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International Growth Fund —
European post-election optimism rising
2nd Quarter, 2017
"The impact of macro events on the relative performance of the Fund was not pronounced this quarter, with most of the outperformance attributable to stock selection. "
– Baillie Gifford Overseas Limited

Emmanuel Macron and his “En Marche!" movement had substantial success in the French presidential election and then soundly defeated his opponents in the subsequent parliamentary elections. European equities performed well in absolute return terms during the second quarter of 2017, which may reflect a degree of relief among investors at the outcome of recent elections. Elsewhere, there was a welcome change in leadership in South Korea, with the election of Moon Jae-in, a former human rights lawyer. In Turkey, Recep Tayyip Erdogan tightened his grip on control having secured a ‘yes’ vote in the referendum for constitutional change. Iran’s recent elections left Hassan Rouhani in charge, a development which may be important for stability in the Middle East region. Issues remain in South Africa, where Jacob Zuma is trying to assert his authority through wholesale cabinet changes. In Brazil, concerns were raised over the latest president, Michel Temer, who was implicated in corruption allegations in the form of hush money.
The Harbor International Growth Fund outperformed its benchmark, posting a return of 8.71%. The Fund’s benchmark, the MSCI All Country World Ex. US (ND) Index, returned 5.78% during the second quarter. The Fund’s relative outperformance was due mostly to stock selection in Financials and stock picking and its overweight position in Consumer Staples. The Fund also benefitted from its underweight position in Energy stocks. Information Technology was the largest detractor, though much of this underperformance can be attributed to developments at one single holding, which ultimately detracted from relative results.
Baillie Gifford’s comments were made in a July, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2017, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2017.

Interview Highlights

Uncertainty Looming Over U.K.
During the period, the U.K. saw yet another election result that confounded initial polls. Prime Minister Theresa May’s decision to call a snap election, in order to consolidate her position ahead of the Brexit negotiations, clearly did not pay off. Now, with no majority and a cobbled together coalition, no one really knows how things will progress from here. Theresa May’s position as prime minister may not even be tenable, and her mandate for negotiating with the European Union is certainly not as strong as it was. Much uncertainty remains for the country, although a second referendum on Scottish independence now looks to be off the cards for the foreseeable future following a decrease in support for the Scottish National Party. U.K. equity markets did not have a particularly strong reaction to the results, which is perhaps unsurprising given the international makeup of the country’s stock market.
Probable Continued Expansion of Asian Middle Class
Our investment approach continued to be based on bottom-up stock selection, and we did not invest on the basis of specific themes or trends. The recent purchase of AIA Group, a Pan Asian life insurer, is reflective of a view that the middle class may continue to expand in Asia, and a number of other holdings in the Fund have the potential to be beneficiaries of that trend. We believe an aging and increasingly wealthy population in the region, combined with low levels of government provisions for citizens, will result in high levels of sustained growth in currently underpenetrated life and health insurance markets.
Consistent Outlook for Foreseeable Future
We have not changed our outlook for international equities as a result of recent geo-political events. While attempting to remain mindful of the potential ramifications, we do not believe in predicting the outcomes of macro events and their knock-on impact on stock market valuations. The landscape of the European Union is about to undergo a significant change, but even those directly involved in the Brexit negotiations can have little certainty over the likely outcome. We do, however, assess the Fund for any particular sensitivity to political developments such as these. We currently do not believe that the long-term investment case for any of our holdings rests on the terms of the U.K.’s exit from the European Union, but we will continue to renew that view as negotiations progress.

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.