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High-Yield Bond Fund —
High yield market moves lower in Q3 after solid first half
3rd Quarter, 2014
"Our research is more than ever focused on identifying B-rated credits that could move up to BB and BB credits that could move into investment grade. It's at those break points that you can pick up incremental benefits from active management. "
– Shenkman Capital Management, Inc.

Speculative-grade bonds declined in the third quarter of 2014 but stayed in positive territory for the year. Bonds issued by lower-rated U.S. companies posted returns of -1.92% for the third quarter and 3.61% for the nine months ended September 30, 2014 as measured by the BofA Merrill Lynch US High Yield Index.
The Harbor High-Yield Bond Fund returned -1.96% for the third quarter and 2.93% on a year-to-date basis. Portfolio Manager Eric Dobbin reports that investments in the Gaming, Mining, and Telecommunications industries helped Fund performance relative to the index in the third quarter, as did a position in bank loans. Conversely, holdings in the Oil & Gas and Utilities industries weighed on relative performance.
Looking ahead, Dobbin expects U.S. economic growth to continue at an annualized rate of 2% to 3%, outpacing Europe and Japan. As such, Dobbin believes that the U.S. economy should provide a supportive environment for the high yield market. He notes that the bulk of the Fund's investments are in companies based in North America and primarily serving North American markets.
Eric Dobbin's comments were made in an October 14, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended September 30, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through September 30, 2014.

Interview Highlights

Favorable backdrop
The broad market we invest in looks very healthy. The issuers have lower levels of leverage than you would typically see in this phase of the cycle. They've got greater financial flexibility, or access to loans, bonds, or equity capital markets. We think it's a pretty good fundamental backdrop, and with the U.S. economy growing 2% to 3% it should remain very supportive.
Focus on quality
We have started a move over the last 6 to 12 months to slightly increase quality in the portfolio, based not necessarily on the ratings but on our standards. We're looking for more consistent companies; companies that we think would be more resistant to exogenous events, and for debt securities exhibiting characteristics that are more akin to our need for liquidity.
Solid relative value
High yield bonds are still trading at more than a 50% spread premium to the investment-grade market. When an investor can get a yield near the 6% level, plus the potential for active management to add value, along with the possibility of spread tightening, the overall relative value of the high yield market looks pretty good to us.
Bias toward quality names
We're going to remain very well diversified with over 200 names in the portfolio. We're aiming to stay in higher quality names. Spreads between BB-rated bonds and CCCs have widened out a bit, but we're still not going into the weakest segment of the marketplace. We're going to stay in the intermediate to higher quality segment.
Rating upgrades
Our view is that you can do well in an environment of increasing interest rates, in particular if you find credits that are improving. Our research is more than ever focused on identifying B-rated credits that could move up to BB and BB credits that could move into investment grade. It's at those break points that you can pick up incremental benefits from active management.

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.