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Bond Fund —
Harbor Bond Fund outperformed benchmark in Q4
4th Quarter, 2011
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"We're going to be overweight duration, as we view the risk of a disorderly outcome in Europe to be significant. "
– PIMCO Investment Strategy Group

Investment-grade bonds recorded modest returns in the fourth quarter of 2011 against a backdrop of continued uncertainty over the global macroeconomic outlook. The broad taxable U.S. bond market, as measured by the Barclays Capital U.S. Aggregate Bond Index, returned 1.12% for the three months ended December 31, 2011.
The Harbor Bond Fund returned 1.85% for the quarter, outperforming the Barclays Capital Aggregate benchmark. Longer term, the Fund outpaced the index for the 5 years and 10 years ended December 31, 2011. Bill Gross, a managing director of Pacific Investment Management Company (PIMCO), has managed the Harbor Bond Fund since its inception in 1987.
An overweight to U.S. duration, coupled with interest rate exposure in the United Kingdom, Canada, and core Europe, added to Fund returns, the PIMCO team reports. Investments in U.S. agency mortgage-backed instruments, bonds of financial institutions, and securities in Brazil also added value, PIMCO says, while an exposure to Build America Bonds hurt performance relative to the index.
PIMCO's comments were made in a January 18, 2012, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2011, unless otherwise indicated. All references to year-to-date are for the period January 1 through December 31, 2011.

Interview Highlights

Macroeconomic weakness
The global macro economy is meaningfully weaker than we thought it was even six months ago. That is primarily because of the impact of the ongoing deleveraging process. We see a huge amount of austerity coming from the fiscal side due to a combination of government pull backs and private sector deleveraging. We expect volatility and policy actions, particularly in Europe but certainly all over the developed world, to have meaningful impacts on growth.
Duration positioning
We're going to be overweight duration, as we view the risk of a disorderly outcome in Europe to be significant. We think the best places with high quality duration are the U.S., Canada, and Australia in the developed world and Brazil and Mexico within the emerging markets. We think it's important to be on the best balance sheets possible.
Risk/return dynamics
We like agency mortgages. We think they're an important source of high quality yield. Valuations are fair and the risk/return dynamics are very attractive relative to lower-yielding cash and increasingly risky credits on the corporate side.
Currency strategy
Currency positions will be a very minor part of the portfolio. Over the last couple of years we've had more of an underweight to the U.S. Dollar, but our need to have a high degree of safety and benefit from any flight to quality causes us to reduce that position and be much more defensive.

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.