News & Commentary

View all Commentary headlines

High-Yield Bond Fund —
Fund performs in line with benchmark in flat market for high yield bonds
2nd Quarter, 2015
"We believe our success over the course of the first half of the year has been driven by bottom-up, fundamental research. "
– Shenkman Capital Management, Inc.

The high yield bond market was flat in the second quarter of 2015, as a June selloff erased gains made earlier in the quarter. The BofA Merrill Lynch US Non-Distressed High Yield Index registered a fractional gain of just 0.12% for the quarter. Equities experienced similar results, with the Russell 3000® Index up just 0.14%. However, investment-grade bonds finished the quarter in the red, with the Barclays U.S. Aggregate Bond Index sinking -1.68%.
The Harbor High-Yield Bond Fund rose 0.13%, edging past the benchmark by one basis point. On the plus side, Portfolio Manager, Eric Dobbin, reported the Fund had strong security selection, particularly in the oil and gas industry, and it also benefited from an underweight in the telecom and wireless industry and from avoiding weaker credits in metals and mining. However, the Fund was hurt by an overweight in the media and cable industry, which experienced weakness on takeover news. Security selection in the aerospace industry also detracted from results, particularly underperformance from regional jet manufacturer Bombardier, a holding that Dobbin believes is financially sturdy but that came under pressure during the quarter on a slowdown in production and news that it would spin out its rail division.
Eric Dobbin’s comments were made in a July 15, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended June 30, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1 through June 30, 2015.

Interview Highlights

Focusing on the Market’s Sweet Spot
Credit quality had a significant influence on performance in the second quarter. The highest quality bonds in the high yield universe (BB-rated bonds) underperformed in the second quarter because they tend to be more sensitive to rising rates than lower-rated bonds. The lowest quality bonds (CCC and lower) also lagged, as investors generally avoided riskier issues during the quarter. So the middle ground, specifically B-rated bonds, was the place to be, in our view, and that is an area we have focused on because we don’t believe investors are getting paid to take on the risk of CCC-rated bonds, and we’ve also underweighted BB-rated bonds to avoid taking on a lot of interest-rate risk. This focus on B-rated securities goes part of the way in explaining our success year-to-date. But really, we believe our success over the course of the first half of the year has been driven by bottom-up, fundamental research.
Favorable Credit Conditions
There are pundits out there who say the high yield market is in danger, because it’s been infiltrated by low quality issuance and sloppy deals. We just don’t think that's true. In 2007, leveraged buyouts (LBOs) made up a third of new issuance. In 2008, it climbed to 36%. In contrast, LBOs represent just 2.8% of new issuance year-to-date. So we’re just not seeing a lot of LBO activity or heavily leveraged deals. In terms of CCCs, in 2007, these low quality bonds were 14% of new issuance, and in 2008, they were 15.9%. However, year-to-date, they’re just 6.5%. So we’re not seeing the decay in credit quality that some people claim is going to kill the market. We think the market is in pretty good shape. Defaults remain in check at roughly 1.5% to 2%. We’re seeing more companies beat earnings expectation than miss, and our companies are cash flowing quite nicely at this point in the cycle. They’ve had a few years of pretty good cash flows to improve their balance sheets, and it’s continuing so far in 2015.
Interest Rate Outlook
We started off at the beginning of the year saying the Fed would begin to raise interest rates in late 2015, at the earliest, while the consensus was for a June rate hike. We currently believe late 2015, at the earliest, remains most likely. The consensus has slid out to September for the first rate increase. Macro issues seem to be guiding the Fed to be a little less aggressive in increasing interest rates. Looking out further to next year, we think there will be increased focus on Fed policy. As a result, we want to keep our portfolios under market duration because the market appears to believe that rates will trend higher. We’re investing on that belief as well. But we’re not of the view that rates will increase dramatically. And that’s why we don’t position the portfolio’s duration even lower.

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.