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International Growth Fund —
International shares up despite concerns on Europe, emerging markets
1st Quarter, 2013
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Please note:  This commentary was provided by Marsico Capital Management, LLC, subadviser to the Harbor International Growth Fund through May 20, 2013.
"A slow growth economic backdrop inevitably will expose companies with weak brands, overly levered balance sheets, and management teams that fail to adapt and execute. "
– Marsico

International equities generated positive returns in the first quarter of 2013 despite continuing macroeconomic concerns in Europe and slowing growth in emerging markets. The MSCI EAFE Growth (ND) Index, a measure of growth stocks in developed international markets, generated a return of 6.71%. Japanese shares, buoyed by the announcement of new monetary stimulus measures, were an important contributor to index performance.
Economic sector returns were led by Telecommunication Services, Health Care, and Consumer Staples. In a slowing global growth environment, these sectors fared well compared to cyclical areas such as Energy and Materials, which were the weakest performing sectors of the index.
The Harbor International Growth Fund returned 4.93% for the quarter, trailing the MSCI EAFE Growth (ND) Index benchmark. The Fund is managed by James G. Gendelman and Munish Malhotra, Portfolio Managers and Senior Analysts with Marsico Capital Management, LLC.
Stock selection in the Financials and Information Technology sectors hurt Fund performance relative to the index, as did a below-benchmark exposure to Consumer Staples stocks, the portfolio managers report. Stock selection in the Consumer Discretionary and Materials sectors were the biggest contributors to relative performance.
Looking ahead, the portfolio managers see a generally improving global economic backdrop. They note, however, that serious fiscal challenges remain in the U.S. and abroad, with high levels of uncertainty about government economic policy.
The Marsico team's comments were made in an April 17, 2013, report. Highlights adapted from the report appear below. All comments relate to the quarter ended March 31, 2013, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2013.

Interview Highlights

High quality growth
The Fund remains anchored by high quality growth companies that are gaining market share, generating free cash flow, returning cash to shareholders, and out-innovating their competition. A slow growth economic backdrop inevitably will expose companies with weak brands, overly levered balance sheets, and management teams that fail to adapt and execute.
Portfolio positioning
The portfolio's positioning became slightly more defensive -- chiefly in the form of reduced economic sensitivity -- during the first quarter. We have a negative outlook for Europe and believe market forecasts for Europe GDP growth to be too optimistic. Most of our positions in European-domiciled companies consist of multinationals with strong international growth.
Poised to expand
The Fund's holdings emphasize investments in companies that we believe are poised to expand their businesses and generate growing top-line revenues, even in a slower global growth environment. They include companies that benefit from increased consumption by emerging markets consumers, innovative technologies that help drive cost savings, and data security.
Slowing EM growth
Growth in many emerging markets is on a slower trajectory. We believe this can be positive over the long-term, as growth rates transition to levels that can be sustainable. With slower growth in mind, we have been carefully evaluating investments in developing markets and have trimmed or sold positions that are approaching full valuation.
Japanese shares strong
Japanese equities soared in the first quarter on expectations that changes in government policy and a weaker Yen will have a positive impact on Japan's economy. Japan represents more than 20% of the MSCI EAFE Index and therefore contributed significantly to the index's first quarter gains. Japan's actions also seemed to have a salutary effect on sovereign debt markets, as Spanish, Portuguese, and Italian yields fell significantly.

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.