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Commodity Real Return Strategy Fund —
Commodities continued to face headwinds in Q4
4th Quarter, 2015
"Commodities were affected by an oversupplied global market, Dollar strengths, and emerging market weakness. "
– Pacific Investment Management Company LLC

Commodity indexes declined in the fourth quarter of 2015, led downward by the Energy sector, where persistently higher output and seasonably warm weather weighed on crude and natural gas. Precious metal prices fell in anticipation of the Fed interest rate hike, which ultimately materialized in December. Within agriculture, sugar was supported by rainfall in Brazil, while wheat prices retreated on weak U.S. product demand and favorable crop weather. The Bloomberg Commodity Index Total ReturnSM Index lost -10.52%. 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 performed in line with the index during the quarter, with a return of -10.71%. 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. The Fund’s relative performance was also aided by exposure to platinum and to expectations of natural gas prices declining for the winter, which proved true.
PIMCO’s comments were made in a January 15, 2016 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2015, unless otherwise indicated. All references to the year-to-date are for the period January 1, 2015 through December 31, 2015.

Interview Highlights


Current Positioning
We are expecting the over-supply conditions in the crude oil market to continue, so we are maintaining calendar spreads for the petroleum products. Our strategy of being short the front end of the natural gas curve has played well so far. We have maintained the long “platinum versus gold” strategy in the portfolio as well. Platinum generally commands a premium to gold. It has a smaller supply and higher marginal cost. Platinum is currently trading at a discount to gold, however, it is an inverted relationship that has only happened a couple of times in the past two decades. Since the financial crisis, we’ve seen the inversion in that relationship. We believe that as business conditions continue to recover, that relationship is likely to revert back to the norm.

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 www.harborfunds.com.

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.