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High-Yield Bond Fund —
Investor risk appetite continued to drive the markets
3rd Quarter, 2018
"Given the robust U.S. macroeconomic environment, the Federal Reserve's methodical normalization of interest rates seems appropriate and reasonable to us. "
– Shenkman Capital Management, Inc.

The markets proved resilient in the third quarter of 2018. U.S. equity markets roared to record levels as investors shrugged off a growing trade rift, hostile political discourse, escalating oil prices and rising interest rates. Investor appetite for risk assets continued to drive the markets.
The Harbor High-Yield Bond Fund returned 2.28% in the third quarter of 2018, underperforming its benchmark, the ICE BofAML US Non-Distressed High Yield Index, which returned 2.45%.
Shenkman Capital Management’s comments were made in an October, 2018 report. Highlights adapted from the report appear below. All comments relate to the quarter ended September 30, 2018, unless otherwise indicated. All references to the year-to-date are for the period January 1 through September 30, 2018.

Interview Highlights

Many Credit Investors Seem Cautious and Skeptical
Although 10-year U.S. Treasury yields pierced the 3% barrier during the quarter and the Federal Reserve (the Fed) finally removed its "accommodative" monetary policy language, market reaction has been relatively benign. We believe strong consumer and business confidence has been the lifeblood of this economic expansion. While the risks of a correction are rumbling below the surface, in our view, pools of capital requiring deployment have provided the fuel driving equity market euphoria. Meanwhile, credit markets have remained more conscious of a possible 100 basis point increase in the federal funds target rate through 2019. Although equity investors seem willing to accept high valuations, many credit investors seem cautious and skeptical.
Contributors to and Detractors from Performance
During the quarter, security selection in the oil and gas industry detracted from relative performance, as did security selection in the Health Care sector. Conversely, security selection and an underweight position in Technology contributed to relative results. An overweight position and security selection in Media: cable also helped. Security selection in credits rated CCC and below hindered relative performance. In contrast, credits rated BB benefited relative performance, due to security selection and an underweight position, while an overweight position in credits rated B also contributed. Additionally, out-of-benchmark exposure to bank loans helped relative results. Security selection among credits with maturities less than three years detracted from relative performance, while security selection among credits with maturities between five and seven years helped.
The High Yield Market Is Firing on All Cylinders
Although investors face potential worries in the fourth quarter, including a contentious U.S. midterm election cycle, another anticipated Fed rate hike and various tariff tussles, we believe a plethora of positive economic news, robust corporate profitability and an unusual scarcity of new issuance leave the high yield market firing on all cylinders. Given the robust U.S. macroeconomic environment, the Fed’s methodical normalization of interest rates seems appropriate and reasonable to us, and we believe it is unlikely to derail solid fundamentals.
We Continue to Maintain Our Defensive and Conservative Posture
We are mindful, however, that high yield spreads are near historically tight levels and intermittent dubious behavior is emerging. We continue to monitor these developments and maintain our defensive and conservative posture. Absent a recession, however, which we believe is a low probability in the intermediate term, and given that default rates could remain low for an extended period of time, we believe the credit markets could sustain current spread levels for a bit longer. Improving cash flows across high yield issuers should lead to stronger balance sheets and credit upgrades, in our view, and we continue to focus on companies we believe will benefit from this environment.

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.