Harbor International Disappoints in 2013

When we add funds to the Kiplinger 25, we do so with the expectation that they will beat their benchmarks and their peers over the long haul. But there will be times when they don’t. Take Harbor International (HIINX). Over the past year, it lagged the MSCI EAFE index, which tracks stocks in developed foreign lands, by 7.5 percentage points. What happened?

One culprit is Japan. Its stock market rocketed 67% over the past year, but Harbor has just 9% of its assets in Japanese stocks, which account for 21% of the EAFE index (all returns are through November 29).

Harbor’s four managers—Howard Appleby, Jean-Francois Ducrest, James LaTorre and Edward Wendell—believe that Japan continues to face critical challenges. One is a large amount of outstanding government debt (the ratio of debt to gross domestic product was recently reported to be a lofty 240%). Another is an aging population, which will pressure corporate and government pension plans and dampen consumer spending. The managers also have concerns about whether the nation’s ongoing economic-recovery plan will work.

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All that said, the fund’s Japanese holdings have performed well. The managers favor high-quality exporters, such as Toyota Motor, which has soared 82% over the past 12 months, and SMC, a global pneumatic-engineering firm (up 78%).

More winners. The past year had other bright spots. Harbor’s holdings in European financials—about 20% of assets—shone. Stock in U.K.-based Lloyds Bank rose 67% over the past 12 months, French insurer AXA increased 58%, and Italy’s Intesa Sanpaolo gained 41%.

The big question for Harbor shareholders is whether the fund lost its mojo when Hakan Castegren died in 2010. Castegren was the fund’s sole manager from its launch in 1987 until 2009, when Appleby, Ducrest, LaTorre and Wendell—all of whom had worked for the fund for years as analysts—were named co-managers. During Castegren’s tenure, Harbor International returned an annualized 12.1%, beating the EAFE index by a whopping 6.4 percentage points per year, on average. In the 38 months since Castegren passed away, however, the fund has trailed the index, returning 9.2% annualized, compared with 10.1% for EAFE. We’re watching the fund closely and mulling possible replacements.