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Fund Times

Harbor International Under Review After Subadvisor Swap

The replacement of longtime subadvisor Northern Cross with Marathon Asset Management will result in a capital gains distribution estimated to be more than a third of net asset value.

 Harbor International's (HAINX) Morningstar Analyst Rating is Under Review after the family replaced longtime subadvisor Northern Cross with Marathon Asset Management.

Harbor acted after years of heavy redemptions and mediocre performance from a formerly revered management team. The fund has suffered a staggering $27.4 billion in estimated outflows over the past three years through July 2018. Although the Northern Cross management team contributed to the fund's outstanding results in the 1990s and 2000s, it has struggled to reach those lofty heights since former lead manager Hakan Castegran died in October 2010. Since then, the fund's 5.3% annualized gain edged the MSCI ACWI ex USA Index's 5.1% through July 2018 but lagged the foreign large-blend Morningstar Category average's 5.5%.

Marathon's London-based team now runs the fund with a strategy that attempts to beat the MCSI EAFE Index. Marathon employs a team-based approach with each comanager running a sleeve of the portfolio. The team takes a long-term view, often looking out seven to eight years. The team invests based on the capital cycle. It looks for companies in industries with the potential for higher profit margins and improving returns on capital. These tend to be industries with falling margins and diminishing competition. Fewer competitors and less capital tend to set the table for better returns on capital down the road. Given its long time horizon, the team focuses on managements with equally long horizons.

The London-based team also runs sibling Harbor Diversified International All Cap (HAIDX), which has generated a mediocre record since its 2015 inception. This team also manages a sleeve of  Vanguard Global Equity (VHGEX).

The capital gains hit from the subadvisor change will be brutal for taxable shareholders. Harbor estimates that the fund's 2018 capital gains distribution will be between $23 and $27 per share, which would be more than a third of the $65.38 net asset value as of Aug. 21, 2018.

Kevin McDevitt does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.