we speak to there are optimistic, leading us to believe that growth will pick up over the next 6-9 months. Brazil is in a different position. Brazil has very high interest rates compared to the rest of the world which we think is priced into stocks. We like the positions the Fund owns in Brazil and believe they will add significant value to Fund performance once things settle down from a fiscal and monetary standpoint. Similarly, Russia is facing near-term challenges, however equity valuations reflect those difficulties, leaving significant upside for those companies that can navigate the current environment well, in our view.

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.