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Emerging Markets Equity Fund —
Emerging markets finish slightly up after a turbulent quarter
2nd Quarter, 2016
"We continue to follow our bottom-up process to find good quality names, no matter the country or sector, that we believe will perform well over the long-term. "
– Oaktree Capital Management, L.P.

Markets were buffeted during the second quarter of 2016 by changing expectations for both Federal Reserve tightening and Chinese growth, and finally, by the Brexit vote in the United Kingdom. Brazil was one of the strongest markets during the period, rising on President Rousseff’s impeachment and the resulting potential for economic and political reform. Oil and commodities continued to rally, a constructive development for commodity exporting countries. Central banks in India, Japan and the U.S. pursued dovish policies. The Dollar index rose nearly 2%, but emerging markets currencies were flat.
The MSCI Emerging Markets (ND) Index ended the quarter with a return of 0.66%. The Harbor Emerging Markets Equity Fund modestly outperformed its benchmark, posting a return of 0.92%. Stock selection in the Materials, Telecommunication Services, Utilities and Financials sectors contributed significantly to relative returns during the quarter. Conversely, stock selection in Consumer Discretionary and Energy had a negative impact. A sizable underweight to Consumer Staples, the best performing sector in the benchmark, also held back relative results.
The top individual contributor to relative performance, Sberbank of Russia, benefited from a strengthening Ruble and an apparent bottoming of economic growth in Russia. Other contributors included Vale, AngloGold Ashanti, Itau Unibanco and China Shenhua Energy. Stocks that detracted on a relative basis included Trina Solar, which suffered as solar stocks came under pressure globally, along with Galaxy Entertainment Group, Turkiye Halk Bankasi, and Gazprom.
Oaktree Capital Management’s comments were made in a July, 2016 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2016.

Interview Highlights

Positive Developments for Brazil
It was encouraging to see the Brazilian market perform well during the quarter. The change in government and the new cabinet provided a significant boost to investor and business confidence. The Brazilian economy has been in a deep recession for the past few years. The country has suffered from a significant negative terms-of-trade shock due to the decline in commodity prices, a broad corruption scandal, and political paralysis. The market rally has been driven by the prospect of political change and the potential for subsequent economic reform. We have held an overweight position in Brazil and we are hopeful that a positive scenario will play out.
Long-Term Brexit Effects Uncertain
The surprising decision of U.K. voters to leave the E.U. caused a sharp turndown in global markets toward the end of the quarter. At this point, it is too early to tell the direct impact on emerging market equities, which generally have minimal exposure to the U.K. One issue we will watch is currency movements. Emerging markets tend to suffer during periods of rapid Dollar appreciation; if the Brexit vote triggers a continuing Dollar rally, we could see renewed weakness in commodity prices and emerging market currencies. If the Dollar remains stable and global interest rates fall, we may see capital shift into emerging markets, given the scope for interest rate declines and attractive relative valuations.
Portfolio Positioning
We added a position in PetroChina during the quarter. We expect to see progress from the company on cost-cutting and non-core asset divestitures. We believe that the company can beat current low earnings expectations, and we see significant upside in its valuation. We liquidated the portfolio’s position in Gazprom when the company disappointed on its dividend payout. We believed that a higher payout ratio would have created more capital discipline within Gazprom; when management gained an exemption from the higher payout, it became apparent that they did not plan to change their approach.
Waiting for Value to Be Rewarded
Market volatility has allowed us to purchase quality names during market dislocations. The relative performance of value names has not yet consistently turned up, so the heavier value weighting in the portfolio has not been rewarded. Globally, banks and financial stocks have struggled due to low interest rates in developed markets. This has created a headwind for emerging market financials even though ultra-low interest rate policies are not in place in most emerging markets.

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.