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Emerging Markets Equity Fund —
Emerging markets equities give back a portion of Q2 gains, nonetheless outpace developed market shares
3rd Quarter, 2014
"What we're trying to do is identify companies that we think have better business models and managements that are more adaptive, who are going to look for opportunities in a slower-growing world and capitalize on it. "
– Oaktree Capital Management, L.P.

Following a solid second quarter, shares of companies based in developing markets relinquished some of their gains in the three months ended September 30, 2014. Developing markets stocks recorded a negative return of -3.49% for the third quarter of 2014, as measured by the MSCI Emerging Markets (ND) Index; this followed a positive return of 6.60% in the second quarter. Shares of Health Care and Telecommunication Services companies moved higher in the quarter, while the other eight sectors in the index lost ground.
Despite the decline, emerging markets equities outperformed their developed market counterparts, which posted a negative return of -5.88% for the third quarter, as measured by the MSCI EAFE (ND) Index. Year to date, the MSCI Emerging Markets (ND) Index returned a positive 2.43% for the nine months ended September 30, while the MSCI EAFE (ND) Index recorded a negative return of -1.38%. The Harbor Emerging Markets Equity Fund posted a negative return of -4.51% for the third quarter, trailing its MSCI Emerging Markets (ND) benchmark. For the 11-month period from its inception on November 1, 2013, the Fund returned -0.60%, compared with the index return of -0.53%.
Portfolio Manager Tim Jensen reports that stocks in South Korea and China detracted from Fund returns relative to the index in the third quarter. From a sector perspective, holdings in the Financials sector hurt Fund returns relative to the benchmark, while investments in the Industrials sector helped relative performance. Top individual performers in the Fund included Singapore-based drug maker Luye Pharma, Airports of Thailand, Indian car maker Tata Motors, Philippines-based food maker Universal Robina, and Chinese computer maker Lenovo. Among the bigger detractors from portfolio returns were smartphone maker Samsung Electronics, Brazilian mining company Vale, Hong Kong-listed casino company Galaxy Entertainment Group, South Korean car maker Hyundai, and gold mining company AngloGold Ashanti.
Tim Jensen's comments were made in an October 13, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended September 30, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through September 30, 2014.

Interview Highlights

Stronger Dollar
September was a difficult month in emerging markets and it turned the quarter negative. Basically it felt like a confluence of factors that happened at one point in time. I think a lot of people look to a strong Dollar as a negative for emerging markets, because when the Dollar strengthened back in the '90s emerging markets had a tough time. We think that kind of view is a little overstated, if you will, because the situation in emerging markets is a lot different now.
Market valuations
The markets overall are trading at less than 11 times forward expected earnings. They're trading between 1.5 and 1.6 times book value, which usually has been a pretty good level at which to buy. We have a few significant overweights in the portfolio that we like. In any given month or quarter they don't always work out the way we'd like, but we're pretty happy with the way we're positioned in the portfolio at this point.
Adapting to slower growth
We're in a world where global growth is slower than it has been. A large part of that is Europe but U.S. growth hasn't been spectacular, either. We'd like to see faster global growth but we're not predicating our portfolio on it. What we're trying to do is identify companies that we think have better business models and managements that are more adaptive, who are going to look for opportunities in a slower-growing world and capitalize on it.
Cheaper commodities
China has been kind of rocky this year but we continue to believe that China should be a real beneficiary of lower commodity prices. China, Korea, Taiwan, India and for that matter most of Asia, are net importers of energy, metals, and, in many of the countries, food. Lower oil and commodity pricing might hurt Russia or Brazil, but it should be a positive for China.
Tracking currency factors
We can't tell you where the Dollar is going to be a year from now, because that's not our strength. But we can tell you, if a currency moves X percent, what the impact might be on an individual company, because we have currency sensitivities built into our forecasts. We have added a few positions to the portfolio that we believe would benefit from Dollar strength and local currency weakness.

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.