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Unconstrained Bond Fund —
Investment-grade securities generate gains for Q4 and 2014
4th Quarter, 2014
"We expect global growth to accelerate to somewhere around 2.75% for the coming year, with the U.S. and China being the leaders in terms of developed and emerging economies, respectively. "
– Pacific Investment Management Company LLC

Investment-grade bonds generated positive results for the fourth quarter of 2014, as the Barclays U.S. Aggregate Bond Index returned 1.79%, reflecting interest payments and price changes. The index, a measure of the broad taxable investment-grade U.S. bond market, returned 5.97% for the full year. U.S. Treasurys and corporate bonds posted positive returns for the fourth quarter, while Treasury Inflation-Protected Securities were generally flat and speculative-grade bonds declined. In addition, the BofA Merrill Lynch US Dollar 3-Month LIBOR Constant Maturity Index recorded returns of 0.06% for the fourth quarter and 0.23% for the year.
In this environment, the Harbor Unconstrained Bond Fund posted returns of 0.11% for the fourth quarter and 2.88% for the year. The Fund is managed by Marc P. Seidner, Mohsen Fahmi, and Daniel Ivascyn of Pacific Investment Management Company (PIMCO).
Currency strategies proved to be a strong positive for performance in the fourth quarter, the PIMCO team reports, as the portfolio was positioned to benefit from a strengthening U.S. Dollar. Security selection within corporates, for both investment-grade and high yield bonds, also was a positive contributor to performance. In emerging markets, exposure to the Brazilian bond market detracted from returns and more than offset favorable positioning in Mexico. Duration positioning in the eurozone and an exposure to inflation-linked bonds also hurt performance in the fourth quarter.
PIMCO’s comments were made in a January 14, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2014, unless otherwise indicated. All references to year-to-date are for the period January 1 through December 31, 2014.

Interview Highlights

Expecting rising rates
With regard to interest rate positioning, the total duration of the portfolio is roughly zero. That is accomplished by our being short U.S. interest rate risk overall and long in other areas such as corporates and emerging markets. That's how we arrive at a zero duration for the portfolio, which is an expression of our expectation of rising rates overall.
Cautious on corporates
In terms of corporate bonds we continue to be cautious but we are constructive on the Finance area. The position we have in the portfolio, roughly 22% corporates, is coming largely from the Finance and Real Estate sectors. We have some exposures in the Communications, Retail, and Food sectors but the vast majority is in the Finance area. In addition, we have some select trades in high-yield bonds. That provides about an 11% allocation and is largely within the same sectors.
Improving growth
While the falling price of oil could be signaling a slowdown in the economy, we've concluded that about three-quarters of the price change has been driven by the supply side and therefore it is not an indication of slowing economic activity. We expect global growth to accelerate to somewhere around 2.75% for the coming year, with the U.S. and China being the leaders in terms of developed and emerging economies, respectively.
Slower pace
We expect the Fed to start raising rates in 2015, somewhere in the middle part of the year. However, we also expect that the pace of raising rates will be much slower than we have seen in the past. As a result, we believe that markets have overpriced the rising-rate environment to a degree.

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.