News & Commentary

View all Commentary headlines

International Fund —
Fourth Quarter Manager Commentary
2nd Quarter, 2019
"While we are taking advantage of price dislocations and establishing new positions where relative valuations present an opportunity to do so, the portfolio in aggregate remains focused on downside protection with a 'quality' tilt (i.e. strong balance sheets, stable free-cash-flow, sound competitive positioning, etc.) from a characteristics standpoint. "

Market in Review
The U.S. Federal Reserve continued its dovish tone in the second quarter of 2019, expressing concern over the health of the global economy and bolstering hopes for rate cuts in July. The European Central Bank set a similar tone, citing rising protectionism as one factor in its decision to postpone any further rate increases until at least midway through 2020. This accommodative tenor emanating from policymakers, combined with a recent truce in the ongoing trade war between the U.S. and China, drove positive equity market momentum during the quarter and led to a more constructive short-term outlook for most equity investors (though a rising chorus of pundits has been questioning how much further this "bull market run" can last). Conversely, the resignation of the U.K.’s prime minister added to uncertainty around Brexit and led to a slight increase in volatility for the British Pound and U.K. capital markets.
Regardless, our outlook has not changed as a result of these macro-level events, and, instead, our investment analysis remains firmly focused on bottom-up fundamental stock selection.
Portfolio Performance
In the second quarter of 2019, the Harbor International Fund (Institutional Class) returned 2.86%, underperforming its benchmark, the MSCI EAFE (ND) Index, which returned 3.68%.
The Harbor International Fund ("Fund") underperformed its benchmark during the second quarter, with a contribution to relative performance from stock selection more than offset by negative allocation effects (both regional and from a currency standpoint). Relative performance weaknesses for the Fund were in the Pacific ex-Japan region (due primarily to an underweight to Australia) and European region (due primarily to an overweight to the British Pound). In Australia, not owning the large bank constituents, in particular, had a negative impact. Although this is stock specific, political factors were at play as bank shares (which constitute a significant part of Australia’s market index) rose after the ruling Conservative party’s surprise victory in the general election helped reduce the threat of financial industry reform that had been promised by the opposition. The Fund’s residual cash position also weighed on relative returns during the quarter as equity markets in general, and the benchmark index overall, appreciated.
By contrast, the largest positive influences on relative performance during the period came from stock selection within Europe (in particular, within the U.K. and France). The Fund’s tilt toward U.K.-listed names with a global presence, as opposed to domestically oriented companies, contributed to relative performance.
From a sector standpoint, stock selection within Financials and Consumer Staples weighed on relative returns. Conversely, the Fund’s underweight exposure to the poorly performing Real Estate sector contributed to relative Fund performance.
Contributors and Detractors
Detractors from relative performance included Bunzl, a U.K.-based distribution and supplies group, which recently announced revised growth prospects for the year, citing a weaker macroeconomic backdrop, which in turn weighed on the company’s share price during the quarter. An out-of-benchmark position in Chinese technology firm Baidu weighed on performance as the company reported its first quarterly loss during the period, citing the ongoing trade war and increased domestic scrutiny as reasons for its weaker earnings guidance. Not owning one of the larger Australian financial benchmark constituents, Commonwealth Bank of Australia, hurt relative returns. Bank shares rose after the ruling Conservative party’s surprise victory in the general election helped reduce the threat of financial industry reform that had been promised by the opposition.
In contrast, sentiment in shares of Merlin Entertainments, a U.K.-listed company that operates a number of attractions and theme parks globally (such as Legoland, Madame Tussauds, and the London Eye), benefited from a £5.9 billion ($7.3 billion) takeover offer from a consortium led by the billionaire family that owns Lego, and private equity firm Blackstone. Sentiment in shares of German publishing group Axel Springer also benefited from a private equity-led takeover bid (by KKR) during the quarter. Shares of Chinese sportswear brand Li Ning continued their strong performance into the second quarter of the year after seeing its profits rise nearly 40% in the first quarter.
Buys and Sells
Shares of German meal-kit provider HelloFresh were added to the Fund’s portfolio. The company is a leading player in the meal-kit market and has been gaining significant market share in the U.S., where it generates over half of its revenue. Meal-kit demand has been growing steadily, and a period of consolidation in the market has seen the number of competitors more than halved. We believe HelloFresh is positioned strongly to benefit from this growth, having overtaken its largest competitor in the U.S.
There were no full sales of any positions during the quarter, only partial sales or trims.
Country Allocation
There were no material country allocation changes during the quarter, and the exposure to developing markets did not change significantly.
Outlook
No new themes or tilts were introduced into the portfolio during the quarter and, rather than attempt to predict macro geopolitical and economic forces and their influence on market conditions going forward, we remain focused on bottom-up stock selection with an aim to invest in businesses where we believe the supply-side capital cycle dynamics and capital allocation decisions by management remain favorable or are improving.
That said, as a general observation, it continues to appear to us that market participants (broadly speaking) have convinced themselves that monetary policy accommodation will continue indefinitely and do so without unintended negative repercussions. We believe, however, that monetary policy normalization must have its day at some point. Debt levels have ballooned as a consequence of historically low interest rates and, at current valuation levels and on peak profit margins with little in the way of upside earnings growth during the last few quarters, we believe equity markets are subject to downside risks and geopolitical uncertainties. Thus, while we are taking advantage of price dislocations and establishing new positions when relative valuations present an opportunity to do so, the portfolio in aggregate remains focused on downside protection with a "quality" tilt (i.e., strong balance sheets, stable free-cash-flow, sound competitive positioning, etc.) from a characteristics standpoint.
Distinctively, emerging markets (collectively) present an attractive opportunity set over the medium term, in our view, as and if investors continue to recalibrate growth expectations, pull capital from those markets as a result, and, in turn, force managers operating businesses in those markets to allocate capital more efficiently.

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 harborfunds.com.

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.