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Emerging Markets Equity Fund —
Challenging quarter for emerging markets
3rd Quarter, 2015
"The common thread through our portfolio holdings is the strength of the balance sheet and the strength of the business model of the companies where the Fund is invested. "
– Oaktree Capital Management, L.P.

It was a very difficult market environment for emerging market equities, which fell -17.90% as measured by the MSCI Emerging Markets (ND) Index, during the third quarter of 2015. Performance across all sectors was negative during the quarter with the poorest performance coming from the Energy and Financials sectors. Similarly, returns across all 23 countries were negative during the quarter with Brazil and China showing the poorest performance. Lastly, foreign exchange weakness accounted for about one-third of the decline for the index as emerging market currencies depreciated versus the U.S. Dollar.
The Harbor Emerging Markets Equity Fund trailed the benchmark during the quarter with a return of -20.50%. A below-benchmark weight to Financials, and positive stock selection within the sector helped relative performance during the quarter. The Fund also generated better than benchmark results broadly in South Africa and Russia. India, Brazil, China and Mexico were notable sources of underperformance compared to the benchmark, while Energy and Consumer related areas were the most negative from a sector perspective. Sector and country weightings are primarily driven by individual stock decisions.
Tim Jensen and Frank Carroll's comments were made in an October 13, 2015 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended September 30, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1, 2015 through September 30, 2015.

Interview Highlights

No Place to Hide
When emerging markets face an environment where all countries and sectors simultaneously perform poorly, there are few places one can go to shield the portfolio from volatility. Defensively oriented sectors that held up better such as Consumer Staples and Health Care were too expensive to buy, in our opinion, trading at very high valuation levels. In addition, Health Care companies represent a very small part of the market, currently less than 3%. Lastly, other defensive sectors such as Utilities and Telecom are not necessarily defensive when currencies are weak like they were in the third quarter. We evaluated the market environment and made an intentional decision to be patient and look for opportunities to buy stocks with good risk/reward characteristics during the market sell-off.
A Word on China
Emerging markets have been driven more by macro sentiment over the last 12 to 18 months than by company fundamentals. Additionally, uncertainty and outright negative sentiment surrounding China has been a factor. We believe that market participants are too negative currently and that confidence will come back to the markets at some point in the future. This renewed confidence will allow stocks to react to fundamentals which favors the Fund’s approach as opposed to macro fears. Regarding China specifically, we view the country as a late stage industrial economy that is in transition to a consumption driven, consumer economy. While the transition may create some volatility as we have witnessed recently, it should provide opportunities longer term. In fact, we are currently researching several interesting stocks that are trading at low multiples and have limited or no debt.
The Positive Side of Falling Commodity Prices and Weaker Currencies
The pullback in commodity prices is generally more of a positive for emerging markets since two-thirds of the emerging market countries are commodity importers while the other third are commodity exporters. In general, market participants have been focused on the negative consequences to commodity exporting countries such as Brazil, Russia, Chile and Columbia, and ignoring the benefits to importers such as China, Korea and Taiwan in terms of cost competitiveness. Additionally, there has been a huge improvement in the competitiveness of manufacturing companies within emerging markets, some of which are held in the Fund due to weaker emerging market currencies.
Revisit the Playbook
We are confident that once investors begin to focus on fundamentals they will see some of the positives within the Fund’s portfolio holdings emerge. For example, emerging market companies are more competitive globally due to the exchange rate moves. Additionally, there are many companies that have proven to be resilient through this volatile period and which may likely be rewarded longer term. Lastly, we are confident based on our past experiences investing in the region. Good companies have been through far worse downturns and have persevered so there is a playbook to follow from 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.