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International Growth Fund —
Foreign stocks post solid gains for Q2
2nd Quarter, 2014
Please note:  This commentary was provided by Marsico Capital Management, LLC, subadviser to the Harbor International Growth Fund through May 20, 2013.
"...I think the broad message on Europe is that it's on the mend and steadily improving. "
– Baillie Gifford Overseas Limited

International equities recorded solid gains for the second quarter of 2014. The MSCI All Country World Ex. US (ND) Index returned 5.03% for the three months ended June 30, 2014. The index is a gauge of equity performance across all capitalization ranges in both developed and emerging markets countries, excluding the U.S. All 10 economic sectors in the index advanced, led by Energy and Utilities.
The Harbor International Growth Fund returned 2.41% but trailed the index. Unfavorable stock selection, especially in the Consumer Discretionary sector, hurt Fund performance relative to the index, as did a below-benchmark exposure to the top performing Energy sector. These factors were offset partially by favorable selection in the Consumer Staples and Financials sectors. The Fund is managed by Baillie Gifford Overseas Limited, which began managing the portfolio on May 21, 2013.
Detractors from Fund performance in the second quarter included British online fashion retailer ASOS, U.K. online financial platform Hargreaves Lansdown, and U.K. property-website operator Rightmove, Portfolio Manager Gerard Callahan reports. Financials holdings Investment AB Kinnevik and Turkiye Garanti Bankasi were among the biggest contributors to absolute returns for the portfolio, as were Chinese internet search engine Baidu, Energy holding BG Group, and Australian winemaker Treasury Wine Estates.
The comments by Gerard Callahan were made in a July 14, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended June 30, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through June 30, 2014.

Interview Highlights

Europe on the mend
Although there have been a few rumblings over the recent past in some of the European peripheral countries, I think the broad message on Europe is that it’s on the mend and steadily improving. Most of the macro GDP numbers in Europe are still proving to be difficult. But the outlook is getting a bit better, I think, in the sense that the crisis that was around a couple of years ago now mercifully feels like a bit of a distant memory. It may not be completely out of the woods but I think it’s steadily healing and things are improving.
Challenging environment
The market's general environment around e-commerce and interrelated stocks has been broadly negative for most of this year. Many of these names, after having had a very good run over the last couple of years, have suffered quite a significant pullback this year.
Attractive valuations
Although the past year has had a very welcome rise in markets, I think over any longer-term context of 5 or 10 years this has not been a particularly euphoric period for international equities. I would suggest that despite recent gains, valuations are still better than reasonable in a number of cases. We are still feeling pretty optimistic that there is a lot going on in terms of investment opportunities.
Emerging markets
Vulnerable pockets remain in certain structurally challenged emerging markets. We sold our holding in Bank Negara, the Indonesian bank, in the second quarter. That was partly because the shares had done very well but it was also mindful of structural issues in some of the more vulnerable emerging markets like Indonesia.
Buyout offer
Treasury Wine Estates has come through quite a difficult period. The main reason its shares went up in the second quarter is that it received an offer to buy the business out. Although that approach was initially rejected, it had the effect of driving the share price, partly in anticipation of the possibility of higher offers down the line.

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