FUND WATCH


A Patient Approach at Harbor International

Marc A. Wojno

Holding stocks for the long term has helped this fund outpace its peers.



In the late 1990s and early 2000s, analysts at Harbor International began taking special interest in Brazil. The slumbering South American giant's economy was depressed, and its currency was cheap.

By 2002, interest rates there were heading down and the Harbor team, led by manager Hakan Castegren, concluded that the country's banking system was poised for growth. So, in the summer of 2002, after years of researching Brazil, Harbor invested in Banco Bradesco, the nation's largest bank, with more than 3,000 branches and some 82,000 employes. The stock (symbol BBD) has been a winner, returning more than 50% annualized since entering Harbor's portfolio.

Banco Bradesco is typical of the companies that have made Harbor International one of the top-performing overseas stock funds. It's a large, well-managed company with a solid franchise. And the stock was cheap when Harbor first bought it.

What is also typical is the length of time the bank has been a Harbor holding. Castegren and team take their time researching stocks and typically hold them for seven to ten years.

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This patient approach has helped Harbor produce a terrific record. Over the past five years through February 4, the institutional shares of Harbor International (HAINX) returned 26% annualized. That beat the MSCI EAFE index, a widely watched measure of foreign stock performance, by an average of five percentage points per year.

Over that period, Harbor outpaced the typical fund that focuses on large, undervalued foreign companies by an average of six percentage points per year. The fund's long-term record going back to its inception, in 1987, is also first rate.

Castegren, who has managed the fund from the outset, prefers to invest in countries with stable currencies, politics and economies. He then looks for companies with strong brands, growing profits and undervalued assets.

Most of the fund's biggest holdings are in large, well-known names. They include energy giant Petroleo Brasileiro (PBR), commonly known as Petrobras; ABB (ABB), a Swiss maker of power transmission systems and a member of the Kiplinger Green 25; Danish drug maker Novo Nordisk (NVO) and Commerzbank (CRZBY.PK, a German financial-services company.

"We're looking for strong, stable franchises that are expected to become more profitable in the future," says Ted Wendell, a principal at Northern Cross Investments, Harbor International's sub-adviser and one of the fund's four senior analysts.

The fund is making a big bet on financial stocks, which currently account for 27% of its assets. It's keen, for example, on BNP Paribas. France's biggest publicly traded bank announced on January 31 that it may offer to buy Societe Generale, the French bank that was victimized by a rogue 31-year-old trader. "BNP Paribas has a very solid franchise, and we think that it should benefit from the problems of Societe Generale," Wendell says.

Harbor International has a fine long-term record, an experienced management team and a low expense ratio, just 0.85% for the institutional shares, which require a minimum investment of $50,000. The investor share class (HIINX), which charges annual fees of 1.24%, still below average, requires just $2,500 to start.

Harbor International is a worthwhile choice for investors seeking exposure to large, undervalued foreign companies.




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