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High-Yield Bond Fund —
Fourth Quarter Manager Commentary
2nd Quarter, 2019
"We believe that with more global fixed income assets offering negative yields, low global growth, and declining U.S. rate expectations, there will be more new issuance but also healthy technical support for leveraged finance assets. "

Market in Review
Returns for the high yield bond market in the second quarter of 2019 were quite healthy. The returns, however, belie the volatility during the quarter, which included the first month of negative returns this year. Just like the December-to-January period, the negative returns of May were quickly followed by a rebound in June, though the volatility was not as extreme as the prior V-shaped mini-cycle. The ICE BofAML US High Yield Index returned 2.57% in the second quarter of 2019, despite a -1.27% return in May. Year-to-date performance for the index through June totaled an impressive 10.16% return.
Some of the same exact issues that triggered the sell-off in the fourth quarter of 2018 seemed to cause the declines in the month of May. These issues included concerns over global growth, political instability, US/China trade tensions, and rising interest rates. These factors hit credit and equity markets. By quarter-end, rates had declined and trade relations with China had improved. While the outlook for growth is not strong, in our view, fears of recession are not either. From a short-term perspective, there do seem to be increasing expectations of an earnings season with more declines than gains as margin pressures seem to be creeping into more and more discussions.
Portfolio Performance
In the second quarter of 2019, the Harbor High-Yield Bond Fund (Institutional Class) returned 2.35%, underperforming its benchmark, the ICE BofAML US Non-Distressed High Yield Index, which returned 2.77%.
Negative security selection effects and underweights in telecom: wireline/wireless and banking detracted from performance, while positive security selection effects and an underweight in oil and gas and positive security selection effects and an overweight in environmental contributed to performance. Security selection in credits rated BB and B detracted from performance; security selection in credits rated CCC and below helped performance. Security selection in credits with maturities between 3 and 5 years and below 3 years detracted from performance; security selection in credits with maturities between 7 and 10.5 years helped performance. Security selection in credits with between 4 and 6 years of effective duration helped performance. The Fund’s out-of-index allocation to bank loans detracted from results during the quarter.
Contributors and Detractors
Individual detractors from performance during the quarter included Exela Technologies, as investors questioned the company’s ability to generate free cash flow. Sanchez Energy hindered results, as expectations of an eventual default increased. Gulfport Energy was negatively affected by a decline in natural gas prices, as the company’s production is heavily weighted toward natural gas. Ensco Rowan detracted due to increased volatility amid an uncertain near-term forecast of offshore drilling activity. Chesapeake Energy also detracted, largely due to a general decline in commodity prices during the quarter.
In contrast, DISH Network contributed to performance amid investor speculation that the company will partner with a large technology company to roll out wireless services. Sprint contributed as expectations of the likelihood to close the Sprint/T-Mobile merger improved significantly. GFL Environmental benefited performance as the company began the process to go public and deleverage. SFR Group/Altice helped results, as it sold assets to deleverage and issued new debt securities to eliminate near-term maturities. Bausch Health Companies continued to retire near-term debt maturities and reiterated solid earnings guidance.
Buys and Sells
We purchased the new issue of GFL Environmental during the second quarter based on our view that the company would be deleveraging through growth, with a potential initial public offering (IPO) to further boost the credit. The company indicated later in the second quarter that it would be going forward with its IPO in the third or fourth quarter, which helped performance of the credit.
We detected a continued decline in the business operation of Weatherford and sold our position during the quarter. The company subsequently filed bankruptcy.
Lower U.S. economic growth expectations than last year may help extend economic expansion as asset value bubbles and bad corporate investment seem less likely to us. We believe disappointments in earnings may trigger a bout of third-quarter volatility. However, from a credit perspective, one has to determine if volatility around earnings is a sign of a fundamental change in the credit quality of a company or simply a market reaction to a short-term event that is creating an opportunity. We believe that with more global fixed income assets offering negative yields, low global growth, and declining U.S. rate expectations, there could be more new issuance but also healthy technical support for leveraged finance assets. When combined, we believe this could create opportunities despite the tighter spreads.

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.