Commodities managed a barely-positive increase in the fourth quarter of 2011 but posted a sharp decline for the full year. The Dow Jones-UBS Commodity Index, an unmanaged index of futures contracts on 19 physical commodities, recorded a gain of 0.35% for the three months ended December 31, 2011, and a full year loss of -13.32%.

The Harbor Commodity Real Return Strategy Fund outperformed the index in both periods. The Fund gained 2.12% for the quarter and registered a negative return of -7.66% for the year. The Fund invests in commodity-linked derivative instruments backed by a portfolio of inflation-indexed securities and other fixed income instruments. The Fund is managed by Mihir Worah, an executive vice president of Pacific Investment Management Company (PIMCO).

Higher corn, wheat, and crude oil prices help boost the commodity index in the fourth quarter, while weakness in sugar and natural gas markets weighed on the benchmark's returns, PIMCO reports. An underweighted position in U.S. Treasury inflation-protected securities (TIPS) and exposure to non-agency mortgage-backed securities hurt Fund performance in the quarter, PIMCO says, while portfolio returns benefited from investments in bonds of financial institutions, emerging markets debt, and inflation-linked securities in Australia and Canada.

PIMCO's comments were made in a January 18, 2012, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2011, unless otherwise indicated. All references to year-to-date are for the period January 1 through December 31, 2011.

U.S. rates have rallied a lot, particularly in the second half of 2011. So you get to a point where you look to diversify into countries that have higher starting real yields as well as the potential for real yield compression, both of which are more limited right now in the U.S. Our ability to use non-U.S. inflation-linked bonds is something we think is going to be a positive in 2012.

Over the cyclical horizon, we think that deleveraging and austerity are going to be dominant factors affecting world economies. Because of that, we need to be very careful about where we peg the level of real growth in the developed world. Currently, we're expecting real growth in the developed world to be between 1% and 1.5%. That's a fairly low number.

We expect a slower rate of growth in China, although we see more of a slight slowdown than a hard landing. What this means is that global inflation will probably also slow down to 1.75% to 2.25% globally. Barring any kind of supply disruptions, we expect inflation to be generally lower in 2012 than it was in 2011.

We are going to maintain a defensive position because we think the European sovereign debt crisis continues to be a risk to the global economy. We think there is a higher risk of default and that is something that forces us to be defensive in our interest rate strategies and in where we find yield.