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International Growth Fund —
Immediate impact of Brexit vote on market and economy appears to have been benign
3rd Quarter, 2016
"Fears over an immediately damaging economic shock have not come to pass, but it is still early days. "
– Baillie Gifford Overseas Limited

International equities delivered a respectable return in the third quarter of 2016, for once marginally ahead of domestic U.S. equities when measured in Dollars. After the initial shock of the referendum vote three months ago, most in the U.K. are still digesting the likely impact of the decision to leave the European Union. In contrast to some of the doomsayers’ predictions, the immediate impact appears to have been benign: in U.S. Dollar terms, the U.K. stock market has been broadly flat since late June. The lingering impact is unpredictable to say the least, since so much will depend on new bilateral trade arrangements and other behavioral factors from businesses and consumers. What we do know is that sorting all the future arrangements, and hence gauging the impact, could take years.
For the third quarter of 2016, the Harbor International Growth Fund posted a gain of 8.05%, outpacing its benchmark, the MSCI All Country World Ex. US (ND) Index, which returned 6.91%. The Fund’s relative outperformance was due mostly to positive stock selection and advantageous sector allocation in Information Technology. Stock selection in Industrials dragged on relative performance.
Baillie Gifford’s comments were made in an October, 2016 report. Highlights adapted from the report appear below. All comments relate to the quarter ended September 30, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through September 30, 2016.

Interview Highlights

Political Uncertainty on the Horizon
During the third quarter, macro events did not have a particularly pronounced impact on the performance of the portfolio, with most of the relative outperformance attributable to stock selection as opposed to asset allocation. At the regional level, the performance of the Fund’s U.K. holdings was ahead of its benchmark’s return by a sizable margin, but this was due to specific company events rather than any broader pattern.
While the coming months could be more volatile due to rising political uncertainty around the U.S. presidential election in November, we have not changed our outlook regarding the prospects for international growth equities. It remains important to look through the short-term noise. Instead, we continue to focus our efforts on identifying high quality companies that offer exciting opportunities for sustainable long-term growth.
Sector Weightings Reflect Growth Prospects
The Fund’s sector weightings are a reflection of where we continue to find good quality companies with attractive long-term growth prospects. Our approach has been to concentrate on the growth prospects for individual companies rather than specific sectors. That being said, our largest overweight positions entering the quarter were Consumer Discretionary, Consumer Staples and Information Technology, while the largest underweight positions were Financials and Energy. We did not have any exposure to Real Estate, Utilities or Telecom Services stocks.
Quality Companies With Long-Term Growth Potential
While our allocation to developing markets increased slightly from the start of the quarter, our overall outlook for the market did not change substantially during the third quarter. Our country weightings do not convey the relative attractiveness of any particular country but are simply a reflection of our bottom-up stock selection approach. Our investment style has always been directed by individual company analysis, where we believe we have a greater chance of doing something different and thus adding value, in preference to making top-down calls on macroeconomic events. We continue to focus primarily on finding good quality companies with attractive long-term growth potential. We believe it is important, and in our clients' interest, that we continue to be disciplined and stay the course.

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.