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Convertible Securities Fund —
The U.S. convertibles market posted solid results in the third quarter of 2016
3rd Quarter, 2016
"From an overall perspective, it is worth noting that we continue to see, with just a few exceptions, a decided shift in the makeup of the performance drivers in the convertible universe. "
– Shenkman Capital Management, Inc.

During the third quarter of 2016, the U.S. Federal Reserve’s (Fed’s) decision to not raise interest rates at its September meeting led to an extension of the credit cycle. Energy prices recovered and stabilized somewhat, which helped reopen capital markets for the Energy sector. The BofA Merrill Lynch All US Convertibles Ex Mandatory Index returned 7.41% for the quarter. The broad stock market, as measured by the S&P 500 Index, returned 3.85%. Investment-grade bonds, as represented by the Bloomberg Barclays U.S. Aggregate Bond Index, posted a return of 0.46%.
The Harbor Convertible Securities Fund generated a return of 4.95%, underperforming its benchmark, the BofA Merrill Lynch All US Convertibles Ex Mandatory Index. The Fund invests primarily in convertible bonds, which can be converted into common stock at a predetermined price. The semiconductors industry detracted from relative performance, while the internet software and services industry contributed.
Shenkman Capital Management’s comments were made in an October, 2016 report. Highlights adapted from the report appear below. All comments relate to the quarter ended September 30, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through September 30, 2016.

Interview Highlights

Portfolio Activity During the Quarter
During the quarter, we rebuilt our Energy sector exposure, which was less than 1% of the Fund at the end of the second quarter, by investing selectively in new issues designed to refinance or extend balance sheets. We broadened our media exposure through crossover high yield issuers, and we extended optionality in core holdings using a series of swaps. Given generally benign market conditions, there were few opportunities to make other material changes.
Performance Drivers Remained in Place for the Convertibles Market
From an overall perspective, it is worth noting that we continue to see, with just a few exceptions, a decided shift in the makeup of the performance drivers in the convertible universe. From 2012 through 2014, convertibles with the most equity-like sensitivity (recognized as those with investment premiums of more than 80%) drove the majority of returns. As a matter of style, we tend to avoid convertibles of this type, as they have little to no bond characteristics and are closely correlated with underlying equity risk and volatility. In 2015, the market began to shift toward a more balanced profile that typically rewards more credit-oriented investments with a defined bond floor, especially during periods of episodic volatility, such as we witnessed during the first half of 2016. Such market conditions, which we believe are generally normalized, tend to favor our investment style, as we focus first on investment creditworthiness, with an emphasis on positive risk/reward characteristics, and then take into account market technical conditions and equity catalysts. We expect that the recent resurgence of the new issue calendar could emphasize this positive trend, given that new issues tend to seek a balance between their underlying equity and bond characteristics.
A Favorable Outlook
We believe two of the three upside accelerators present for most of 2009 to 2015 continue to be in place, with theoretical convertible valuations and equity improvement potentially acting as market catalysts. However, we believe the third possible catalyst, spread tightening, is also a possibility. With overall credit fundamentals remaining firm as a function of improved corporate balance sheets and historically low default rates, we see a potential for further overall spread compression, especially as fears related to global macroeconomic concerns and Energy sector fundamentals have continued to stabilize.

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.