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International Fund —
Consumer stocks provided a relative advantage during the quarter
2nd Quarter, 2017
"Stock selection accounted for all of the Fund's outperformance during the quarter. "
– Northern Cross, LLC

The second quarter of 2017 saw positive returns and low volatility for both domestic and international stocks. The Harbor International Fund gained during the quarter, posting a return of 6.77% and outperforming its benchmark, the MSCI EAFE (ND) Index, which returned 6.12%. The benchmark is a measure of equities in developed markets outside of the United States. The Fund’s outperformance relative to its benchmark largely was driven by stock selection within the Consumer Discretionary and Consumer Staples sectors. Stock selection within the Energy sector held back relative results for the period.
Northern Cross’ comments were made in a July, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2017, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2017.

Interview Highlights

Contributors and Detractors
Las Vegas Sands, Alibaba, and Wynn Resorts and were the top individual contributors to relative returns in the second quarter. Las Vegas Sands and Wynn Resorts, both of which derive the majority of their revenue from Macau, continued to see strong mass-market visitation. We believe the Macau revenue segment should continue to grow for these businesses should expected infrastructure improvements for increased access to Macau and entertainment options to attract non-gamblers come to fruition. China-based Internet services provider Alibaba continued to report strong results from its core e-commerce business, which is being driven by mobile users, as well as strong growth in its cloud computing business.
On the negative side, Schlumberger, Shire, and Fanuc were the top detractors. Schlumberger declined alongside the fall in oil prices on oversupply concerns. The company is widely used by sovereign oil producers who rely on the company’s expertise. Shire’s hemophilia franchise is under pressure from a competitor’s new drug. Fanuc marked time after nine months of strong performance.
Sector Allocations
Excluding the effects of cash, the Fund’s sector selection did not have a significant impact on relative performance during the quarter. On the positive side was an underweight allocation to the Energy sector, the worst performing sector in the benchmark for the quarter. Conversely, an overweight position to the Consumer Discretionary sector detracted from relative results. Our sector weightings did not change materially during the quarter.
Currency Effect
On a relative basis, currency did not have a meaningful impact on performance, and was a marginal detractor versus the index. The portfolio benefitted from an underweight position to the Japanese Yen, which declined versus the U.S. Dollar, but this impact was offset by the portfolio’s U.S. Dollar positions, as the Dollar declined versus most major currencies in the quarter. As a result, the unhedged portfolio and index both saw strong absolute contribution from currency effect versus a weaker U.S. Dollar.
Should the new U.S. administration find a way to follow through on its stated legislative goals, both the U.S. and global economies could potentially benefit as fiscal and budgetary stimuli could revive growth. At the same time, Europe has seen an uptick in short-term economic indicators, which has driven a slightly more optimistic view on that region. We do view some international currencies, especially the Mexican and Colombian Pesos and the Swedish Krona, as undervalued, and we increased our exposure to Mexico during the period. We have continued to remain unhedged in the portfolio as we do not feel we can add significant value over the long-term from currency trading.

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.