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International Growth Fund —
Fund outperforms international equity benchmark, aided by Energy stocks
2nd Quarter, 2015
"As long-term investors, the portfolio holds lots of interesting and exciting businesses with good growth prospects. "
– Baillie Gifford Overseas Limited

International equities were essentially flat for the second quarter of 2015, recording a positive return of 0.53% as measured by the MSCI All Country World Ex. US (ND) Index. The index is a measure of equity returns across all capitalization ranges in both developed and emerging markets excluding the U.S. Returns varied during the quarter with half of the sectors posting positive returns, led by the Utilities, Energy, and Financial sectors. From a country view, China, Brazil, and Hong Kong delivered the most positive returns with weakest returns from New Zealand, Australia, and Germany.
The Harbor International Growth Fund outperformed the index with a return of 0.69% for the quarter. For the year-to-date period, the Fund was up 7.60%, ahead of the index return of 4.03%. Stock selection in the Energy, Information Technology, and Consumer Discretionary sectors helped relative performance as did an above-benchmark weight to Consumer Staples. These positive factors were partially offset by investment choices in the Industrials sector. The best performing stocks were domiciled in the U.K., Taiwan, and India. The sector and country weights generally are the result of individual stock selection decisions rather than an active element of the portfolio strategy.
Portfolio Manager, Joe Faraday, notes that the British multinational energy company BG Group, the British online real estate portal Rightmove, and the Japanese insurance company MS&AD Insurance were the top contributors for the quarter. Others included the Japanese cosmetics producer Shiseido Company Limited, and the British online fashion retailer ASOS. These companies posted share price gains from 11% to 35%. Major detractors from Fund performance for the quarter included the Japanese e-commerce company Rakuten, the Japanese bicycle component manufacturer Shimano, and the Swedish manufacturer of industrial compressors Atlas Copco.
Joe Faraday’s comments were made during an interview on July 14, 2015. Highlights adapted from the interview appear below. All comments relate to the quarter ended June 30, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1 through June 30, 2015.

Interview Highlights

Positive Outlook
The second quarter of 2015 was marked by turmoil as suggested by many of the headlines, but there is plenty to be optimistic about. The slower economic development in Asia has led to a renewed emphasis on continued growth in China. There has been a notable pickup in economic activity on a variety of measures in the eurozone. Germany continues to have a strong economy with signs that growth in wages are beginning to occur. As long-term investors, the portfolio holds lots of interesting and exciting businesses with good growth prospects. An increasing number of interesting growing new investment opportunities are available to international equity investors, and the team is working hard to try to identify the most attractive ideas.
Research in Emerging Markets
The team has recently discussed some exciting opportunities in the internet industry and in sectors such as Technology and Industrials within emerging markets. Some of these online companies can have quite novel, and potentially disruptive, business models. The team is continuing to develop its understanding of these. There are some great businesses within the emerging economies that are becoming more attractive investment opportunities but require caution with respect to corporate governance, management, and shareholder alignment.
A Note on Acquisitions
During the quarter, the oil major Shell announced their acquisition of BG Group, an oil and gas explorer and producer, for $70 billion. The share price of BG Group increased by over 35% and was the top contributor during the quarter, though this had been preceded by a large fall in the price of its shares. It can feel like a rewarding experience when acquisitions like this happen, given the sudden appreciation of the share price. However, we would much rather hold great businesses such as BG Group for a long period of time in order to realize the potential for more significant returns. During periods of increased appetite for corporate acquisitions, it can become more difficult to find and keep good businesses to invest in over the long-term.
Current Thoughts on the BRIC Countries
Brazil continues to have a soft economy with little to no growth, rising unemployment, and political issues, but we anticipate positive changes over the next few years. Last year, the Russian stock market appeared overcome with fears that it would not improve. Russia has begun to turn around, and it has been one of the better stock markets so far this year. India is in the process of making reforms, but it is early and will take time for land and labor reform. China’s headline growth rate of 7% was the lowest in more than two decades but is still an impressive number. It is becoming clear that China is gradually transitioning from a credit-fueled investment growth model to a more consumption oriented model.

Performance data shown represents past performance, which is no guarantee of future results. Current performance may be higher or lower than the past performance data shown. Investment returns and the value of an investment will fluctuate, and an investor's shares, when sold, may be worth more or less than their original cost. You can obtain performance data current to the most recent month-end (available within seven business days after the most recent month-end) by calling 800-422-1050 or visiting

Performance figures discussed reflect that of the institutional class shares.

The views expressed herein are those of the portfolio manager at the time of the interview and may not be reflective of their current opinions or future actions.  These views are not necessarily those of the fund company and should not be construed as such.

This information should not be considered as a recommendation to purchase or sell a particular security and the holdings or sectors mentioned may change at any time and may not represent current or future investments.