Harbor Funds | Manager Commentary

News & Commentary

View all Commentary headlines

Real Return Fund —
Inflation-linked securities lost ground in challenging quarter
1st Quarter, 2013
View as a PDF|View Fund Details
"An environment of modest growth with modest inflation is what we believe is on the immediate horizon. "
– PIMCO Investment Strategy Group

Inflation-protected bonds struggled in the first quarter of 2013 and ended up losing ground. The Barclays Capital U.S. TIPS Index, a measure of inflation-indexed securities, recorded a negative return of -0.36% for the three months ended March 31.
The real yield curve steepened during the quarter, with shorter maturity yields declining and longer maturity yields rising (bond yields and prices move in opposite directions). Yields of shorter term U.S. TIPS, or Treasury Inflation-Protected Securities, benefited from Federal Reserve purchases, while yields of longer term TIPS rose in response to stronger economic data.
In this environment, the Harbor Real Return Fund registered a negative return of -0.06%, slightly outpacing the Barclays Capital U.S. TIPS benchmark. The Fund also outdistanced the index for the 12-month and 5-year periods ended March 31. The Fund is managed by Mihir Worah, an executive vice president of Pacific Investment Management Company (PIMCO).
During the first quarter the Fund favored the middle of the U.S. TIPS curve while being underweight in longer maturity TIPS, the PIMCO team reports; this was positive for performance relative to the benchmark. Investments in corporate debt in the Financials sector and inflation-linked bonds in the United Kingdom also helped relative performance; this was partly offset by exposure to Australian inflation-linked debt.
PIMCO's comments were made in an April 12, 2013, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2013, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2013.

Interview Highlights

Slow growth outlook
Our concept of the “new normal” is an expression of our belief that Western economies in particular are mired in a period of slow growth as a result of the high debt overhang as well as high unemployment and other structural problems. We continue to believe that the world economy remains in the new normal, and many of the numbers we're seeing are consistent with that.
Enhancing yield
We're purchasing inflation-linked bonds in countries outside the United States in order to increase yield in the portfolio. For example, Australia, Mexico, the United Kingdom, and France are areas that we think offer a slightly better yield for the portfolio while retaining the inflation sensitive characteristics that investors in this Fund are seeking.
Modest growth and inflation
An environment of modest growth with modest inflation is what we believe is on the immediate horizon. Our expectation going forward is for economic growth of roughly 2% to 2.5% in real terms for the global economy with inflation expectations of roughly 2% to 2.5%.
Inflation hedge
Emerging markets currencies can work as a hedge against inflation. If the U.S. Dollar were to depreciate substantially, for example, holding emerging market currencies could provide a nice counterbalance to that. These tend to be very small positions in the portfolio but they are one of the strategies we can use to enhance returns in the Fund.
Yield curve positioning
For the Real Return Fund, we are aiming to be close to the benchmark on duration. We like the intermediate part of the yield curve because we think it currently provides the best risk/reward characteristics.

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.