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High-Yield Bond Fund —
Positive economic news drives high yield gains
2nd Quarter, 2016
"We believe the U.S. economic recovery remains fragile and highly dependent on the consumer, rates will be 'lower for longer,' and the commodity sectors will remain stable as they continue to recover. "
– Shenkman Capital Management, Inc.

High yield bonds posted solid returns in the second quarter of 2016 amid mixed results for other asset classes. Risk-on sentiment was a key driver of high yield returns, as investors largely shrugged off the late June Brexit vote, instead choosing to focus on positive developments: increased optimism on the part of the U.S. consumer, first quarter U.S. gross domestic product (GDP) growth being revised upward to 1.1%, and prospects that the European Central Bank would act aggressively to stabilize financial markets. Triple-C rated credits soared by 14.22% in the quarter, massively outperforming their higher quality single-B and double-B counterparts, which garnered returns of 5.39% and 4.03%, respectively.
The Harbor High-Yield Bond Fund returned 3.24%, underperforming its benchmark, the BofA Merrill Lynch US Non-Distressed High Yield Index, which advanced 3.49%. The majority of the underperformance versus the benchmark was due to the Fund’s underweight in so-called fallen angels – bonds that were originally rated investment grade but then downgraded to lower quality ratings – which include holdings in the metals & mining group as well as oil exploration & production.
Factors that held back relative performance included a lack of exposure to credits with maturities of 10.5 years or higher; an underweight in metals and mining excluding steel; and security selection in the BB-rated range. Areas that contributed on a relative basis encompassed positive security selection in oil and gas; an underweight to the banking industry; security selection in B-rated credits, and both selection and an overweight in credits rated CCC and below; and, finally, non-benchmark positions in bank loans. On an individual security basis, detractors included mortgage servicing company Walter Investments, Endo Pharmaceuticals and Viking Cruises. Conversely, Sanchez Energy, Oasis Petroleum and WPX Energy benefited from the recovery in energy prices and added relative value.
Shenkman Capital Management’s comments were made in a July, 2016 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2016.

Interview Highlights

Industry Positioning
We slightly decreased the Fund’s exposure to Health Care during the quarter after the sector rallied, yet that allocation remains overweight relative to the benchmark. We also increased oil and gas holdings in the portfolio as more attractive opportunities became available. Lastly, we slightly decreased BB-rated securities and increased B-rated issues; the portfolio remains underweight BBs and overweight Bs.
Default Volume Down
In June, default volume in the high yield market fell to the lowest level since September 2015 after a third straight monthly decline. The par-weighted U.S. default rate decreased in June to 3.56%, down from 3.82% in May. As has been the case for the last several months, defaults have been dominated by commodity-related issuers. Excluding the commodity sectors, the high yield default rate is only 0.53%, according to data from J.P. Morgan. While commodity-related companies have experienced the most defaults, the rebound in oil and iron ore prices has propelled the oil & gas and metals & mining segments higher, with year-to-date returns of 23.0% and 26.7%, respectively, while the rest of the market returned 6.8%, according to the BofA Merrill Lynch High Yield Index.
Although the United Kingdom may exhibit signs of “Bregret” following its decision to leave the European Union, and while volatility may be elevated as the exit plan’s details begin to emerge, our base case is that this largely unexpected event will ultimately prove to be a European political crisis as opposed to a global financial catastrophe. We believe the impact on U.S. GDP is unlikely to be material, and the Brexit negotiations will be prolonged and could take years to conclude. In the meantime, investors’ unrelenting search for income in a low yield environment should persist. The psychological impact of the referendum could be short lived, and investors may quickly return to focusing on fundamental data such as GDP, earnings, and the Federal Reserve’s interest rate policy. As a result, we believe that high yield should continue to react positively to the supportive interest rate environment, slow growth economic backdrop and tolerable default rate landscape.

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.