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Emerging Markets Equity Fund —
Fourth Quarter Manager Commentary
4th Quarter, 2018
"While investor sentiment toward emerging market equities quickly turned negative in 2018, valuations are more attractive in absolute terms, with what we view as wide valuation discounts in comparison to developed markets. We believe uncertainty is creating opportunity. "

Economic Overview
As the trade war between the U.S. and China continued, emerging market equities declined during the fourth quarter of 2018, but outperformed developed markets. Oil prices declined, and emerging market currencies were broadly flat against the Dollar, which appreciated against many developed market currencies. Within the Fund’s benchmark, the MSCI Emerging Markets (ND) Index, Mexico performed poorly due to concerns about the new president’s economic policies. China also underperformed the broader index, as investors remained skeptical on the progress of trade negotiation. Conversely, Brazil was the best-performing country during the quarter, following a market-friendly election outcome in October, which boosted business and consumer confidence. On a sector basis, all but two—Utilities and Real Estate—declined, with the weakest returns in Health Care, Information Technology, and Consumer Discretionary.
Portfolio Review
In the fourth quarter of 2018, the Harbor Emerging Markets Equity Fund (Institutional Class) returned -7.73%, modestly underperforming its benchmark, the MSCI Emerging Markets Index (ND), which returned -7.47%.
Stock selection in China and in Taiwan were the largest drivers of relative underperformance; an overweight to China-based holdings also had a negative impact. Stock selection in South Korea and Mexico also detracted. Conversely, an overweight allocation to Brazil helped relative performance, along with stock selection in Brazil and South Africa. From a sector perspective, security selection among Information Technology and Consumer Staples had a negative impact on relative returns. In contrast, selection within Consumer Discretionary, Industrials, and Materials contributed to relative performance, along with overweight exposure to Financials. The Fund’s sector and market weightings, however, are purely a residual outcome of the bottom-up stock selection process.
Several key relative detractors were holdings that suffered from a downturn in the semiconductor cycle, as demand slowed in end markets such as smartphones, servers, and automobile components. Shares of South Korea-based Samsung Electronics, the Fund’s largest holding, performed poorly after memory semiconductor prices fell from their cyclical peak. Weak global smartphone sales hurt both Samsung’s own smartphone sales, as well as sales of components to competitors. Taiwan Semiconductor Manufacturing Company (TSMC), which counts Apple as one of its largest customers, also weighed substantially on relative returns. Likewise, shares of UMC, another Taiwan-based chipmaker, felt the sting of the downturn. UMC was also hurt after the U.S. government accused a Chinese company UMC has worked with of intellectual property theft.
In contrast, India-based ICICI Bank shares advanced more than 20% during the quarter, contributing to relative results. ICICI has provisioned against legacy non-performing assets from the last lending cycle. In addition, the company has improved its funding mix of low-cost deposits and has resumed growth of its loan portfolio. In October, ICICI named a new, highly-regarded CEO. We believe earnings growth should accelerate over the next few years.
Azul, the Brazil-based airline, was one of the Fund’s strongest performers during the quarter, and a substantial contributor to relative returns. Shares benefited from election results, while the sharp decline in oil prices lowered fuel costs, one of the company’s largest expenses.
Within Materials, higher fourth quarter gold prices bolstered shares of South Africa-based AngloGold Ashanti. Kelvin Dushnisky, who took over as CEO in September 2018, outlined what we view as a clear strategic plan of reducing costs, divesting marginal assets and focusing capital allocation on high-quality mines. Those clearer strategic goals, combined with rising gold prices and a better asset mix, drove strong stock performance during the quarter. While the bulk of the firm’s mining assets are located outside South Africa, we believe the company has traded at a discount due to perceived South African risk.
We did not dramatically shift our positioning during the quarter, and the portfolio remains value biased. However, when macroeconomic uncertainty is high, we focus on identifying company-specific risks. At the country level, we reduced our overweight to Brazil and Russia during the quarter and increased our overweight to China. We believe a resolution of the trade war could boost Chinese and Asian markets. We did not dramatically shift our sector allocations during 2018.
We added Ultrapar to the portfolio during the fourth quarter, and we believe we were able to purchase a quality company after a significant pullback. The performance of Ultrapar’s service station business suffered from weak demand and more vigorous competition from a subsidiary of Petrobras. We believe that Ultrapar will improve performance within that business through the implementation of several marketing and operational initiatives.
We liquidated Brilliance China Automotive after the Chinese government granted permission to German carmaker BMW to increase its stake in its joint venture with Brilliance at what we viewed as a bargain price.
Emerging market equities endured a rough stretch in 2018, in both absolute terms and relative to developed markets. We acknowledge that there is significant macroeconomic uncertainty, given protectionism and tighter monetary policy. However, we believe emerging markets have already absorbed extensive selling. While investor sentiment toward emerging market equities quickly turned negative in 2018, valuations are more attractive in absolute terms, with what we view as wide valuation discounts in comparison to developed markets. In short, we believe uncertainty is creating opportunity. Taking a longer term view, corporate governance trends have been positive in most markets, and capital returns to investors have increased. We remain constructive and continue to conduct vigorous, bottom-up research in order to construct a portfolio of good companies with solid management and strong balance sheets at attractive valuations. Our main focus is to find good quality names, no matter the country or sector, which we believe will perform well over the long-term.

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.