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International Growth Fund —
Brexit vote pushed international markets down for the quarter
2nd Quarter, 2016
"Overall, despite the volatility and excitement of commentators, markets were broadly unchanged over the period. "
– Baillie Gifford Overseas Limited

In the United Kingdom, the vote in favor of departing from the European Union (the so-called “Brexit”) took center stage during the second quarter of 2016. In the immediate aftermath, many U.K.-based stocks were negatively impacted by the results of the June 23rd vote. The British Pound and many international currencies fell sharply against the Dollar, with the Pound yet to recover. Global markets traded sideways, with bouts of uncertainty, before falling in the immediate aftermath of the vote, though they have since improved.
For the quarter, the Harbor International Growth Fund posted a return of 0.32%, faring better than its benchmark, the MSCI All Country World Ex. US (ND) Index, which returned -0.64%. Entering the quarter, the largest overweight positions were in the Consumer Staples, Information Technology and Consumer Discretionary sectors, while the largest underweights were in Financials and Energy. Allocations to these sectors did not change significantly during the period, except for an increase to the overweight allocation to Consumer Discretionary. The portfolio did not have any exposure to Utilities or Telecommunication Services stocks during the period.
In Consumer Discretionary, Adidas continued to perform strongly, having posted better than expected revenue figures for the first quarter driven by growth in China and North America. Shares of online fashion retailer ASOS continued to benefit from a shift toward online sales. Mahindra & Mahindra’s shares were supported by a number of strong product launches. In Health Care, Cochlear, the world’s leading hearing implant manufacturer, reported a 32% rise in interim sales and profits during the quarter. Consumer Staples holding Clicks, a South African beauty and drugstore chain, maintained its strong market share of the retail pharmacy market and continued its ambitious rollout of new stores.
Baillie Gifford’s comments were made in a July, 2016 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2016.

Interview Highlights


Brexit Hasn’t Changed Our Strategy
While we have not changed our outlook regarding the prospects for international growth equities, we are mindful of the potential political and economic challenges relating to the Brexit referendum. This reflects our time-tested investment approach of identifying long-term structural growth opportunities on a company-by-company basis. It has served us well over the long-term to avoid overreacting during previous periods of market angst, such as those experienced in 2008.
Unsurprisingly, a number of the portfolio’s holdings were negatively impacted by the Brexit vote during the quarter, especially those based in the United Kingdom, such as Rightmove, Hargreaves Lansdown, and Burberry. Most of the U.K.-domiciled businesses in the portfolio are international businesses, and their future revenue and profit growth will likely depend much more on their success outside the U.K. than within it. Those operating within the confines of the U.K. are exposed to secondary effects of European membership on their U.K. consumer base, but we believe that their competitive advantages should endure regardless of the outcome.
Mixed Performance in Asia and Emerging Markets
Japan continued to perform strongly, likely helped by Prime Minister Abe’s ‘three arrows’ initiative, which combines fiscal stimulus and monetary easing with structural economic reforms. Emerging markets remained mixed, with performance depending on the makeup of their economies and the degree to which they are transitioning from investment-led growth to more consumption-led economies. The main detractors over the period were companies whose share price performance is often tied to wider market movements in the short-term. For example, Japanese securities exchange operator Japan Exchange Group was particularly hurt by market volatility caused by the shock Brexit referendum result.
Staying the Course
Our investment approach continues to be based on bottom-up stock selection, and we do not invest on the basis of specific themes or trends. Over recent years, we have found more opportunities in consumer-focused companies and Information Technology stocks. Our style of investment has always been led by individual company analysis, where we think we have a greater chance of adding value, rather than by making top-down calls on macroeconomic or political events. We think it’s important, and absolutely in our investors’ interests, that we retain discipline and stick to our approach.

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 www.harborfunds.com.

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.