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High-Yield Bond Fund —
High yield market posts Q1 gain, outpacing investment-grade bonds
1st Quarter, 2015
"While the market has been very strong, the weakest credits have not been outperforming the way they did in the first half of 2014 and for much of the prior three or four years. It's been a market for bond pickers, for people who do their research. "
– Shenkman Capital Management, Inc.

Bonds issued by lower-rated U.S. companies turned in a positive performance in the first quarter of 2015, with the BofA Merrill Lynch US High Yield Index, posting a return of 2.54%. By comparison, investment-grade bonds, as measured by the Barclays U.S. Aggregate Bond Index, returned 1.61% for the quarter, while the broad U.S. stock market, as measured by the Russell 3000® Index, returned 1.80%.
The Harbor High-Yield Bond Fund returned 3.18% for the quarter, outperforming the BofA Merrill Lynch US High Yield benchmark. Portfolio Manager Eric Dobbin reports that investments in single-B and triple-C rated securities were key drivers of Fund performance relative to the benchmark in the first quarter.
From an industry-level perspective, security selection in the oil and gas industry and among metals and mining companies boosted relative performance, Dobbin notes. In oil and gas, a shift to better-quality securities aided outperformance, as higher-rated bonds in that industry rebounded in the first quarter. In metals and mining, a position in Murray Energy produced strong results, while the Fund avoided exposure to several coal companies that had negative returns.
Eric Dobbin's comments were made in an April 15, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2015.

Interview Highlights

Favorable rate environment
The interest rate environment looks very benign. It now looks like September to December as the time frame for the first rate increase by the Federal Reserve. On top of that, we have had very mild inflationary data, well below the Fed's 2% target. Globally, interest rates are at record lows. From a comparative standpoint we believe the rate environment is very beneficial for high yield.
Institutional demand
From a supply/demand standpoint, institutional fund flows have continued to be very strong. Over the last six months institutional investors such as insurance companies, pension funds, and endowment funds have continued to invest in the high yield market. It is gratifying that half a dozen years into an up cycle you're still seeing investors renew their commitment to the high yield space. We think it’s because the attractiveness of high yield on a relative basis has kept it in a solid position to garner incremental capital.
Focus on research
While the market has been very strong, the weakest credits have not been outperforming the way they did in the first half of 2014 and for much of the prior three or four years. It’s been a market for bond pickers, for people who do their research. We have been using this up period as an opportunity to sell some of the weakest credits we own and to add more single-Bs. Our approach remains to underweight the double-Bs since they trade more closely with Treasurys and their yield spreads are relatively tight.
Currency impact
The high yield market is not the S&P 500 or the Russell 1000®, it's the Russell 2000®. It’s not the top thousand companies in this country, it’s the next thousand. The movement of the Dollar has really impacted the largest and most global companies in the world and in this country, and we don’t invest in a lot of them. What we have done is monitor our companies very closely as to how much business they do internationally, and we've kept a short leash on our risk there.
Solid cash flows
I think we will see companies using the Dollar’s movement as well as weather in North America as an excuse for missing first quarter numbers. However, we expect most of our companies in high yield to make their numbers. Cash flows remain very solid. We are expecting GDP growth of 1% to 1.5% for the first quarter and around 2.5% for the full year. We think these kinds of numbers imply that our companies should do fine from an earnings and cash flow standpoint.

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.