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Convertible Securities Fund —
A high quality, credit-focused investment process is rewarded in the quarter
3rd Quarter, 2015
"The overall message from our point of view is that credit matters again, and portfolio selection and positioning are critical. "
– Shenkman Capital Management, Inc.

Continuing a trend that began late in the second quarter, the convertibles market declined during the third quarter of 2015. The BofA Merrill Lynch All US Convertibles Index fell by -7.20%. Market sentiment turned negative on uncertainty regarding policy decisions, fears relating to commodity price weakness, and other factors. The broad stock market, as represented by the S&P 500 Index, lost -6.44% and investment grade bonds, as represented by the Barclays U.S. Aggregate Bond Index, gained 1.23%.
The Harbor Convertible Securities Fund lost -4.29% during the quarter, outperforming its benchmark, the BofA Merrill Lynch All US Convertibles Index. The Fund invests primarily in convertible bonds, which can be converted into common stock at a predetermined price.
Security selection was additive to the quarter’s results, according to Portfolio Manager Ray Condon. Indeed, the equities underlying the portfolio declined less than the stocks underlying the benchmark for the period. Plus, he reports that index results were hurt by sharply negative performance of the most equity-sensitive convertibles. The portfolio benefitted because it had a 0% weighting in this sector. The Manager tends to avoid convertibles of this type as they have little or no bond characteristics and are closely correlated with underlying equity volatility.
From an industry perspective, the best performing industries for the Fund from an attribution standpoint were semiconductors, pharmaceuticals, commercial services and integrated oil. The Fund was underweight in semiconductors, which helped performance as the industry slid during the quarter due to overcapacity concerns and a slowdown in China. The Fund also made a positive selection of NVIDIA, a provider of 3D interactive graphics. These positive contributions more than offset the negative effects of other industry positions. Convertibles issued by banks and airlines were strong performers for the benchmark during the quarter. However, due to lack of transparency of many banks, and a higher historical default rate for airlines, the Manager tends to stay away from those industries.
Ray Condon’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

Positioned Properly for a Correction
We believe we really got a much overdue repricing in the market--not only in high yield, but in equities. Obviously what happened in China and in commodities had a lot to do with it. But it’s something we were expecting, given the run-up over the years between the middle of 2011 through the better part of last year.
Trading Opportunities
Price swings enabled us to take advantage of numerous swap and rebalancing opportunities. For example, we have about 10 holdings in our portfolio where there are multiple convertible issues, and typically one issue would be more equity-sensitive than the other. So, in a correction like we’ve had, where the equity-sensitive security goes down further than the more debt-sensitive security, we’ll swap a portion of the position into the equity name on weakness. We’ll also swap back into the more debt-sensitive issue on any upsurge in the equity price. We’ve had many opportunities to do that over the last three or four months.

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.