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Convertible Securities Fund —
Consistent application of investment approach leads to outperformance in the quarter
2nd Quarter, 2015
"We continue to be very constructive on credit conditions as default rates are low and balance sheets are strong. "
– Shenkman Capital Management, Inc.

The convertibles market managed to hold onto modest gains in the second quarter of 2015, in spite of a broad sell-off late in the period. For the quarter, the BofA Merrill Lynch All US Convertibles Index rose 0.73%. Meanwhile, the broad stock market, as represented by the S&P 500 Index, inched up 0.28%, while investment-grade bonds lost ground, as the Barclays U.S. Aggregate Bond Index fell -1.68%.
The Harbor Convertible Securities Fund returned 0.95% in the second quarter, outpacing its benchmark, the BofA Merrill Lynch All US Convertibles Index. The Fund invests primarily in convertible bonds, which can be converted to common stock at a predetermined price.
Careful security selection is a key component of management’s strategy and once again, it was the primary factor behind the Fund’s outperformance over the index, reports Portfolio Manager, Ray Condon. He noted that during the quarter, the equities underlying the securities in the portfolio outperformed the stocks underlying the benchmark.
From an industry perspective, the Fund benefited from underweights in the integrated oil and semiconductor industries. The Fund had no exposure to Micron, a large index constituent that sold off sharply during the quarter on a slowdown in PC demand. Meanwhile, the Fund’s position in Lam Research rallied strongly over the quarter due to continued end-user demand in the semiconductor processing equipment space. On the negative side, the Fund’s underweights to the pharmaceutical, auto, and biotechnology industries hurt relative results in the second quarter. The Fund had no exposure to rallying issuers, such as Gilead Sciences and Mylan in the pharma sector, and Insight in biotechnology. All of these securities have equity-like characteristics that the portfolio typically avoids.
Ray Condon’s comments were made in a July 15, 2015, interview. Highlights adapted from the interview appear below. All comments relate to the quarter ended June 30, 2015, unless otherwise indicated. All references to year-to-date are for the period January 1 through June 30, 2015.

Interview Highlights

Heavy New Issuance Continues
The strong new issue trend seen for most of the last two years has continued through June. New issuance year-to-date consists of 53 deals totaling $26.2 billion. Redemptions for June totaled $25.9 billion, with acquisitions and debt repurchases accounting for the majority of the activity. Assuming that the recent trend of new issues continues, we expect that in 2015, convertible new issues will exceed redemptions for the first time since 2007.
Portfolio Changes
On the sell side, we exited a few positions on takeover news, including AOL, Dealertrack, and Bristow. We also sold Liberty Interactive on news that it would pay a special dividend to equity shareholders. In addition, we sold the last of our position in Trinity Industries, a railcar manufacturer, due to concerns related to a slowdown in demand from the energy sector. In a continuing effort to diversify, we added Chart Industries, a global manufacturer of hydrocarbon storage equipment used in the liquefied natural gas space, and Envestnet, a developer of computer software for financial advisors. We also took advantage of an exchange opportunity in Nuance, the speech recognition company, by extending out a portion of our holdings into a new tranche with more potential upside. We've also purchased recent issues from FireEye and Proofpoint. Each of these companies specializes in creating solutions in the fast growing cyber security space. In addition, in an effort to continually balance the portfolio profile, we added new issues from existing holdings,, the Chinese internet travel company, and NRG Yield, an operator of renewable infrastructure assets.
We expect to see the market remain focused on the growth attributes of the underlying equities given positive fundamental credit metrics. We also expect that the recent pickup in volatility will provide multiple entry points for rebalancing opportunities. We continue to be very constructive on credit conditions as default rates are low and balance sheets are strong. Given these positive credit fundamentals, we think spreads are attractive, and we see the potential for further tightening.

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.