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High-Yield Bond Fund —
High yield bounced back to end the first quarter in positive territory
1st Quarter, 2016
"After a tough finish to 2015, the market turned in mid-February, mainly due to bottoming commodities and positive cash flow for high yield. "
– Shenkman Capital Management, Inc.

High yield bonds advanced 2.80% for the first quarter of 2016, according to the BofA Merrill Lynch US Non-Distressed High Yield Index, after a very difficult finish to 2015. The high yield market was under tremendous pressure until mid-February, when it reversed across the board.
The Harbor High-Yield Bond Fund had a positive return of 2.36% for the period, underperforming the index. The main area that weighed on relative performance was the oil and gas industry, in which selection and an overweight relative to the benchmark held back results. The Fund benefited on a relative basis primarily from security selection in the electric utilities and health care industries.
According to Portfolio Manager Eric Dobbin, the economic backdrop has been supportive of fixed income markets. The first quarter saw job growth continue at a very attractive level, with unemployment claims ticking along at multi-year lows, and while industrial activity came in relatively flat, it did not decline. Additionally, consumer spending increased slightly over the prior year. According to Dobbin, the market turn in mid-February was mainly due to the bottoming of commodities and the positive technical cash flow for high yield bonds. The Manager believes that on the supply side, relative value that was brought into the marketplace was fairly good, but there was not much issuance, so there was a decline in supply.
Eric Dobbin’s comments were made in an April 14, 2016 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through March 31, 2016.

Interview Highlights

Industry Positioning
We have maintained our significant position in Health Care, while selling some holdings within our broadcasting segment. That segment tends to do well as an election cycle plays out, so we want to sell into what we believe is the strength there. Our allocation to oil and gas grew somewhat, and we expect it may go higher.
A Reasonable Quarter with Strong Fundamentals
We believe that we’re in a good market environment, with good technicals, fundamentals, and relative value. We remain of the view that Treasuries are likely to finish the year higher than where they are today. Because of this, we've kept the Fund’s duration short of the market. We believe that with a clean book and a short duration, we've got a highly liquid portfolio, which leaves us very flexibly positioned to move into opportunities, which we continue to do. As we see attractive new opportunities in the secondary market or on the new issue front, we are able to take advantage of them.
In general, we think the economic environment remains positive for high yield bonds. Relative value remains positive from a long-term perspective, and technicals are still decent. We believe the calendar on the horizon is fairly muted — we do not foresee much issuance. Therefore, we feel supply is muted but demand keeps coming. Globally, everyone is looking for yield. As European rates crash toward zero, and are negative in some countries, we believe U.S. interest rates continue to appear attractive and stable. With what we perceive to be good technicals, decreased supply, and solid demand, we remain optimistic about continued progress in high yield bonds.

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.