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Commodity Real Return Strategy Fund —
In a “risk-off” quarter, commodities experienced broad based selling pressure in Q3
3rd Quarter, 2015
"Commodities faced headwinds during the third quarter as the asset class was no exception to the effect of weakness in China, which outweighed even some commodity-specific tailwinds. "
– Pacific Investment Management Company LLC

Concerns about a global economic slowdown, particularly in China, hit commodities hard in the third quarter of 2015. The Bloomberg Commodity Index Total ReturnSM fell -14.47%. Crude oil prices led the market lower, but selling was broad based across all segments of the commodity market. The Bloomberg Commodity benchmark is an unmanaged index of futures contracts on a diversified group of physical commodities.
The Harbor Commodity Real Return Strategy Fund declined by -16.52% over the quarter, underperforming the index. The Fund invests in commodity-linked derivative instruments backed by a portfolio of inflation-indexed bonds such as Treasury Inflation-Protected Securities (TIPS) and other fixed income securities. Underperformance relative to the benchmark was largely driven by strategy within the TIPS collateral portfolio; the Fund’s exposure to longer term TIPS proved detrimental to performance as real interest rates rose over the period.
As for the Fund’s commodity strategies, the Fund was positioned for a steepening of the crude oil futures curve and that helped performance in the quarter. A short position on gasoline prices also proved beneficial as gasoline prices declined at the end of the summer driving season. However, the Fund was hurt by exposure to platinum and natural gas.
PIMCO’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 the year-to-date are for the period January 1, 2015 through September 30, 2015.

Interview Highlights

Challenging Commodity Backdrop for 3Q
After ending the first half of 2015 relatively flat, commodities faced headwinds during the third quarter as the asset class was no exception to the effect of weakness in China, which outweighed even some commodity-specific tailwinds. The energy sector faced the biggest challenges during the quarter with crude oil prices testing new lows, even with support mid-quarter from decreased U.S. production. Precious metals and base metals posted negative returns for the quarter. Despite some price support following the September Federal Reserve meeting, gold posted losses on the anticipation of a possible near-term interest rate hike, as well as expectations for lower global demand. The agricultural sector also posted negative returns for the quarter. Grain prices in particular faced headwinds from favorable crop conditions and crop yield upgrades by the USDA.
Current Positioning
On the agriculture side, the Fund is long ethanol versus corn. That trade is based on our bullish view of demand for ethanol in the coming season and expectations that production margins will continue to improve. Currently, the futures curve for soybeans is inverted, and we expect that to revert back to normal based on the production statistics we're seeing. We’ve taken positions that will benefit when the curve returns to its normal slope. In natural gas, we are underweight the winter months, based on our forecast that natural gas prices will fall over that period. And lastly, we expect the crude market to be oversupplied. Shale production is still well in excess of what we've historically seen, especially at this price level. So we have taken short positions on West Texas Intermediate crude contracts.

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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.