News & Commentary

View all Commentary headlines

High-Yield Bond Fund —
High yield not immune from global growth concerns
3rd Quarter, 2015
"We've got low interest rates, solid GDP growth, no recession, and default rates which are not at worrisome levels. "
– Shenkman Capital Management, Inc.

High yield bonds turned in their worst monthly performance since June 2013’s “taper tantrum” induced sell-off, generating a loss of -2.59% for September, according to the BofA Merrill Lynch US High Yield Index. Accumulating negative headlines across most commodity markets, a highly volatile global equity market, Chinese growth concerns, and investor confusion about the Federal Reserve’s ultimate strategy in raising interest rates pressured the asset class.
During the third quarter of 2015, losses for the Harbor High-Yield Bond Fund and BofA Merrill Lynch US Non-Distressed High Yield Index were broad-based as few areas offered positive performance. The Fund returned -4.78% and the benchmark returned -3.37%. According to Portfolio Manager Eric Dobbin, the lower quality credits once again sustained the largest loss, falling -3.23% for the month. In particular, the oil and gas sectors were hit the hardest as these areas continue to be pressured based on slowing global growth and supply and demand imbalances. The Fund was slightly overweight in this area and suffered a setback in performance as a result. Positions in chemical company debt also contributed to losses. On the positive side, avoiding metals and mining has been the correct positioning for the Fund as those sectors underperformed.
With job gains averaging roughly 200,000 per month so far in 2015 and the U.S. economy moving closer to full capacity, data conditions are relatively supportive of a hike in the Fed funds rate before year end. Any failure by the Fed to raise rates risks extending uncertainty and volatility even further. The Manager’s view is that the first Fed rate hike in ten years should not be disruptive to high yield as it has been well telegraphed to the financial markets, and that future hikes should be gradual. The Manager’s projection is that the U.S. economy does not derail, inflation remains muted, and ten year treasury yields remain in the low- to mid-2% range.
Eric Dobbin’s comments were made in an October 14, 2015 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended September 30, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1, 2015 through September 30, 2015.

Interview Highlights

Defaults have been at unusually low levels for some time and we think the level will increase more towards historical norms going forward. We expect this increase will come from stress mainly related to the Energy sector, including coal, but also from metals and mining. It’s worth noting that approximately 74% of year-to-date defaults have come from the energy and metals and mining sectors.
Opportunities Arise
Volatility can offer opportunities to add positions that previously were too expensive. The Fund added to certain segments of Health Care which has already proved to be a positive addition. Similarly, the Fund was able to purchase bonds in Cablevision at very attractive levels.
We have gone through a significant drawdown and we think that period is likely over. We are entering a seasonally favorable period for high yield from now until year end. In our opinion, the environment actually remains benign. We’ve got low interest rates, solid GDP, no recession, and default rates which are not at worrisome levels. This leads us to maintain a fully invested position and focused on medium to high quality credits in the universe.

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.