During the fourth quarter of 2025, the Harbor International Fund experienced a return of 2.21%, which was less than the 4.86% return of its benchmark, the MSCI EAFE (ND) Index. This period marked a critical point where the effects of an unprecedented global tightening cycle began to manifest across various companies. Looking ahead, these economic shifts are expected to open up significant opportunities in the lower half of the market over the next few years.

The market's performance indicated a challenging environment, particularly for specific investment styles and sectors. Quality-focused investments generally outperformed both value and growth strategies globally, with the exception of the U.S. market, where value stocks showed a 3%–6% lead over growth stocks. From a sector-specific viewpoint, stock selection proved to be a weak point for the fund, especially in the Health Care, Industrials, and Consumer Discretionary sectors.

Understanding the Recent Investment Landscape

In the fourth quarter of 2025, the Harbor International Fund's returns of 2.21% fell short of the MSCI EAFE (ND) Index's 4.86%. This underperformance reflects the broader market's reaction to the extended period of global monetary tightening. The economic environment showed clear indications that businesses worldwide were starting to feel the pressure from these policies, leading to a noticeable impact on corporate earnings and valuations. The disparity between the fund's performance and its benchmark underscores the complex nature of navigating international markets during a period of significant economic adjustments.

A closer examination of investment styles reveals that quality investments demonstrated resilience, outperforming both value and growth strategies in most regions, except for the U.S. In the U.S., value stocks interestingly managed to outperform growth stocks by a margin of 3% to 6%. However, the fund's overall performance was hindered by poor stock selection within key sectors such as Health Care, Industrials, and Consumer Discretionary. This suggests that while macro factors played a role, specific allocation choices within these sectors did not yield the desired results, contributing to the fund's lag against the benchmark.

Future Outlook and Strategic Adjustments

Despite the recent underperformance, the current economic climate, characterized by the lingering effects of global tightening, is anticipated to create new investment avenues. The expectation is that the ongoing economic pressures will lead to increased opportunities in the bottom half of the market capitalization spectrum in the upcoming years. This outlook is based on the premise that challenging economic conditions often expose undervalued assets and provide fertile ground for strategic investments that can yield substantial returns once market conditions stabilize or improve. The fund aims to capitalize on these emerging opportunities by carefully identifying companies that have been disproportionately affected but possess strong underlying fundamentals.

The strategic focus will shift towards identifying companies that, despite current headwinds, are poised for recovery and growth. This involves a diligent process of bottom-up research to uncover businesses with robust balance sheets, strong management teams, and sustainable competitive advantages that may currently be undervalued. The investment team believes that the impact of the tightening cycle, though initially negative, will ultimately cleanse the market, leading to a more favorable environment for discerning investors. Therefore, while recent performance was challenging, the long-term perspective remains optimistic, with a clear strategy to leverage the evolving market dynamics to enhance future returns for the fund.