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Commodity Real Return Strategy Fund —
Decline in commodities continues in Q1
1st Quarter, 2015
"Global trends that weighed on performance across commodity sectors in 2014 lingered into 2015. "
– Pacific Investment Management Company LLC

Commodities continued to struggle in the first quarter of 2015, as the Bloomberg Commodity Index Total ReturnSM posted a return of -5.94%. Continued weakness in oil prices and strength in the U.S. Dollar were among the factors weighing on commodities markets in the latest quarter. The decline followed a negative return of -17.01% for calendar 2014. 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 returned -4.98% for the first quarter but outperformed the index. Longer-term, the Fund also outperformed the index for the latest five-year period and since its inception in 2008. 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. It is managed by Mihir Worah, Nicholas Johnson, and Jeremie Banet of Pacific Investment Management Company (PIMCO).
In terms of the Fund's commodity strategies, positions in crude oil and natural gas benefited returns relative to the index, the PIMCO team reports, while an exposure to ethanol hurt relative performance. Currency strategies also helped relative performance, including underweighted exposures to the Euro and Japanese Yen and overweights to the Indian Rupee and Polish Zloty. Exposure to the Brazilian Real was a slight negative as the currency weakened over the quarter. In the collateral portfolio, an emphasis on the intermediate part of the TIPS yield curve versus longer maturities aided relative performance, as the curve became steeper during the quarter.
PIMCO’s comments were made in an April 14, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2015.

Interview Highlights


Global headwinds
Commodities experienced a negative quarter to start 2015 amid a selloff across most sectors. Global trends that weighed on performance across commodity sectors in 2014 lingered into 2015. Diverging global growth continued to impact commodity markets, with the Federal Reserve remaining an outlier as more than 20 central banks eased monetary policy during the quarter. Lower interest rates in the Eurozone helped anchor government bond yields in the U.S., while the U.S. Dollar continued to appreciate against most other currencies.
Volatile oil market
Crude oil slipped further during the quarter as geopolitical events in the Middle East did not provide adequate price support. Prices experienced a temporary rally in February given improved demand. In general, crude oil prices have remained volatile, reacting to the latest headlines, and have not shown a meaningful directional trend. Precious metals posted positive returns as silver rallied. Conversely, base metals posted negative returns on worries about the Chinese economy.
Soft agricultural pricing
The agricultural sector reversed some of the previous quarter's gains and posted negative returns, despite support earlier in the year from cold weather across the Midwest. In the U.S., wheat and corn were among the underperformers, as weather concerns were not enough to offset bearish supply estimates and slower exports. Abroad, soy beans were hurt by Brazilian currency weakness and weather-related uncertainties.
Muted inflation
Measures of economic activity point toward higher growth and, when combined with the backdrop of the falling oil prices, inflation expectations have been relatively muted in most economies. At the same time we expect that, over time, real rates will rise.
Slower growth in China
We expect growth of about 5.75% to 6.75% in China, which is a little below consensus. Real estate prices have been declining, which is a concern to us, along with the de-leveraging of the shadow banking system, which has been financing much of the economic growth in China. We also believe that the low wages that China has benefited from over the course of the past couple of decades are becoming less relevant in terms of providing support for their exports. Those elements together make us a bit more bearish about China. It should continue to be the growth engine for the world, in our view, but perhaps at a lower level.

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.