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Unconstrained Bond Fund —
Investment-grade securities post positive return for Q1
1st Quarter, 2015
"In addition to accommodative policies on the monetary side, we believe that the global economy will benefit from lower oil prices. This means that our overall outlook for the world economy is marginally better than it was last quarter. "
– Pacific Investment Management Company LLC

The U.S. bond market produced positive results for the first quarter of 2015. The Barclays U.S. Aggregate Bond Index, a measure of the broad taxable investment-grade U.S. bond market, returned 1.61% for the three months ended March 31, 2015. By comparison, inflation-indexed bonds returned 1.42%, as measured by the Barclays U.S. TIPS Index, while speculative-grade bonds, as measured by the BofA Merrill Lynch US High Yield Index, returned 2.54%. In addition, the BofA Merrill Lynch US Dollar 3-Month LIBOR Constant Maturity Index returned 0.06%.
In this environment, the Harbor Unconstrained Bond Fund posted a return of 0.29%. The Fund is managed by Marc Seidner, Mohsen Fahmi, and Daniel Ivascyn of Pacific Investment Management Company (PIMCO).
Currency strategies were a strong positive for performance in the first quarter, the PIMCO team reports, as the portfolio was positioned to benefit from further gains in the strength of the U.S. Dollar. Holdings in investment-grade and high yield corporate bonds, non-agency mortgage-backed securities, and U.S. Treasury Inflation-Protected Securities, or TIPS, also helped performance. Interest rate strategies detracted from performance, as did to exposures to select markets in Europe, Mexico, and Brazil.
PIMCO’s comments were made in an April 14, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended March 31, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1 through March 31, 2015.

Interview Highlights

Attractive yields
We are very constructive on non-agency mortgages. We've got about a 20% allocation to non-agencies and that has been unchanged for quite some time. This is an area where we perceive a lot of opportunity because they continue to yield at a high level. They are self-liquidating in that over time they will pay down, but for the time being investors are able to gain incremental return by holding these securities as part of their portfolios.
Corporate exposures
We have about 23% of the portfolio in investment-grade corporate bonds and another 11% in high yield credits. We prefer companies that are benefiting from consolidation and pricing power, which means that we have a number of banking and real estate names in the portfolio. We are staying away from the Energy sector, which we believe is still a challenging place to be. On the high yield side, we have a diversified basket of securities that we believe are positioned to potentially benefit from ratings upgrades.
Improved outlook
In addition to accommodative policies on the monetary side, we believe that the global economy will benefit from lower oil prices. This means that our overall outlook for the world economy is marginally better than it was last quarter. In terms of the Eurozone, we are forecasting growth between 1.25% to 1.75%, with inflation at around 1%. We believe that low oil prices and the weak Euro will help the economy grow a bit faster, as will the quantitative easing program that the ECB is pursuing. Nonetheless, Europe continues to have its challenges. It has not done enough on structural reform, in our view, and hasn't significantly reduced debt levels.
Emerging markets
We remain selective in our exposures to emerging markets. We have investments in Brazil and Mexico. You saw those exposures in the portfolio at the end of December and they remained consistent over the past quarter. On the currency front, we are short the Japanese Yen and the Euro and we have a small long position in the Mexican Peso.
Divergence in policies
Since December more than 20 central banks have cut rates and provided additional accommodation for the markets through monetary policies. A notable exception is the Federal Reserve, which has curtailed its quantitative easing program and is now looking forward to potentially raising rates. We are seeing a wide divergence in monetary policies around the world, which in our view represents an opportunity for strategies such as currency trading, which has been a source of enhanced returns for the portfolio.

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.