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Emerging Markets Equity Fund —
Emerging markets equities outperformed their developed market counterparts
2nd Quarter, 2017
"Emerging markets equities have performed very well from early 2016 through the second quarter of 2017, and fund flows into the asset class have resumed. "
– Oaktree Capital Management, L.P.

Emerging markets (as measured by the MSCI Emerging Markets (ND) Index) advanced during the second quarter of 2017, outperforming developed markets. The Information Technology sector drove the index’s returns during the quarter, as Korean semiconductor and Chinese internet stocks appreciated following strong upward revisions of earnings estimates. Asia was the strongest region during the quarter, led by the large markets of South Korea, China, and Taiwan. Energy was the weakest sector. Crude oil prices fell about 9% during the quarter after it became apparent that growth in U.S. shale oil production was likely to overwhelm OPEC’s efforts to support prices by restraining output. Russia and Qatar, two energy producers, were the weakest markets during the quarter.
Emerging markets currencies were mixed during the quarter, but slipped 1.1% overall against the U.S. Dollar, largely due to weakness in oil-dependent currencies like the Russian Ruble. The Brazilian market had a tough quarter after new revelations in an ongoing corruption scandal implicated President Temer. Although Temer may survive the scandal, a hoped-for constitutional amendment that would reform the Brazilian social security system is unlikely to pass before the 2018 presidential election.
The Harbor Emerging Markets Equity Fund returned 5.27% during the second quarter, underperforming its benchmark, the MSCI Emerging Markets (ND) Index, which returned 6.27%. On a sector basis, Financials made the largest contribution to relative performance thanks to stock selection. An overweight allocation to Materials detracted from relative results. Among countries, stock picking in India was advantageous, while stock selection in China, the Fund’s largest individual country holding, weighed on relative results.
Oaktree Capital Management’s 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

Sticking to Our Bottom-Up Discipline
Our portfolio trades at a discount to the market on price-to-book value and price-to-earnings. As of June 30, 2017, the portfolio was overweight Financials and Materials relative to its benchmark, and underweight Consumer Staples, Consumer Discretionary, Industrials, and Health Care. Just over 26% of the portfolio was in Information Technology stocks at quarter end, in line with the benchmark’s weighting, but our exposure to that sector has been tilted more toward semiconductors than internet names. As we have stated in the past, our main focus is 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. It is important that we stick to our bottom-up discipline and be certain that each name in the portfolio is performing in line with our expectations.
We Believe Emerging Markets Are Attractively Valued
Emerging markets equities performed very well from early 2016 through the end of the second quarter of 2017, and fund flows into the asset class have resumed. Emerging markets continue to trade at price- to-book value and price-to-earnings multiples below the asset class’s long-term averages. They also continue to trade at discounts to developed markets. Earnings revisions have been strong this year, although dominated by Information Technology stocks. Corporate governance trends also seem to be improving in most markets, in our view.
Encouraging News in China, Despite Market Reaction
Despite the constructive backdrop, the markets are climbing a wall of worry. After five years of difficult performance for emerging markets from 2011 to 2015, investors remain conditioned to seek safety first. For example, Chinese regulators have made it very clear to the markets that they are trying to limit the growth of shadow-bank financing. Consequently, they incrementally tightened monetary policy during the second quarter. We welcome the Chinese regulatory moves and consider them prudent, because we believe they could force credit onto the balance sheets of regulated financial institutions that will be required to maintain adequate capital and create provisions for losses. However, on the tightening headlines, the markets experienced a knee-jerk reaction, with cyclical stocks underperforming as some funds apparently shifted into high-multiple defensive stocks, such as Consumer Staples and some Consumer Discretionary stocks. We did not dramatically shift our positioning, and the Fund’s portfolio remains value-biased.

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.