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Commodity Real Return Strategy Fund —
Commodity strategies generated negative returns for the quarter
2nd Quarter, 2017
"We maintain our view from last quarter that global Gross Domestic Product (GDP) growth could reach the 2.75%–3.25% range this year. "
– Pacific Investment Management Company LLC

From key elections in France to political controversy in both the United States and Brazil, geopolitics dominated headlines during the second quarter of 2017 and contributed to brief periods of market volatility. Still, robust risk appetite continued, largely underpinned by a solid fundamental backdrop. Despite geopolitical uncertainty, volatility remained relatively low for the most part, equities rallied and credit spreads tightened. Emerging market assets broadly continued to strengthen despite falling oil prices (stemming from supply dynamics) and another U.S. Federal Reserve (Fed) rate hike.
The Harbor Commodity Real Return Strategy Fund declined during the quarter, returning -4.01% and underperforming its benchmark, the Bloomberg Commodity Index Total Return SM, which posted a return of -3.00%. The Bloomberg Commodity Index is an unmanaged index of futures contracts on a diversified group of physical commodities. 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.
Underperformance relative to the benchmark was driven in part by a strategy of shorting Dubai crude oil, which had a negative impact during the quarter as Dubai has received support from a deal with OPEC (Organization of the Petroleum Exporting Countries). The Fund’s longstanding “platinum versus gold" strategy also detracted from relative returns, as gold outperformed platinum as the principal flight-to-safety metal. A short position on natural gas spreads had a positive impact.
PIMCO’s comments were made in a July, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2017, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2017.

Interview Highlights

Economic Backdrop
Financial conditions in the U.S. eased even as the Fed raised rates and unveiled details of its plan to gradually reduce its balance sheet. The Fed’s actions contributed to a flattening in the U.S. yield curve. On the back of falling oil prices, soft inflation data and waning prospects for fiscal stimulus, inflation expectations dropped to pre-U.S. election levels. Longer term U.S. yields also fell on the quarter. Global central bankers struck a less accommodative tone: rhetoric from the European Central Bank, the Bank of England, and the Bank of Canada highlighted positive economic outlooks and suggested the potential for a reduction in easy monetary policy. In turn, most developed market yields rose higher even as those in the U.S. (outside the front end) fell.
We Believe the Economic Expansion Could Continue
We believe the eight-year-old global economic expansion could strengthen and broaden for the remainder of 2017. We maintain our view from last quarter that global gross domestic product (GDP) growth could reach the 2.75%–3.25% range this year, up from 2.6% in 2016, while consumer price index (CPI) inflation could reach 2.0%–2.5%. Our outlook reflects several factors that we consider encouraging, including generally supportive fiscal policies (or expectations of them) in most developed market economies and improved consumer and business confidence data. In the U.S., we believe GDP growth could reach 2%–2.5% in 2017 should business investment recover, particularly in the Energy sector.
International Outlook
For the eurozone, we now believe that growth could rise to a range of 1.75%–2.25% in 2017, revised higher from our forecast in March to reflect what we view as stronger momentum since then. We believe that Japan’s strong private demand and export growth could support GDP growth of 1.0%–1.5% in 2017, with inflation likely remaining significantly below the 2% target. Turning to emerging markets, we believe that China could achieve growth in a 6.25%–6.75% range in 2017 if policymakers prioritize financial stability over economic stimulus. We believe Brazil and Russia could experience moderate growth in 2017 as they emerge from recession.

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