Harbor International Fund Institutional Class (HAINX)

Investment Strategy

The Fund invests primarily (no less than 65% of its total assets under normal market conditions) in common and preferred stocks of foreign companies located principally in developed markets across Europe, Japan and Asia Pacific.

Marathon-London's investment strategy focuses on identifying attractive long-term investment opportunities that can arise as a result of certain capital cycle conditions. Capital cycle investing is based on the concept that periods of growth and profitability within an industry will prompt additional business investments and increased competition within that industry, and will therefore lead to increasing stock prices and excessive investor optimism. Eventually, however, growth will slow and that heightened competition will lead to lower prices, lower returns on business investments, falling profitability, and excessive investor pessimism.

Capital Cycle

Marathon-London's investment team seeks to understand how individual companies' management teams respond to the changes in the capital cycle through their own business investments and practices, and how they are incentivized, because those things are critical to how those businesses will perform, and ultimately how their stocks will perform. While capital cycles are often observed at an industry level, investment opportunities are first identified through bottom-up analysis at the company level.

The portfolio managers look for investments in companies within two opposite points of the capital cycle:

  • High return phase: Businesses in the top half of the capital cycle, where profitability and growth within a company and/or industry allow them to fend off competition and excess capital that would otherwise be drawn to the prospects of high returns. These types of investments can also be characterized as having an industry without many strong competitors and with high barriers to entry.
  • Depressed return phase: Businesses in the bottom half of the capital cycle, where profitability has fallen so that business investment has declined. These are often characterized as contrarian, deep value investments where an improvement in the economic returns of a business is not accurately assessed by the broad market. A market where supply and competition are removed, through failing competitors or acquisitions, or a radical shift in management strategy, are often conditions leading to these types of investments.

Marathon-London uses fundamental, bottom-up qualitative analysis to evaluate businesses and the industry within which they operate. Research meetings with company management represent a significant aspect of the analysis conducted by the Subadviser. Companies that the Subadviser finds attractive include those that:

  • Use money effectively and efficiently
  • Have high rates of ownership by employees and management, and/or use incentives to ensure that management is focused on long-term results
  • Operate in a industry without many strong competitors
  • Show improving, or high and sustainable returns on money invested in the business
  • Generate enough profit to allow for future investments in the company

Given the contrarian and long-term nature of capital cycle investing, Marathon-London's strategy tends to result in a portfolio of investments that can differ significantly from the Fund's benchmark index, with average holding periods of seven years or more for individual company investments.

The portfolio managers are organized into teams, each focusing on a different region of the world: Europe, Japan, and Asia Pacific. Mr Ostrer and Mr Arah are jointly responsible for determining the allocations to each individual portfolio manager. The combined portfolio's overarching regional allocation is broadly benchmark neutral. However, the portfolio also may have a modest exposure to emerging markets. All of the portfolio managers employ the capital cycle approach to investing across their respective regions in order to identify individual companies for investment, but have autonomy to select the investments they find most attractive. The investment ideas generated across each of the three regions are then combined into the Fund's overall portfolio. This results in an inherently diversified portfolio that generally maintains investments in between 350 and 450 companies.

Risks

Marathon-London's assessment of the capital cycle for a particular industry or company may be incorrect. Investing in companies at inopportune phases of the capital cycle can result in the Fund purchasing company stock at pricing levels that are higher than the market dynamics would support and therefore subject the Fund to greater risk that the stock price would decline rather than increase over time.

Investing in international and emerging markets poses special risks, including potentially greater price volatility due to social, political and economic factors, as well as currency exchange rate fluctuations. These risks are more severe for securities of issuers in emerging market regions. Stocks of small and mid cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies.

Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market and economic conditions.