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International Growth Fund —
Foreign equities decline in Q4 as most sectors lose ground
4th Quarter, 2014
"We see the divergence between international and U.S. stock markets over the past year as a good opportunity for investing in international stocks. "
– Baillie Gifford Overseas Limited

International stocks declined in the fourth quarter of 2014 and posted a negative return for the full year. The MSCI All Country World Ex. US (ND) Index recorded a return of -3.87% for both the quarter and the 12 months ended December 31, 2014. The index is a measure of equity returns across all capitalization ranges in both developed and emerging markets, excluding the U.S. Eight of the 10 economic sectors in the index lost ground in the fourth quarter; Energy, down 20%, was the weakest performing sector in the index. The Consumer Discretionary and Information Technology sectors posted modest gains.
The Harbor International Growth Fund outperformed the index in the fourth quarter with a return of -1.68%. Portfolio Manager Joe Faraday notes that a smaller-than-benchmark exposure to Energy stocks boosted Fund returns relative to the index. Stock selection in the Industrials and Information Technology sectors helped relative performance, as did the exposure to certain Japanese and Emerging Markets stocks. These positive factors were partially offset by investment choices in the Energy sector and an underweighted position in Financials. Sector weights generally are a result of individual stock selection decisions rather than an active component of portfolio strategy. For the full year, the Fund returned -4.47%, trailing the index.
Among the Fund's leading individual performers in the fourth quarter were South Africa-based media company Naspers, Tokyo-based online retailer Rakuten, laboratory instrument maker Mettler-Toledo International, U.K.-based specialty chemicals producer Johnson Matthey, and Taiwan Semiconductor Manufacturing Company. Major detractors from absolute returns included U.K.-based Energy names BG Group, Weir Group, and John Wood Group, U.K.-based bank Standard Chartered, Swedish holding company Investment AB Kinnevik, and Danish insulin maker Novo Nordisk.
Joe Faraday's comments were made in a January 15, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through December 31, 2014.

Interview Highlights

Strong management teams
Our primary focus is growth and our objective is to outperform the index over long periods of time. A key component of our approach is to find strong management teams. One of the questions we ask of all our holdings is: Is the management team a sensible guardian of our clients’ capital?
Visionary leadership
The largest contributor over the past quarter was Rakuten, a Japanese e-commerce company. It had some very encouraging operating results, with profits up 20% on a year-over-year basis. I think it helps serve as a reminder of just how fast some of these capital-light, Internet-related franchises can grow, and there are a number of those in the portfolio. We believe its leader is also a good example of the strong and visionary leaders that feature across a number of the Fund's holdings. Hiroshi Mikitani founded the company in 1997 and has been CEO throughout. We have a lot of confidence in him.
Track record
A notable strong performer in the quarter was Naspers, an international media-related group with operations across a variety of emerging markets. News of a tie-up between Naspers and various Internet companies with operations in Brazil, Indonesia, Thailand, and Bangladesh was very well received. It also had some encouraging results from its holding in Tencent, the Chinese social-network company. I think the operational tie-ups are a good example of the new CEO’s willingness to be more hands-on with the company’s operation. We think Bob van Dijk, who was appointed CEO at Naspers in April 2014, has a very visionary approach and a good operational track record.
Growth outlook
One of the top contributors over the past year was Shimano, the cycling-components company. It had strong operational performance and we are very excited about the growth backdrop for that company. We think it is well positioned with strengths in brand, research and development, distribution, and market share. We believe it is also an example of an exceptionally well-managed company. Yozo Shimano, the President and CEO, has been in place since 2001 and has worked at the company since 1974. He is a very longstanding, good steward of the business.
Positive outlook
We believe the portfolio has lots of exciting, well-managed businesses with great potential. The management teams are investing and they're confident about growing their companies over the next year and much further out. We see the divergence between international and U.S. stock markets over the past year as a good opportunity for investing in international stocks. We enter 2015 feeling upbeat, both in terms of our view of the global economy and in terms of the attractive opportunities we feel that we have in the Fund.

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.