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International Growth Fund —
Deft stock selection drove the Fund’s outperformance
1st Quarter, 2016
"We were not alone in being surprised by how the first quarter turned out. Performance in international markets has been pretty lackluster, but we're pleased that the Fund's performance has been slightly better. "
– Baillie Gifford Overseas Limited

After a small recovery in the fourth quarter of 2015, international equity performance was lackluster in the first quarter of 2016, turning in slightly negative returns for the period. The MSCI All Country World Ex. US (ND) Index, a measure of equity returns across all capitalization ranges in both developed and emerging markets excluding the U.S., posted a return of -0.38% for the quarter. Returns across sectors were mixed for the period, with strong performance coming from the Energy and Materials sectors, while Health Care and Financials struggled. On a country basis, the Fund’s holdings in Australia and Japan outperformed during the quarter, though having no exposure to Canada, which generated a double-digit return, weighed on relative results.
The Harbor International Growth Fund outperformed its benchmark for the first quarter of 2016, generating a positive return of 0.65%, which was 1.03% above its benchmark. For the one-year period, the Fund’s return of -4.38% was also better than the benchmark’s return of -9.19%. Stock selection was strong across most sectors held by the Fund, notably Health Care and Consumer Staples. Despite a significant underweight to the Energy, stock selection in this sector positively contributed to performance. Although sector allocation was negative overall, an underweight to Financials and an overweight to Consumer Staples boosted relative returns.
Two portfolio holdings that contributed to the Fund’s positive performance in the quarter were Cochlear, an Australian company that makes implants for the profoundly deaf, and Jardine Matheson, a Hong Kong-based conglomerate with interests in retailing, real estate, and car retailing. Cochlear moved higher on positive financial results, and is proving to the market that it has moved past its 2011 troubles with a product recall. Jardine Matheson’s exposure to emerging markets proved especially beneficial in the first quarter.
Portfolio Manager Iain Campbell’s comments were made in an April 13, 2016 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through March 31, 2016.

Interview Highlights

Reversal of 2015 Trends
The trends of 2015 seem to have reversed in the first quarter of 2016. Commodities, which had a pretty dramatic decline in 2015, have rallied so far this year. This has had a positive effect on emerging markets, which had been poor performers in 2015, but were good performers in the first quarter of 2016. It’s been a surprising start to the year. But we don’t tend to take short-term macro views, so we weren’t placing bets for any particular direction for markets or commodities or currencies.
Market Environment and Easing Measures
Japan, which had pretty strong performance in 2015, was a disappointing performer in the first quarter of 2016. I think the introduction of a negative interest rate policy by the Bank of Japan at the end of January hasn’t really helped the situation there. The series of economic reforms introduced by the Japanese Prime Minister Abe, dubbed “Abenomics,” has not had the impact that he had hoped for three years ago, though much of that is due to the fact that Japan does not operate in a vacuum. Global deflation, combined with drops in oil and commodity prices, hasn’t been helpful.
Europe is still struggling with deflation as well, and measures from the European Central Bank (ECB) to extend its easing process, which aimed to help the market, resulted in a view that things must be bad to deserve further easing. And I think it’s safe to say that uncertainty surrounding the British exit from the European Union, the so-called “Brexit,” has helped neither the U.K. market nor the broader European market.
Optimistic Outlook on Japan
Clearly inflation and growth have not been a success in Japan. The Japanese financial sector has been hit hard, and negative interest rates have not boosted net margins for banks. The Fund has little exposure to this sector, so that particular setback from Abenomics has not affected the Fund dramatically. But I think there are other underlying changes which have been really helpful and have created opportunities for us as bottom-up stock pickers. Japanese regulatory reform has led to a broader acceptance of unconventional businesses. And that’s really where we’re finding opportunities in Japan: in entrepreneurial businesses that are disrupting some of the old businesses. I think there’s some exciting ideas coming through.

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.