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Emerging Markets Equity Fund —
Fund advances, outperforms despite emerging market difficulties
3rd Quarter, 2018
"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. Based on that vigorous, bottom-up research, we remain constructive going forward. "
– Oaktree Capital Management, L.P.

Amid an escalating trade conflict between the United States and China and continued U.S. monetary policy tightening, emerging market equities declined during the third quarter of 2018 and underperformed developed markets, which broadly advanced. Within the Fund’s benchmark, the MSCI Emerging Markets (ND) Index, Chinese equities performed poorly following several rounds of U.S. trade tariffs. Elsewhere, stocks in countries dependent on capital inflows due to current account deficits, such as Turkey and India, declined. Equities based in markets with current account surplus, including Thailand and Taiwan, advanced. On a sector basis, Consumer Discretionary and Health Care posted the largest declines, while Energy advanced sharply amid rising oil prices.
Against this backdrop, the Harbor Emerging Markets Equity Fund advanced 1.47% during the quarter, outperforming its benchmark, the MSCI Emerging Markets Index (ND), which returned -1.09%.
Stock selection in China was the largest driver of relative outperformance for the quarter. Stock choices and above-benchmark exposure to Brazil, which advanced in the benchmark, also bolstered relative returns. India contributed, driven largely by security selection. Conversely, stock selection and above-benchmark exposure in Greece, one of the benchmark’s weakest markets during the quarter, detracted from relative performance. An underweight to Thailand also weighed on relative returns. From a sector perspective, stock selection and a favorable underweight to Information Technology was a key driver of outperformance. Overweight exposure and stock choices in Energy had a positive impact. Within Industrials, stocks held outperformed those in the benchmark. The Fund’s sector and market weightings, however, are purely a residual outcome of the bottom-up stock selection process.
Oaktree Capital Management’s comments were made in an October, 2018 report. Highlights adapted from the report appear below. All comments relate to the quarter ended September 30, 2018, unless otherwise indicated. All references to the year-to-date are for the period January 1 through September 30, 2018.

Interview Highlights

A Good Time to Be Value Investors
In emerging markets, value stocks outperformed growth stocks during the third quarter of 2018. We are more exposed to value names, which helped generate strong relative performance, just as it did during the first quarter of the year. While the second quarter was a different story, we now believe we are in the early stages of a strong value cycle.
Higher Exposure to Energy, Financials and Materials
Entering the third quarter, our portfolio was overweight Energy, Financials and Materials, and underweight Information Technology, Telecommunication Services and Health Care. While our sector weightings did not change materially over the quarter, we further increased our three largest overweights. We reduced our exposure to Consumer Discretionary and increased our exposure to Consumer Staples and Health Care. The Fund’s sector and market weightings are purely a residual outcome of our bottom-up stock selection process.
Quality Stocks in Any Environment
Since reaching highs in January, 2018, we have witnessed a rough stretch for emerging market stocks, marked by significant global uncertainty. At Oaktree Capital Management, we don’t spend a lot of time forecasting larger themes or trends. Rather, our main focus is to follow our bottom-up process to find good quality names, no matter the country or sector, which 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. Based on that vigorous, bottom-up research, we remain constructive going forward.

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.