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High-Yield Bond Fund —
The U.S. presidential election led to expectations of greater growth rates
4th Quarter, 2016
"We believe the economic cycle should extend several years longer with a new political regime. "
– Shenkman Capital Management, Inc.

During the fourth quarter of 2016, the U.S. presidential election led to expectations of greater growth rates. There was a move in the market toward shorter duration bonds and away from longer duration securities due to the higher growth expectations and the Federal Reserve’s interest rate increase. In addition, major oil producers were able to agree on oil production limits designed to increase oil prices. In this environment, the high yield bond market posted positive results for the quarter.
The Harbor High-Yield Bond Fund returned 1.72% in the fourth quarter of 2016, outperforming the BofA Merrill Lynch US Non-Distressed High Yield Index, which advanced 1.41%. Security selection in the Health Care industry contributed to relative performance, while security selection and an overweight position in the electric utilities industry detracted from relative results.
Shenkman Capital Management’s comments were made in a January, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended December 31, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through December 31, 2016.

Interview Highlights

The Fund’s Shorter Duration Helped Results
During the quarter, the Fund maintained its duration below the market’s average duration. We reevaluated which companies we believed could benefit from reductions in regulation and which could suffer as result of revisions to the Affordable Care Act, a strong U.S. Dollar and possible new international trade policies. The Fund’s results benefited from its shorter duration positioning in a rising interest rate environment. In particular, the Fund experienced positive selection effects in credits with durations to worst of between four and six years.
Industry Positioning
As oil prices rose during the period, many energy companies issued stock and improved their balance sheets, and we increased our weighting in the oil and gas industry.
We Expect Default Rates to Decline in 2017
Default rates increased in 2016 due to troubled commodity sectors; however, we expect default rates to decline in 2017 as those sectors have improved. Yield spreads tightened in 2016, and we believe they may continue to do so. New issuance was relatively constant over the fourth quarter of the year, but the primary market ground to a halt in the last two weeks of the year, as is typical heading into the holiday season. New issuance for the quarter was significantly less than the average issuance over the prior three quarters. Companies in the Energy industry were most active during the fourth quarter.
We Believe the Economic Cycle Should Extend Several Years Longer With a New Political Regime
We are more optimistic about the market heading into 2017, as we believe the economic cycle should extend for several years longer with a new political regime. Although the prospect of quickening economic expansion in 2017 and beyond increases apprehension about larger budget deficits, higher inflation and rising interest rates, we believe more pro-growth government policies in the form of lower taxes and less regulation augurs well for improved corporate profitability. Moreover, we believe higher consumer confidence and spending, falling default rate expectations, demand from international investors seeking yield, and a possibly accelerating merger and acquisition environment provide a favorable backdrop for the credit cycle to continue to be extended. While 2016 proved to be a momentum-driven market, with low priced and CCC-rated bonds experiencing substantial advances, we think returns in 2017 could likely return to coupon-like gains, with credit selection likely to reward diligent, research-focused managers.

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.