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High-Yield Bond Fund —
High yield market advanced in 2013, outpacing investment-grade securities
4th Quarter, 2013
"We're comfortable with the fundamentals and the environment, so our goal remains to keep our duration inside the market while simultaneously trying to pick up yield. "
– Eric Dobbin

High yield bonds turned in a solid performance in 2013, generating positive returns while other fixed income investments were losing ground. Speculative-grade bonds, as measured by the BofA Merrill Lynch High Yield Index, returned 3.50% for the three months ended December 31, 2013, and 7.42% for the calendar year. By comparison, the Barclays U.S. Aggregate Bond Index, a measure of the broad taxable U.S. bond market, returned -0.14% for the fourth quarter and -2.03% for the full year.
The Harbor High-Yield Bond Fund closely tracked the index in the fourth quarter with a return of 3.38%. For calendar 2013, the Fund returned 5.51%. Signs of a strengthening economy helped drive the high yield rally in the second half of the year, in the view of Portfolio Manager Eric Dobbin, as investors grew comfortable with greater levels of risk.
The high yield market could continue to provide competitive rates of return in the year ahead, Dobbin says, although U.S. Treasury rates could rise moderately as the Federal Reserve begins to scale back its bond buying program. The pace of economic growth could accelerate in the U.S. in 2014, which should foster a favorable environment for issuers of high yield securities, Dobbin notes.
Eric Dobbin's comments were made in a January 15, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2013, unless otherwise indicated. All references to year-to-date are for the period January 1 through December 31, 2013.

Interview Highlights

Portfolio strategies
We think the volatility in Treasurys will continue, so we are trying to maintain a meaningful underweight in duration in the portfolio. We're comfortable with the fundamentals and the environment, so our goal remains to keep our duration inside the market while simultaneously trying to pick up yield.
Favorable outlook
The fundamentals picture is solid. We see our companies earning more this year than last, due in part to an increasing GDP. In addition, companies have had ample opportunity over the last five years to refinance their balance sheets, with the result being that the companies we invest in have very little debt coming due over the next two to three years. They have long-term debt in place with very low fixed rates and a generally positive environment in which to access the equity market. Overall, the fundamentals for high yield appear to us to be in very good shape.
Conservative approach
Our analysis shows that the broader market benefited considerably in 2013 from its exposure to triple-C rated bonds, at the riskier end of the high yield sector, as well as to securities issued by companies in the Financials sector. We take a more conservative approach. Our exposure to the Financials space and to higher-risk, volatile securities in general, is low.
Stronger growth
We're expecting a somewhat faster rate of economic growth in 2014. Whereas the last couple of years we've been chugging along at around 2% GDP, we think that 2.5% to 3% could be more likely in the year ahead. That should be positive for high yield overall because it enables the companies we invest in to do better from an earnings standpoint.
Treasury yields
It wouldn't surprise us to see the yield of the 10-year Treasury note move from 3.03%, where it started the year, to 3.5% or 3.75% over the course of 2014. We think the high yield market still could do very well in that environment, although it could cause some people to reassess their exposure to the high yield space.

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.