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International Growth Fund —
Fourth Quarter Manager Commentary
2nd Quarter, 2019
"We remain confident that technological innovation and disruption, new business lines, and growing access to customers in emerging markets will create significant opportunities for growing businesses. "

Market in Review
After a strong start to the year, the second quarter of 2019 was less impressive for international equity markets, with returns barely making it into positive territory. Hopes of a resolution to the ongoing trade tensions between the U.S. and China, which had been rising in early 2019, faded in May after the U.S. announced it would move ahead with tariff increases on imports from China. Whether this turns out to be a negotiating tactic or not, the news weighed on market confidence.
Underlying the small gain for the index were negative returns from economically exposed semiconductor, retailing, and Information Technology businesses and positive returns from defensive sectors such as Health Care and Consumer Staples. On a regional basis, the Continental European portion of the benchmark performed best. Asia fared less well, with the Chinese market falling by double digits in percentage terms after a buoyant first quarter. In the U.K., Brexit took a turn for the worse with the resignation of the Prime Minister. The U.K. market was flat during the quarter.
Against this mixed backdrop, the Harbor International Growth Fund ("Fund") delivered a positive return versus its benchmark. As usual, the outcome over such a short period is quite random. We have not altered our outlook and continue to believe that much of the "news" each quarter is of limited relevance to our long-term approach to investing. We remain confident that technological innovation and disruption, new business lines, and growing access to customers in emerging markets will create significant opportunities for growing businesses.
Portfolio Performance
In the second quarter of 2019, the Harbor International Growth Fund (Institutional Class) returned 5.62%, outperforming its benchmark, the MSCI All Country World Ex. US (ND) Index, which returned 2.98%.
Specific developments within individual holdings had the greatest impact on performance during the quarter. The Fund’s holdings in Europe were the largest contributors to performance, while in aggregate, emerging markets holdings detracted slightly. At the sector level, the largest contributions came from the Fund’s Health Care and Industrials holdings, while Communications Services businesses detracted from performance.
Contributors and Detractors
Two of the largest contributors to performance during the quarter were businesses that are functioning particularly well operationally. The Canadian ecommerce platform provider Shopify released financial results during the quarter that highlighted accelerating revenue growth and an unexpected net profit (excluding certain items). The company also announced that it would increase the scope of services it provides to its clients by moving into logistics and fulfilment. We believe this not only creates new revenue opportunities for Shopify but also likely increases the loyalty of its customers.
German sports apparel producer Adidas released strong first-quarter results, with earnings rising buoyed by rapid growth in ecommerce sales. As a result, Adidas is now achieving better operating margins than Nike, which had led the industry for years. Coupled with general optimism around sports apparel following Under Armour's decent results, shares of Adidas performed well during the quarter, continuing their solid progress from the past 12-plus months.
The Fund’s holdings in Chinese online businesses such as Baidu, Ctrip, and Alibaba were among the largest detractors during the quarter. Some of this underperformance can be attributed to concerns stemming from the U.S.-China trade dispute, while part may also be attributable to a seemingly global change in perception when it comes to large online platform businesses. Baidu, in particular, seems to be in a weaker position than it used to be, replacing advertising revenue from its search business with revenue from its growing cloud and iQiyi businesses.
Buys and Sells
We initiated a new position in Hong Kong-based Techtronic Industries during the quarter. The company manufactures and sells the popular Ryobi and Milwaukee ranges of power tools. We believe that the power tool market is set for growth as more efficient motors, batteries, and better software combine to allow more tools to go cordless. We think this will drive a replacement and upgrade cycle in professional-grade tools and will also allow Techtronic to expand its range of cordless tools to include higher power applications. This trend is also spilling into garden equipment, which we view as a further growth opportunity. In our opinion, Techtronic’s distribution scale, product quality, research and development expertise, and brand strength put it in a very strong competitive position.
We sold our position in Swedish bank Svenska Handelsbanken. For many years, the bank has grown by giving responsibility to its individual branches while at the same time preserving a customer-focused and conservative culture. We believe that its business model, which is based on personal interactions in its banks, is slowly becoming less distinctive as branch-based banking gives way to the digital world. Our confidence has also been dented by a rapid succession of CEOs—which is uncharacteristic of what has previously been a very stable organization—at a time when growth prospects appear less appealing.
Country Allocation
We did not change our country allocations significantly during the quarter. We take a bottom-up approach to portfolio construction, so any changes to country allocations are generally an output of individual stock decisions.
There were no new themes introduced into the portfolio during the quarter, but our new positions indicate continuing enthusiasm for the ability of technology to disrupt a diverse range of end markets.
For example, improving battery and motor technology is enabling Techtronic to drive a mass adoption of cordless electric tools, replacing less efficient corded and gasoline-powered power tools and gardening equipment. In addition, Ping An, the Chinese financial conglomerate, is using technology to price its insurance products and broaden the range of products it sells to its customers. Finally, Trainline is using its online platform to improve pricing transparency and make it easier to purchase rail travel tickets online, which we believe will eventually completely replace paper ticket sales.

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.