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Commodity Real Return Strategy Fund —
Commodities post mostly flat returns in Q2 after strong first quarter
2nd Quarter, 2014
"We employ active commodity structural strategies and these were overall positive for the quarter. Management of the collateral portfolio also contributed favorably to performance. "
– Pacific Investment Management Company LLC

After solid gains in the first three months of 2014, commodity prices were only fractionally higher in the second quarter. The Bloomberg Commodity Index Total ReturnSM, an unmanaged index of futures contracts on a diversified group of physical commodities, registered a return of 0.08% for the three months ended June 30, 2014. On a year-to-date basis the index returned 7.08% for the first six months of the year.
The Harbor Commodity Real Return Strategy Fund outperformed the index with returns of 2.36% for the second quarter and 9.97% for the first six months. The Fund also outperformed the index for the five years ended June 30 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. The Fund is managed by Mihir Worah, executive vice president and managing director of Pacific Investment Management Company (PIMCO).
Copper, gold, and crude oil were among the stronger commodity performers during the second quarter, the PIMCO team reports. Management of the collateral portfolio was a positive contributor for performance, PIMCO notes, including investments in non-agency mortgage-backed securities, corporate credit, municipal bonds, and emerging markets debt. The implementation of commodity structural strategies also added value for the Fund.
PIMCO’s comments were made in an July 14, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended June 30, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through June 30, 2014.

Interview Highlights


Mideast tensions
The energy sector returned about 4.4%, driven mostly by crude oil gains, while natural gas prices remained relatively flat. Crude rallied most notably in mid-June amid escalating violence in Iraq as well as concerns over the possibility of reduced production in Libya. However, prices reverted later in the month as tensions in Baghdad eased. West Texas Intermediate crude oil outperformed Brent crude. Natural gas opened the quarter on a strong note, as a cold start to spring and an expectation of robust demand led to sharply higher prices. However, prices reversed course later in the quarter given reports of larger-than-expected inventory builds and forecasts for milder weather across the U.S.
Precious metals
Precious metals returned 3.8%. Gold posted gains following the announcement of accommodative policy measures by the European Central Bank as well as the Federal Reserve’s decision to keep interest rates unchanged. This was further supported by tensions in Iraq and Ukraine, as demand for safe-haven investments drove gold prices higher.
Falling inventories
The industrial metals sector was the leading performer among commodities in the second quarter, gaining 8.5%. Copper was one of the stronger performers, reacting to concerns that global inventories were falling as stockpiles in the U.S., U.K., and China dropped to their lowest levels since 2008. In addition, China’s plans to reform its capital markets also supported copper prices, as this assured investors that the government remained committed to growth.
Q2 strategies
We employ active commodity structural strategies and these were overall positive for the quarter. Management of the collateral portfolio also contributed favorably to performance. The main driver was the use of spread sector strategies, including positions in non-agency mortgages, corporate credit, the municipal bond sector, and also emerging markets, all of which benefited the Fund. Our currency strategy overall also was a positive contributor to performance.
Energy sector positioning
Given that gasoline has done well on a year-to-date basis, we expect to see a larger share of industry production geared towards gasoline going forward. This could result in downward pressure on prices, which we see as a potential opportunity in the energy sector. We also believe that seasonal spreads are very tight in the natural gas market as a result of the very cold winter we experienced. We expect those to widen and are positioned accordingly in the spread market in natural gas.

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.