Howard Appleby
Jean-Francois Ducrest
Jim LaTorre
Ted Wendell
Northern Cross, LLC
125 Summer Street, Suite 1470
Boston, MA 02110

Howard Appleby, Jean-Francois Ducrest, Jim LaTorre, and Ted Wendell comprise the portfolio management team for the segment of the Fund’s assets run by Northern Cross, LLC (“Northern Cross”).  Appleby, Ducrest, LaTorre and Wendell are the co-founders and principal owners of Northern Cross.  Hakan Castegren, President of Northern Cross Investments Ltd., consults with Northern Cross LLC regarding investment themes and ideas. Castegren has managed the Harbor International Fund since December 1987.  Appleby, a British citizen, has been engaged in the investment business since 1982. Having started as an equity analyst for W. Greenwell & Co. covering basic materials and energy, Appleby moved to the USA in 1986 to pursue a 16 year sell-side career serving U.S. portfolio managers investing in non-U.S. equities in various research, sales and management roles. This culminated in a senior equity sales/management  position with ABN AMRO from 1994 to 2002. Appleby had a sell-side relationship with Castegren beginning in 1996 that involved presenting stock ideas on a regular basis, which eventually led to him becoming part of the investment group as an analyst in 2002. In 2003 he became a founding partner and portfolio manager of Northern Cross LLC. Ducrest, a French citizen, has been engaged in the international equity business since 1988. He started his career on the sell-side as an equity analyst at Paris-based European broker Cheuvreux, covering multiple sectors including industrials, consumers and utilities. Between 1995 and 2001 he was a Senior Vice President and Principal of Cheuvreux’ New York based U.S. operation serving U.S. institutions investing in European equities.  Ducrest’s sell-side relationship with the group dates to 1992 when he began presenting stocks for potential inclusion in Castegren’s managed products.  Ducrest joined the investment group as an analyst in 2002, and in 2003, he became a founding partner and portfolio manager of Northern Cross LLC.  LaTorre began his career in the investment industry in 1982 with Merrill Lynch in New York.  In 1989, he became Vice President of Investments with the Ivy Fund group where he managed the Ivy Growth with Income Fund and co-managed the Ivy Growth Fund.  In 1992, LaTorre began working with Castegren who was managing the Ivy International Fund and the Harbor International Fund.  He became Director of Research for Mr. Castegren in 1993.  From 1996 to 2002 LaTorre also managed the Harbor International Fund II.  In 2003, he became a founding partner and portfolio manager of Northern Cross, LLC.  Wendell has been involved in the investment management business since 1985 when he began his association with Castegren. During that period Mr. Wendell provided operational support to the investment process developed by Mr. Castegren, and provided non-US equity investment programs for mutual funds, ERISA plans and high net worth individuals.

Northern Cross is initially targeted to manage up to 10% of the International Fund’s assets.  The team’s investment philosophy and process  are characterized by:

• An in-depth understanding of a company and its industry leads to a long investment time horizon (3-5+ years) and results in low portfolio turnover
• Analysis of the attractiveness of countries and industries from a top-down perspective, though stocks are selected  on a bottom-up basis
• Stock selection, not top-down views, determines industry and country weightings
• Low portfolio turnover minimizes transaction and market-impact costs
• An emphasis on quality “blue chip” companies with long-term catalysts that will lead to expanding profit margins
• A willingness to think independently and deviate significantly from benchmark industry and country weightings
• Concentration in their best ideas with the most attractive risk/reward potential

The investment process encompasses a top-down, thematic approach coupled with intensive, fundamental, bottom-up industry and company analysis.  It is not uncommon for an idea to be monitored for years before a position is taken. Research is focused on identifying secular trends (rather than shorter-term cycles) that will drive margin expansion. Patient due diligence of companies, countries and regions are critical to the investment process. The sub-advisor believes this due diligence, in combination with a top-down investment theme, provides the best opportunity to invest in truly undervalued companies. Before qualifying a country for investment, the sub-advisor analyzes the stability of its currency, political, social, and economic environment and its legal infrastructure. Consequently, the team focuses on companies located in Europe, the Pacific Basin and emerging industrialized countries whose economies and political regimes appear stable and are believed to provide adequate protection to foreign shareholders.
Among the long-term drivers of stock price appreciation the team looks for are the following:

• Margin expansion
• Pricing power driven by industry consolidation
• Franchise value
• Restructuring
• Asset plays

On-site company meetings play an important role in the portfolio construction process with each firm held in the portfolio visited at least twice per year.  Contact with company management and other key people serve to help the team gain insight and understanding of the business’s operations and judge the strength of company management.  The sub-advisor utilizes a worldwide network of brokers/traders and local contacts for additional insight and trade execution.

Rigid buy/sell price targets are avoided and the relative attractiveness of a stock or group of similar stocks is continuously evaluated.  No single set of metrics is used to value all companies. Typically, the team looks for companies with strong and sustainable market positions that are selling at low price/earnings multiples relative to other stocks in the same country and industry.  In addition to assessing a company’s relative P/E ratio, other valuation metrics considered include the potential for long-term margin expansion compared to the enterprise value/sales multiple, the long-term sustainable free cash flow yield, and the absolute P/E ratio looking many years out.
Positions are commonly sold when:

• A new idea presents better risk/reward characteristics
• The stock’s price reaches the underlying business value
• There is an adverse change in the economic, political or regulatory environment
• Management fails to execute their business plan
• There is an overwhelming change in the company’s policy of shareholder rights

The team does not plan to hedge currencies. However, in a market where the local currency is expected to be weak, investments are often made in companies with assets or earning streams denominated in US dollars.

For industry terms and definitions, click here.