News & Commentary

View all Commentary headlines

Emerging Markets Equity Fund —
Emerging markets post strong gains, beating developed markets
3rd Quarter, 2016
"We were early in adding value and cyclical exposure to the portfolio during 2015, but over the past three months, we have seen our shift into value as beneficial on a relative basis. "
– Oaktree Capital Management, L.P.

International markets surged in the quarter, with emerging markets outperforming their developed market peers. With a gain of 13%, China was one of the best performing markets, due in part to the release of positive economic data and the approval of the Shenzhen-Hong Kong stock connect program. Developments in other major emerging markets provided additional reasons for investor optimism. After many years of debate, India’s Upper House of Parliament approved the Goods and Services Tax (a national sales tax), which will create a single domestic sales tax system and signals encouraging progress in the government’s reform efforts. Brazil’s impeachment proceedings finally ended after many months, ousting Dilma Rousseff and introducing new president Michel Temer, who has proposed a series of economic reforms.
Central banks in India, Japan and the U.S. continued to pursue dovish policies. Emerging market currencies rose 1.1%, while the Dollar index fell slightly. Consensus earnings expectations for emerging markets for 2016 and 2017 were revised higher. Emerging markets enjoyed inflows during the period based on data compiled by EPFR, an encouraging indicator that negative sentiment toward the asset class has diminished.
The MSCI Emerging Markets (ND) Index generated a gain of 9.03%, outgaining developed markets by a wide margin. The Harbor Emerging Markets Equity Fund outperformed its benchmark, posting a return of 11.02%. Stock selection in South Korea contributed to relative performance, while stock selection in India slightly detracted. By sector, stock selection among Information Technology contributed positively while selection in Financials detracted from relative performance.
Oaktree Capital Management’s comments were made in an October, 2016 report. Highlights adapted from the report appear below. All comments relate to the quarter ended September 30, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through September 30, 2016.

Interview Highlights

Beginning to Reap the Rewards of Our Value Positioning
The third quarter was a rewarding time after months of rotating the portfolio into more opportunistic value names. Given valuations, we have been selecting stocks that would perform well in a better market environment rather than hide in (overpriced) defensive names that would lose less in continued poor markets. We were early in adding value and cyclical exposure to the portfolio during 2015, but over the past three months, we have seen our shift into value as beneficial on a relative basis. We hope that the recent better markets will continue and we can build on the last six months of relative and absolute performance.
We See Excellent Value in China
China had its best quarter since 2009. Second-quarter company earnings and earnings outlook improved, specifically within the Consumer Discretionary, Telecom Services and Materials sectors as well as internet stocks. This was in line with the release of positive economic data surrounding consumer consumption and the encouraging steps to improve coal and steel production overcapacity. In August, the State Council of China approved the Shenzhen-Hong Kong Stock Connect program, which will allow global investors access to more Chinese companies for investment, specifically technology companies listed on the Shenzhen exchange. During the quarter, we added to our overweight exposure to China. We continue to believe that China will grow, albeit at a more modest pace, and that China-based stocks offer excellent value.
Confidence in Emerging Market Equity Prospects
We continue to follow our bottom-up process to find good quality names, no matter the country or sector, which we believe will perform well over the long-term. We continue to be optimistic about the long-term prospects for emerging markets. Emerging market equities currently trade at a low price-to-book value relative to the index’s long-term average and relative to developed market indexes. We believe the portfolio is positioned well for a market upswing and a rotation into value, as value names have been out of favor for several years. Additionally, many of the companies have strong balance sheets and experienced management teams who have weathered volatile economic environments in the past.

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.