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Unconstrained Bond Fund —
Global growth fears and falling U.S. Treasury yields led to a negative absolute return for the quarter
3rd Quarter, 2015
"We continue to see liquidity being provided by global central banks. Importantly, Japan, Europe, and China are expected to maintain an easing monetary stance. "
– Pacific Investment Management Company LLC

The Harbor Unconstrained Bond Fund posted a negative absolute return for the quarter of -3.29%. The Fund was positioned to benefit from an increase in interest rates in September, which did not take place. Slowing Chinese growth sparked a rally in U.S. Treasury yields, and led to losses in the portfolio.
The Fund also had positions in Mexican and Brazilian sovereign debt, anticipating capital appreciation due to the relative attractiveness of the yields offered in those areas. However, political uncertainty in Brazil, and global growth uncertainty generally, caused both positions to underperform during the third quarter of 2015.
Other detractors from performance included U.S. investment grade and high yield debt, and U.S. Treasury inflation-protected securities (TIPS). The former retreated in sympathy with other risk assets due to global growth concerns, while the latter produced negative returns when U.S. inflation expectations fell to multi-year lows.
On the positive side, the Fund generated gains from Italian and Spanish debt which continued to appreciate following the news of a resolution to the Greek crisis in early summer 2015. Additionally, currency positions also produced positive performance for the Fund. Specifically, the Fund profited from holding the U.S. Dollar versus a basket of other currencies, including emerging markets currencies.
PIMCO’s comments were made in an October 14, 2015 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended September 30, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1, 2015 through September 30, 2015.

Interview Highlights

Government Bonds
We have elected to maintain positioning that will benefit the Fund if the U.S. Federal Reserve begins to raise rates. Generally, we expect shorter term maturities to be affected more negatively and are positioned accordingly. Outside of the U.S., Mexico and Brazil continue to be areas of focus for the Fund as we see the higher yields in those countries as attractive. Lastly, we have reduced our TIPS position slightly in favor of credit opportunities described below.
Mortgage Backed Securities
We continue to be constructive on mortgages across the asset class, and have positions in commercial mortgages, residential mortgages, as well as home equity loans. We are most heavily weighted in non-agency mortgages because the area is characterized by good valuations, limited supply and high credit quality. This leads us to believe that we can continue to generate positive performance in this area.
We are long both U.S. investment grade and high yield credit. These areas should benefit from the continued easy monetary policy stance globally. We expect Japan, Europe, and China to maintain an easy monetary policy and provide support for asset classes that offer an attractive yield like investment grade and high yield credit.
From a currency perspective the Fund is maintaining a bias towards a strong U.S. Dollar. In contrast to earlier in the year where this position was versus the Euro and Yen, we have now pivoted and hold a Dollar position versus mainly Asian currencies ex Japan.

Performance data shown represents past performance, which is no guarantee of future results. Current performance may be higher or lower than the past performance data shown. Investment returns and the value of an investment will fluctuate, and an investor's shares, when sold, may be worth more or less than their original cost. You can obtain performance data current to the most recent month-end (available within seven business days after the most recent month-end) by calling 800-422-1050 or visiting

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.