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Global Growth Fund —
Global stocks ease in Q3 amid concerns over weaker growth
3rd Quarter, 2014
"Although China's growth is slowing, we believe that a growing percentage of the country's GDP will come from consumer-related domestic activity. "
– Marsico Capital Management, LLC

Global equity markets declined in the third quarter of 2014 but remained in positive territory for the year. The MSCI All Country World Index recorded returns of -2.30% for the third quarter and 3.73% for the nine months ended September 30, 2014. Health Care and Information Technology were top performers in the quarter, while Energy and Materials struggled. The quarter saw considerable volatility amid signs of weakening growth outside the U.S. and continued investor scrutiny of U.S. Federal Reserve and European Central Bank policies.
The Harbor Global Growth Fund posted returns of -0.63% for the quarter and 2.31% for the nine month period, outperforming the index for the latest quarter but lagging on a year-to-date basis. From a longer term perspective, the Fund outperformed the benchmark for the latest 12-month and 5-year periods and since its inception in 2009.
Portfolio Manager Thomas Marsico reports that Information Technology holdings benefited performance in the third quarter, including social media company Facebook and Alibaba, China's largest online commerce and services company, which was added to the portfolio through its initial public offering in September. Biotechnology holding Gilead Sciences was the portfolio's most significant individual contributor to third quarter performance, while Canadian Pacific Railway was the Fund's leading holding within the Industrials sector. Energy sector names Continental Resources, Antero Resources, and Schlumberger posted double-digit declines, as Energy was the weakest performing area of the benchmark. In the Consumer Discretionary sector, casino operator Wynn Macau and luxury goods maker Hermes International also detracted from returns.
The investment team's comments were made in an October 13, 2014, report. Highlights adapted from the report 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

Stronger Dollar
During the third quarter, the U.S. Dollar appreciated sharply, reflecting better-than-expected news in the U.S. as well as dimming prospects in Europe and the developing world. The Dollar rose by approximately 8% versus both the Euro and the Japanese Yen. Among the biggest uncertainties in U.S. equity markets are the timing and extent to which the Federal Reserve chooses to move rates higher in 2015 and beyond. We believe that an inflation rate well below the Fed's target is likely, given weakness in much of the rest of the world and a strengthening U.S. currency. Our view is that these factors could well postpone the timing and limit the size of rate increases in 2015.
Consumer trends in China
Although China's growth is slowing, we believe that a growing percentage of the country's GDP will come from consumer-related domestic activity. Alibaba is an example of a unique company positioned to benefit from this trend. Compared to the U.S., China has a significantly less developed physical retail infrastructure and distribution system, especially in smaller cities which account for over 60% of retail sales. We believe Chinese consumers will “leapfrog” physical retail stores and go directly to online and mobile commerce to meet their needs.
Portfolio strategies
The Fund holds positions in a number of strategic areas, such as biotechnology and Internet services, that we believe are experiencing positive fundamental changes at an industry and stock level. The Fund also has a significantly overweighted allocation to the Consumer Discretionary sector, spanning a variety of companies that we believe are poised to benefit from higher levels of consumer discretionary spending and increased travel. We believe the commodity super-cycle, which previously had been fed by China and other emerging markets, is over. Given slowing emerging market growth and continued development of low cost U.S. shale oil and gas, we do not foresee strength in commodities-related industries. The portfolio had no exposure to the Financials sector as of September 30, as we favor investments in companies with unique products and services that are positioned to take market share in large and growing markets.
Growing market share
We favor investments in companies gaining market share in large and growing markets. Many of our holdings are companies displaying compelling innovation in solving unmet needs. We also seek to invest in businesses with repeatable revenues, strong free cash flow generation, and responsible capital allocation, as in a lower-growth environment share buybacks and dividends may be larger contributors to total returns.
Diverging economic outlooks
Overwhelming evidence suggests that the U.S. economy continued to expand at a reasonably healthy pace in the third quarter, despite speculation about rising interest rates in 2015. In contrast, data remained poor in Europe and Japan. Developing markets including China, Brazil, and Russia revealed evidence of growing economic weakness.

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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.