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Convertible Securities Fund —
In 2017’s first quarter, the U.S. convertible securities market had a positive return
1st Quarter, 2017
"The changes that we began to implement in the fourth quarter of 2016 continue to be a work in progress. "
– Shenkman Capital Management, Inc.

The macroeconomic changes that we saw developing in the fourth quarter of 2016 continued to play out during the first quarter of 2017. The unexpected result of the U.S. presidential election signaled an anticipation of a more business friendly environment for U.S. companies, with a consequent boost in the economy. The Federal Reserve’s decision to reinitiate a gradual rise in interest rates signaled a shift from a multi-year dependence on monetary stimulus to a greater focus on the outlook for growth through fiscal policy. The continued stabilization of Energy prices, buoyed by major oil producers’ agreement to limit production, removed a substantial sector from market uncertainty, at least for the time being. In this environment, the benchmark, the BofA Merrill Lynch All US Convertibles Ex Mandatory Index, returned 5.62% for the quarter. The broad stock market, as measured by the S&P 500 Index, returned 6.07%. Investment-grade bonds, as represented by the Bloomberg Barclays U.S. Aggregate Bond Index, posted a return of 0.82%.
The Harbor Convertible Securities Fund generated a return of 3.40%, underperforming its benchmark. The Fund invests primarily in convertible bonds, which can be converted into common stock at a predetermined price.
Shenkman Capital Management’s comments were made in an April, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended March 31, 2017, unless otherwise indicated. All references to the year-to-date are for the period January 1 through March 31, 2017.

Interview Highlights

We Are Continuing to Gradually Increase Our Exposure to the Energy Sector
The changes that we began to implement in the fourth quarter of 2016 continue to be a work in progress. We are looking to extend optionality, as appropriate, through the use of swaps and the selective purchase of new issues. We are continuing to gradually increase our exposure to the Energy sector, with an emphasis on improved balance sheets. We will look to enhance the current yield of the Fund as we move toward a higher yield environment.
We Continued to Diversify Through Selective Purchases
During the first quarter, a significant pickup in new issue activity gave us ample opportunity to further diversify the Fund’s portfolio through selective purchases. In addition, the secondary market was fluid enough for us to also further diversify by initiating several positions.
The First Quarter Saw a Reversal of Much of the Rotation Effect of Late 2016
After seeing signs of stabilization in December 2016, the rotation effect in the underlying equities of the convertible securities market’s two largest sectors, Health Care and Information Technology, largely reversed. After declining in the fourth quarter of 2016, the Health Care sector rose significantly in the first quarter of 2017, while the Information Technology sector continued its overall positive momentum. During the period, convertible securities with investment premiums were a significant factor in the Fund’s underperformance relative to its benchmark. As a matter of style, we tend to underweight or avoid convertible securities of this type, as they have little to no bond characteristics and are closely correlated with equity risk and volatility.
We Expect Increased New Issue Activity Going Forward
Convertible securities have a historical non-correlation to rising Treasury rates, and we believe there could be increased new issue activity going forward. As we enter a period of higher interest rates, with associated intermittent periods of volatility, we believe the market is likely to favor more balanced convertible securities, with positive credit profiles, which would place a premium on risk versus reward.
Looking Forward, We Believe Prospects for Convertible Securities Appear Positive
We believe the market’s transition from monetary to fiscal stimulus should enhance opportunities for convertible securities. Looking forward, we believe prospects for convertible securities appear positive. The equity market is likely to face a growth oriented environment, in our view, with positive overall credit conditions.

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.