Value Added


A Great Foreign Fund

Steven Goldberg

Harbor International boasts impressive long-term performance -- and a low expense ratio.



Maybe Hakan Castegren and his four co-managers are just a bunch of lucky coin flippers. That’s surely what the academics who believe that no one can consistently beat the market, except by chance, would argue.

If that’s true, I just hope Castegren and company maintain their hot hands. Harbor International (symbol HAINX), the fund that Castegren has either managed or co-managed since its inception in 1987, has returned an annualized 12.2% from its launch through February 5. That’s an average of seven percentage points per year better than the MSCI EAFE index, the most popular benchmark of foreign-stock performance.

Harbor has performed well over the past ten years, too. Over that period, it gained an annualized 6.6% -- an average of 5.5 percentage points per year more than the EAFE index. For that stretch, it ranks in the top 2% among funds that invest in foreign, large-company “blend” stocks (those with attributes of both growth and value stocks), according to Morningstar.

I’m a firm believer that short-term performance -- even for periods of three years and longer -- is pretty meaningless. But when a manager puts up good numbers for a decade or longer, I pay attention.

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Harbor International exhibits other promising attributes. Castegren, 75, has assembled an investment team that seems likely to excel after he ultimately steps down. Ted Wendell, 69, has worked with Castegren since 1985. The other three co-managers are in their forties and early fifties. One has been with the fund since 1992; the others since 2002. Another manager will be hired soon.

In an unusual arrangement, Castegren lives in Bermuda while the rest of the team calls Boston home. But Wendell says all five co-managers participate in a wide-ranging daily conference call. “This is the way it has been since 1993, when Hakan went to Bermuda and I stayed in Boston,” Wendell says.

One hallmark of Castegren’s style is that the fund keeps turnover to a bare minimum. It typically holds stocks for five to ten years. With about 70 stocks, that means roughly one buy and one sell decision per month. “We focus on where a company will be in three to five years,” Wendell says.

Harbor International’s worldview

Unlike many fund managers, the Harbor team tries to forecast the big economic picture as well as hunt for promising stocks. Currently, they see the U.S. growing slowly, Europe emerging from the recession at an even slower pace, and Japan trailing the pack as it continues to struggle with deflation. The greatest global threats, says Wendell, are the unwillingness of banks to make more loans and the risk that the U.S. Federal Reserve will wait too long to end the super-easy-money policy it put in place to prevent an economic calamity.

Emerging markets, particularly China, will continue to expand rapidly, Wendell says. The fund currently has more than 20% of its assets in stocks of companies located in developing nations.

Sustained growth in emerging markets, coupled with concerns about a resurgence of inflation, has prompted the fund to invest 40% of its assets in energy and industrial-materials stocks. “Growth in China will continue to pressure prices,” Wendell says.

Harbor International has stashed 9% in Brazil. Says Wendell: “While Brazil is classified as an emerging market, it shows economic discipline. Plus, it possesses this huge, wonderful natural-resources base. We’d own Petrobras [the giant Brazilian oil company] no matter where it was located.”

Expansion in China and other emerging markets is creating new middle-class consumers who are eager to buy products that had previously been beyond their reach. The fund has 22% in consumer goods.

More generally, Castegren and team look for companies with great franchises, strong balance sheets, rising profit margins and the ability to raise prices. The fund has a growth tilt but won’t buy stocks selling at sky-high price-earnings ratios.

Last but hardly least, Harbor International boasts a low expense ratio. The institutional shares, available through most discount brokers for a small transaction fee, charge just 0.83% annually. Minimum investments vary, but are as low as $1,000 at some brokers. You can buy the institutional shares directly from Harbor, but there’s a $50,000 minimum. The investor shares (HIINX) charge 1.20% annually. They’re available directly from the fund with a $2,500 minimum, as well as through many discount brokers without a transaction fee. Buy the lower-cost shares if you can.

Steve Goldberg is an investment adviser in the Washington, D.C., area.



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