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Emerging Markets Equity Fund —
Emerging markets equities reverse course, move higher in Q1
1st Quarter, 2015
"The way emerging markets sometimes work is that it becomes necessary to have bad news to create more of a crisis-like environment to get the needed response from government. "
– Oaktree Capital Management, L.P.

After ending 2014 in negative territory, emerging markets equities reversed course in the first quarter of 2015. The MSCI Emerging Markets (ND) Index recorded a return of 2.24% for the three months ended March 31, 2015. Seven of the 10 economic sectors in the index gained ground, led by Information Technology and Health Care. For calendar 2014, the index had a negative return of -2.19%.
The Harbor Emerging Markets Equity Fund returned -0.43% for the first quarter of 2015, trailing its MSCI Emerging Markets (ND) benchmark. Portfolio Managers Tim Jensen and Frank Carroll report that the underperformance was driven primarily by stock selection. Portfolio holdings in Information Technology and Energy lagged those in the benchmark. This more than offset favorable stock selection in the Industrials sector.
Top contributors to absolute performance for the Fund in the first quarter included South Korean smartphone maker Samsung Electronics, South Africa-based media company Naspers, Chinese solar company Trina Solar, Chinese online retailer, and Russian petroleum company Lukoil. Brazilian companies were among the bigger detractors from absolute returns, including mining company Vale, oil producer Petrobras, and poultry and pork producer BRF. Other detractors included Galaxy Entertainment Group, which operates hotels and casinos in Macau, and Turkish beverage company Coca-Cola Icecek.
The comments by Tim Jensen and Frank Carroll 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

Volatile quarter
It was a choppy quarter with some big ups and downs. When you look at it over the whole three months, there was some fairly wide dispersion in returns at the country level. A couple of the markets that were the most beaten up last year, Russia being a prime example, had a very strong quarter. A couple of the Asian markets, like China, not as affected by emerging market currency weakness or the strength of the U.S. Dollar, did well. But countries with current account deficits, Brazil and Turkey notably, had a very difficult quarter.
Government reforms
If you were looking for an emerging market story where you wanted a young population, strong population growth, a relatively low income base to build on, a reformist government, and an economy that happens to benefit from low oil prices and low global interest rates, India would be a poster child for that. The problem is that after Modi came in last year as prime minister, the market discounted a lot of improvement right away and it's been marking time now for six to nine months. We think he got a number of important reforms passed in parliamentary session, and as they are implemented over the rest of this year and next year, we would expect to see growth and earnings pick up.
Problems in Brazil
Brazil has been a problem-child market, but it was important that the market put pressure on the government down there. The administration needed to get going on reforms and cut spending and tighten the budget, and they've actually been responding over the last month or so. The way emerging markets sometimes work is that it becomes necessary to have bad news to create more of a crisis-like environment to get the needed response from government. We think the Brazilian government has recognized the severity of the problems they have. We're feeling better about Brazil and we think there's a lot of upside in the stocks we own there.
Strong quarter for Russia
Russia is about 5% of the portfolio. It had a very good first quarter. There were signs of some stability in Ukraine, a bit of sideways-to-up movement in oil, and some debt has been getting rolled over. The Ruble has appreciated. We are overweight between 1 and 2 percentage points versus the benchmark in Russia, and it was helpful to the portfolio's return because Russia was up almost 20% in the first quarter.
Strength in China
We're kind of encouraged by the strength in China, where we've had a big overweight for quite a while. China has been cutting interest rates and encouraging investment in the equity markets. The government is encouraging investment by foreigners into the Chinese market and recently eased the ability of Chinese investors to invest in Hong Kong. Some of that spillover from the local Chinese markets started to lift shares listed in Hong Kong, and so far this month Hong Kong is having a great stretch. We have had a big exposure in China and hopefully it's starting to pay off.

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.