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International Growth Fund —
Foreign stocks edge higher in Q1
1st Quarter, 2014
Please note:  This commentary was provided by Marsico Capital Management, LLC, subadviser to the Harbor International Growth Fund through May 20, 2013.
"We don't take big macro views and then buy stocks to match that view. We're very much bottom-up stock pickers. "
– Baillie Gifford Overseas Limited

In a challenging environment, international equities managed to close the first quarter of 2014 in positive territory. The MSCI All Country World Ex. US (ND) Index recorded a return of 0.51% for the three months ended March 31, 2014, while the MSCI EAFE Growth (ND) Index returned 0.10%.
The quarter generally saw narrow changes in share prices, as 6 of the 10 economic sectors in the MSCI All Country World Ex. US (ND) Index posted slightly positive or negative returns of less than 1% each. Utilities and Health Care were the best performing sectors in the index with positive returns of 6%, while Telecommunication Services, with a negative return of less than -3%, was the weakest sector. The index is a gauge of equity performance in all capitalization ranges in both developed and emerging market countries, excluding the U.S.
The Harbor International Growth Fund outperformed both indices with a return of 1.92% for the quarter. Stock selection, especially in the Industrials sector, gave the largest lift to Fund performance, both on an absolute basis and relative to the MSCI All Country World Ex. US (ND) Index. The Fund is managed by Baillie Gifford Overseas Limited, which began managing the portfolio on May 21, 2013.
Leading individual contributors to the Fund's absolute returns in the first quarter included Industrials holdings Scania AB and Seek Limited, Portfolio Managers Gerard Callahan and Iain Campbell report, along with Health Care stocks Novo Nordisk and Roche. Notable detractors included Financials stocks Kinnevik and MS&AD Insurance, Energy holding BG Group, and ASOS in the Consumer Discretionary sector.
The comments by Gerard Callahan and Iain Campbell were made in an April 14, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2014.

Interview Highlights

Bottom-up focus
We don't take big macro views and then buy stocks to match that view. We're very much bottom-up stock pickers. We have never had a significant view on whether Abenomics will or won't work, and our portfolio is not really put together to express that sort of a view. What we've been doing in Japan has been just a continuation of our bottom-up stock picking.
Buyout offer
One of our best performers in the quarter was Scania, the Swedish truck manufacturer. Volkswagen, which already has a majority position in Scania, offered to pay what we think is a pretty reasonable premium for the remaining shares. With the stock trading very close to the offer price, we decided to sell during the quarter and reinvested the proceeds primarily in existing holdings in the portfolio.
Opportunities in Japan
Although the mood seems to be slightly worsening on Japan, we are still identifying attractive Japanese investment opportunities. One of the recent purchases is a company called Sugi Holdings, a Japanese drugstore chain. It will benefit, we think, from the demographic background in Japan, where you have an aging population that is buying more pharmaceuticals and is buying more locally. We like the bottom-up fundamentals and think it could outperform over a 5-year to 10-year horizon.
Slow recovery in Europe
In some of the smaller, troubled markets on the periphery of Europe I think there is a sense that the crisis feels less pronounced than it was. On the other hand, there is a lot of work yet to be done. Around the periphery things feel slightly less precarious. But in terms of building a strong macro tailwind for the core economies of Europe, the jury is still out.

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.