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International Growth Fund —
International equity struggled in the third quarter
3rd Quarter, 2018
"Our bottom-up approach to stock-picking allows us to uncover quality companies that we believe are well placed to endure through market cycles. "
– Baillie Gifford Overseas Limited

International markets remained weak in the third quarter of 2018, though they just scraped into positive territory in the final weeks of the period. Uncertainty in markets surrounding Brexit negotiations, trade wars and interest rate tightening likely affected the Fund, but no single event on its own was notable as having had a profound effect on the Fund this quarter.
In the third quarter, the Harbor International Growth Fund returned -1.40%, underperforming its benchmark, the MSCI All Country World Ex. US (ND) Index, which returned 0.71%. Stock selection and an overweight position in Consumer Discretionary detracted from relative results. Conversely, the Fund’s relative performance benefited from stock selection in Financials. On a country basis, stock selection in China detracted from relative performance, whereas stock selection in Taiwan had a positive impact.
Baillie Gifford’s comments were made in an October, 2018 report. Highlights adapted from the report appear below. All comments relate to the quarter ended September 30, 2018, unless otherwise indicated. All references to the year-to-date are for the period January 1 through September 30, 2018.

Interview Highlights

Trade Wars Led to Investor Concerns
Along with worries about Brexit, Italian politics and the Turkish currency crisis, the main concern for international markets was centered around the potential for a global trade war. The discussion on this subject appears only to get more negative, not just as far as trade is concerned, but also in relation to the broader impacts of limits on the movement of people, and the freedom of companies that are systemically important to a country, as is the case with many of the big Chinese Information Technology names.
During the quarter, we saw weak performance from several of the Fund’s China-exposed holdings. In some cases, this was a function of general weakness in the Chinese market as a period of strong performance came to an end and the prospect of a trade war raised fears for the domestic economy.
Difficult Period for Growth Equities as Value Outperformed
Our bottom-up approach to stock-picking allows us to uncover quality companies that we believe are well placed to endure through market cycles. That said, the last quarter was a challenging one for companies that typically fall into the growth bracket, some of which are large holdings in the Fund. As the U.S.-China trade spat continues, some have been caught in the crossfire, largely as a result of uncertainty rather than weak company fundamentals. Our approach remains one of patient investment in a diversified Fund of businesses we consider to be strong franchises run by sensible management.
Differentiated from the Benchmark
The Fund continued to look firmly differentiated from the benchmark through the third quarter. Consumer Discretionary and Information Technology were the Fund’s most heavily overweight sectors as of September 30, whereas the largest underweights were Energy and Financials. Rising valuations, coupled with some concerns over fundamentals, prompted us to trim or sell holdings in Consumer Staples. We added to some of the Information Technology names in the Fund, which have performed well in share-price terms over the course of the year. While we monitor sector exposures closely, companies are not picked because of the sector they fall into, but because of their fundamentals. That being the case, the Fund’s sector weightings are an output of the investment process, not an input.

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.