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Commodity Real Return Strategy Fund —
Commodities decline after second quarter advances
3rd Quarter, 2016
"Our baseline forecast is for a continuous global expansion, mostly supportive monetary and fiscal policies and broadly range-bound markets. "
– Pacific Investment Management Company LLC

Markets generally shook off the surprise Brexit result as equities rallied and volatility remained low, despite building concerns over the future path of monetary policy globally. Markets remained relatively resilient despite a host of geopolitical shocks, including new leadership in the United Kingdom and Brazil, an attempted coup in Turkey and an increasingly contentious presidential race in the United States. Volatility generally remained below long-term averages, U.S. equities set new all time highs, credit spreads tightened and emerging market assets performed well in the seemingly benign market environment.
The Bloomberg Commodity Index Total ReturnSM posted a loss for the third quarter of 2016, returning -3.86%. The Bloomberg Commodity Index is an unmanaged index of futures contracts on a diversified group of physical commodities.
The Harbor Commodity Real Return Strategy Fund lost ground for the quarter, returning -3.13%, a more resilient performance than that of its Bloomberg Commodity benchmark. The Fund invests in commodity-linked derivative instruments backed by a portfolio of inflation-indexed bonds, such as U.S. Treasury Inflation-Protected Securities and other fixed income securities. Outperformance relative to the benchmark was driven in part by positioning related to natural gas prices and by fixed income collateral positioning. The portfolio’s longstanding “platinum versus gold” strategy detracted from relative returns, as gold outperformed platinum as the principal flight-to-safety metal.
PIMCO’s comments were made in an October, 2016 report. Highlights adapted from the report appear below. All comments relate to the quarter ended September 30, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through September 30, 2016.

Interview Highlights

Investment Themes
In agriculture, we are positioned long ethanol versus corn. This positioning is based on our belief that deferred ethanol margins are currently inexpensive, and that solid demand for gasoline combined with plentiful corn inventories should be supportive of stronger margins as they roll up to prompt months. We are short soybean versus corn, due to our view that the ratio of deferred soybean to corn prices is on the higher end of the historical range, which should incentivize more soybean planting next summer and reduce soybean prices relative to corn.
We believe global growth could pick up slightly from around 2.5% this year to between 2.5% and 3.0% in 2017, and that inflation will remain below target in most major developed market economies. Our baseline forecast is for a continuous global expansion, mostly supportive monetary and fiscal policies and broadly range-bound markets. However, we are concerned about risks that lurk beneath the surface, especially with asset prices that in many cases appear stretched, and periods of relative calm in the markets are likely to be punctuated by bouts of volatility and uncertainty brought on by the “cause” of the moment. External conditions for many emerging market economies have improved due to the stabilization of commodity prices and the U.S. Dollar. In our view, internal conditions in these countries are also more conducive to growth: we see inflation as having likely peaked, giving central banks room to ease; several countries are making progress on structural reforms; and we anticipate that deep recessions in Brazil and Russia could give way to modest recoveries, removing a major drag on aggregate emerging market growth.

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