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International Growth Fund —
Fund performance in line with international equity benchmark, aided by country and sector allocation
3rd Quarter, 2015
"Periods of market worry can provide us with exciting opportunities to invest in what we believe are great businesses at attractive prices. "
– Baillie Gifford Overseas Limited

International equities fell during the third quarter of 2015, recording a negative return of -12.17% 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 across all sectors were negative during the quarter with the poorest performance coming from the Energy and Materials sectors. Returns across all countries were also negative during the quarter with Brazil and China showing the poorest performance.
The Harbor International Growth Fund held up slightly better than the index, with a return of -11.54% compared to -12.17% for the benchmark. The performance of the Fund was ahead of the index over the year-to-date period with a return of -4.82% compared to -8.63% for the index. Below-benchmark weights and positive stock selection in the Financials and Energy sectors helped relative performance during the quarter as did an above benchmark weight to Consumer Staples. The portfolio countries that performed better than the index were from holdings domiciled in the Australia, Japan, Switzerland, Taiwan and Hong Kong. Sector and country weights generally are the result of individual stock selection decisions rather than an active element of the portfolio strategy.
Portfolio Manager Gerard Callahan noted that British online real estate portal Rightmove and U.K. retail investment platform Hargreaves Lansdown were top contributors for the quarter. Rightmove reported strong operating results over the quarter and Hargreaves Lansdown continues to benefit from a deeply entrenched customer base. Detractors from Fund performance include British online fashion retailer ASOS, Chinese internet search business Baidu and the emerging markets-focused bank Standard Chartered.
Gerard Callahan’s comments were made in an October 9, 2015 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended September 30, 2015, unless otherwise indicated. All references to the year-to-date are for the period January 1, 2015 through September 30, 2015.

Interview Highlights

Some Good News
Despite Q3 being a period of market angst, particularly around international and emerging market stocks, the market provided buying opportunities on companies that we have followed for a long time. Six new companies were added to the portfolio during the quarter; Chinese e-commerce company Alibaba, U.K. outsourcing company Capita, power supply switching company Delta Electronics in Taiwan, Japanese stock exchange Japan Exchange Group, Swiss luxury goods company Richemont and German online fashion company Zalando. We look at this period as an opportunity to enhance the quality of the portfolio over the next three to five years.
Selective Approach to Emerging Markets
We take a thoughtful and careful approach to evaluating businesses with exposure to emerging markets, both those that are domiciled in emerging markets and developed market companies with exposure to emerging markets. We are very selective and try to pick businesses that have the durability to withstand market turbulence and those that we believe can thrive over the next five to ten years.
Macro Environment
In general, there has not been a lot of good news on the macro front and this quarter showed increased anxiety around China and other emerging markets. The deceleration of China became a big theme. There appears to be a disconnect between the real Chinese economy and the Chinese stock market, which tends to be volatile or highly speculative with its recent decline of 40% from the peak. The response by the Chinese government has not been helpful and the negative sentiment has made both emerging market and developed countries more vulnerable to sluggish economic progression. In addition, the market’s reaction to the Fed’s decision to defer interest rate increases has not been favorable.
While the macro environment was an important factor influencing Q3 market performance, it is important to note that we do not make large top-down or macro decisions. While the macro had an impact on performance, the portfolio is built through bottom-up, fundamental stock picking.
Current Research Focus
We maintain our long-term perspective as we carry out our research and avoid making short-term, macro predictions. Our research is focused on sorting through companies to find high quality businesses, while staying away from those that are lower quality and highly leveraged. Periods of market worry can provide us with exciting opportunities to invest in what we believe are great businesses at attractive prices.

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.