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International Growth Fund —
Fund outperforms international equity benchmark, aided by Consumer stocks
1st Quarter, 2015
"We try to buy companies that can grow in varied economic circumstances, and we're finding what we think are some exciting opportunities. "
– Baillie Gifford Overseas Limited

International equities began the new year in positive territory, as the MSCI All Country World Ex. US (ND) Index returned 3.49% for the first quarter of 2015. The index is a measure of equity returns across all capitalization ranges in both developed and emerging markets, excluding the U.S. Most areas of the index posted positive returns, led by the Health Care, Information Technology, and Consumer Discretionary sectors.
The Harbor International Growth Fund outperformed the index with a return of 6.86% for the quarter. Stock selection in the Consumer Discretionary and Consumer Staples sectors helped relative performance, as did a below-benchmark weighting in Energy stocks and a lack of exposure to the Utilities sector, the only two areas of the index to record negative returns. These positive factors were partially offset by investment choices in the Information Technology sector. Sector weights generally are a result of individual stock selection decisions rather than an active element of portfolio strategy.
Portfolio Manager Iain Campbell notes that British online fashion retailer ASOS and Danish insulin maker Novo Nordisk were among the biggest contributors to absolute performance for the Fund. Others included Japanese detergent maker Kao, Tokyo-based online retailer Rakuten, and South Africa-based media company Naspers. These companies posted share price gains ranging from 17% to 34%. Major detractors from Fund performance in the quarter included Chinese Internet search engine Baidu, Singapore-based United Overseas Bank, U.K.-based energy company BG Group, Korea's Samsung Fire & Marine Insurance, and Kazakhstan copper miner KAZ Minerals.
Iain Campbell's comments were made in an April 13, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2015.

Interview Highlights

Strength in European equities
In January the European Central Bank reacted to a fairly anemic recovery and low levels of inflation by announcing an unexpectedly large program of quantitative easing. This move, along with increased expectations that the Federal Reserve will raise U.S. rates later this year, led to a fall in the Euro of around 11% against the Dollar over the course of the quarter. Although the currency has been weak, European stock markets were pretty strong in the first quarter; it seems that the market is optimistic that a weaker currency, together with lower energy prices, could be helpful to European corporate profits.
Emerging markets weakness
Emerging markets were the weaker part of the benchmark in the first quarter. While China and India continued to see good equity market movement as their long-term recoveries continued, shares in other emerging markets struggled, as currency weakness and weakness in commodity prices weighed on their performance.
Low turnover
Turnover in the portfolio remained low in the quarter, which is consistent with our long-term investment philosophy. We took an initial holding in a company called Jeronimo Martins, a discount food retailer based in Portugal. Although it’s Portuguese, its most valuable asset is a Polish discount supermarket chain called Biedronka, which has the leading market share in Poland. Jeronimo Martins is a company that we’ve admired for some years now. Its stock was weak throughout 2014 and we saw an opportunity to take a position at what we think is a fairly attractive entry price.
Recovery on track
We see signs of continued recovery in the European economy and of greater traction in the Japanese reforms, which are being enacted under the banner of Abenomics. We think the prospect of normalization in U.S. monetary policy, which is now expected toward the latter end of this year is a positive sign that recovery from the global financial crisis is on track.
Stock-by-stock approach
We place our greatest emphasis on bottom-up stock picking. We’re spending the bulk of our time looking for growth companies that we can invest in, rather than in trying to make big predictions about macro events. We try to buy companies that can grow in varied economic circumstances, and we're finding what we think are some exciting opportunities. Overall, we remain bullish about the long-term potential for the companies in the portfolio.

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.