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International Growth Fund —
Foreign stocks decline in Q3 with most sectors in negative territory
3rd Quarter, 2014
"We feel optimistic about our holdings and the opportunities being presented to us. "
– Baillie Gifford Overseas Limited

Shares of international companies retreated in the third quarter of 2014. The MSCI All Country World Ex. US (ND) Index recorded a negative return of -5.27%, as 9 of the 10 economic sectors in the index lost ground. The only gainer was the Health Care sector, up 1%. The index is a gauge of equity performance across all capitalization ranges in both developed and emerging markets countries, excluding the U.S.
The Harbor International Growth Fund posted a negative return of -6.92%, trailing the index. Stock selection hurt Fund performance relative to the index, especially in the Financials and Consumer Staples sectors. Selection in the Consumer Discretionary sector helped relative performance.
Portfolio Manager Gerard Callahan reports that Baidu, the Chinese Internet search engine, and Shimano, a Japanese-based manufacturer of bicycle parts, were among the Fund's best performing stocks in the quarter. Other leading contributors included Indian auto maker Mahindra & Mahindra, hearing implant maker Cochlear, and insulin maker Novo Nordisk. The biggest detractors from performance included U.K. asset manager Hargreaves Lansdown, Swedish holding company Investment AB Kinnevik, Spanish discount supermarket chain DIA (Distribuidora Internacional de Alimentacion), Danish brewer Carlsberg, and British online fashion retailer ASOS.
Gerard Callahan's comments were made in an October 10, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended September 30, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through September 30, 2014.

Interview Highlights

Diverging economic trends
One of the big-picture macroeconomic features of the third quarter was the strength of the U.S. Dollar, which probably reflects a degree of divergence in the economic indicators in the U.S. vis-a-vis those in the eurozone and in Japan. I think it is fair to say that in Europe and Japan indications are that we are further away from the normalization of monetary policy whereas most, though by no means all, of the indicators in America suggest an ongoing strengthening of the economy there.
Positive trends
Kinnevik, the Swedish holding company which has a number of internet-related investments, was down in the third quarter after having a terrific run. We think that was probably just a pause for breath and that the underlying trends are still sound.
Optimistic outlook
The third quarter was a rather dull period for markets and disappointingly we were behind for the period so we have a bit of catching up to do. On the whole, we are still feeling pretty upbeat about the outlook for the holdings in the Fund and we think we've got some terrific businesses put together in the portfolio. We feel optimistic about our holdings and the opportunities being presented to us.
Uneven recovery
Trends in the economy here in the UK have been stronger than most people would have anticipated. What that means is that we are almost certainly getting closer to the point where interest rates could go up in the UK, reflecting that underlying strength. The only reason I hesitate is that much of the strength of the recovery has been targeted around areas such as the housing market, which has been very strong; but not everyone is of the view that that is a terribly healthy foundation for solid economic progression. So I think we're moving closer to interest rate rises in the UK but doing so rather tentatively given the unbalanced nature of the recovery.
International perspective
Our investments in the companies we have been buying in Europe are not predicated on a macroeconomic call. With one or two exceptions, most of the European investments we have made are international businesses that happen to be domiciled in a European country; they are not wholly reliant on European GDP to support their earnings progression. Clearly it would help at the margin but they are not hugely sensitive to a rather lackluster European environment.

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.