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Commodity Real Return Strategy Fund —
Commodities start 2014 with solid Q1 advance
1st Quarter, 2014
"Commodities rebounded in the first quarter after a very challenging 2013. "
– Pacific Investment Management Company LLC

Commodity prices registered solid gains in the first quarter of 2014, reversing course from a weak performance in the prior year. The Dow Jones-UBS Commodity Index, an unmanaged index of futures contracts on a diversified group of physical commodities, returned 6.99% for the three months ended March 31, 2014. This follows a negative return of -9.52% by the index in calendar 2013.
The Harbor Commodity Real Return Strategy Fund outperformed the index with a return of 7.43% for the first quarter. From a longer-term perspective, the Fund outperformed the index for the five years ended March 31 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).
Most commodity sectors advanced in the first quarter, the PIMCO team reports. Natural gas, West Texas Intermediate crude oil, gold, coffee, and corn were among commodities posting higher prices during the quarter, while copper declined. The use of TIPS in the collateral portfolio boosted relative returns, as inflation-indexed bonds performed well in the quarter, PIMCO notes. This was offset in part by a short position in longer-dated U.S. Treasury securities.
PIMCO’s comments were made in an April 14, 2014, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2014.

Interview Highlights

Commodity rebound
Commodities rebounded in the first quarter after a very challenging 2013. The Dow Jones-UBS Commodity Index returned 6.99%. Returns were very commodity-specific and driven largely by supply factors.
Agriculture prices up
Agriculture was the top performer in the index with a return of 16.5%, as supply factors dominated. Coffee had a strong rally due primarily to dry conditions in Brazil. Grains rallied as well. Corn prices rose due to weather conditions in the U.S. as well as to tensions in Ukraine.
Portfolio positioning
We are going to be neutral to slightly underweight in duration in the collateral portfolio. We'll have exposure to some non-U.S. sectors including inflation-adjusted bonds in Germany, Italy, and Brazil to provide a measure of additional yield.
Mixed results in metals
Precious metals were up 5.4% in the first quarter and this was largely driven by gold. Industrial metals were the only sector in the index to lose ground, posting a negative return of -4.5%, with copper being the weakest performer.
Weather weighed on growth
It was definitely an interesting quarter. We saw swings in the equity markets and overall gains across fixed income and most commodity sectors. U.S. economic data came in generally weaker than expected. The market attributed this to an unusually cold winter, with anticipation of a spring bounce-back; we think we’re beginning to see that rebound in some of the recent data.

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.