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Unconstrained Bond Fund —
The Fund gained for the quarter as strategic positioning boosted performance
4th Quarter, 2015
"We continue to believe that there is opportunity in credit. High yield, in particular, I think becomes more and more attractive as the spreads widen. But you have to be very, very selective in the names that you pick. "
– Pacific Investment Management Company LLC

The Harbor Unconstrained Bond Fund benefited from positions in corporate debt in the fourth quarter of 2015, including both investment grade and high yield issues. Security selection was notably helpful among high yield bonds in the Financials sector. The Fund’s allocation to non-agency mortgage-backed securities also contributed, as strength in the U.S. housing market supported that asset class. The Fund posted a positive absolute return of 0.92% for the quarter. For comparison, its benchmark, the BofA Merrill Lynch US Dollar 3-Month LIBOR Constant Maturity Index, returned 0.03%.
The Fund generated gains from positions in Treasury Inflation-Protected Securities (TIPS) and from its currency positioning, including a bias toward U.S. Dollar strength and positions that stood to benefit from depreciation of the Euro, the Brazilian Real and the Chinese Yuan.
On the negative side, the Fund had positions in Brazilian sovereign debt, anticipating capital appreciation due to the relative attractiveness of the yields offered in those areas. However, uncertainty around the fiscal and political outlook in Brazil negatively impacted these positions.
PIMCO’s comments were made in a January 15, 2016 interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended December 31, 2015, unless otherwise indicated. All references to the year-to-date are for the period January 1, 2015 through December 31, 2015.

Interview Highlights

Mortgage-Backed Securities
We're constructive on non-agency mortgages. We haven't changed that position all that much in the past quarter or so. We've kept it stable. Obviously the Fund's size has fluctuated a little bit so that as a percentage of the Fund, it's likely larger than it was before. But it's essentially the same position. We really like those bonds; they are providing a lot of value to the portfolio and strong yields in terms of helping to build some interest income.
We are long investment grade and we are long high yield. We have not made much of a change in our allocations in those areas. We continue to believe that there is opportunity in credit. High yield in particular, I think, becomes more and more attractive as the yield spreads widen. But you have to be very, very selective in the names that you pick.
Financial Industry Exposure
We still have a strong view on the financial services names. Our view is that government regulators and the Fed have basically created a safety net underneath the financial services industry. That means that most of these companies are very bond holder-friendly. They're not equity holder-friendly necessarily, because of the fact that these types of environments where you are required to hold more capital can potentially result in poorer performance from a return on equity perspective. But for bond holders, we consider that a positive, because we believe it makes all these bonds a lot more creditworthy.

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.