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Convertible Securities Fund —
U.S. equity markets hit record highs in the third quarter
3rd Quarter, 2018
"Performance for the Fund and the market continued to be led by the two largest sectors, Information Technology and Healthcare. "
– 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.
In this environment, the Harbor Convertible Securities Fund generated a return of 2.24% for the third quarter of 2018, underperforming its benchmark, the ICE BofAML US Convertible Excluding Mandatory Index, which returned 4.02%. The convertible securities market’s most equity-like constituents contributed a significant portion of the market’s performance. As a matter of style, Shenkman tends to underweight or avoid this type of convertible security, as they generally have little to no bond characteristics and are closely correlated to equity risk and volatility. The broad stock market, as measured by the S&P 500 Index, returned 7.71%. Investment-grade bonds, as represented by the Bloomberg Barclays U.S. Aggregate Bond Index, posted a return of 0.02%. The Fund invests primarily in convertible bonds, which can be converted into common stock at a predetermined price.
Shenkman Capital'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

Information Technology and Health Care Drove Performance
Buoyed by continuing strength in underlying equities after another strong earnings season, the convertible securities market posted positive results during the quarter. Performance continued to be led by the market’s two largest sectors, Information Technology and Health Care. In Information Technology, it should be noted that weakness in semiconductors due to trade war fears was more than offset by strength in the fast-growing software sub-sector. Health Care, with an average market weight in the Fund of 15.64% had a total return of 15.71% and contributed 150 basis points to performance. Also, the benchmark’s average market weight during the quarter was 17.03% with a total return of 9.59% and a contribution of 159 basis points. Strength in the sector was led by biotechnology, equipment and life sciences.
Uncertainty and Periodic Volatility Tend to Favor Our Strategy
Similar to most of the first half of 2018, the continued strength in new issue activity provided us the opportunity to further diversify the portfolio through selective purchases. In addition, new issuance from a number of existing holdings enabled us to maintain a more balanced risk-reward profile. We are looking to extend optionality, as appropriate, through the use of swaps (i.e., selling out of one tranche and buying into another tranche of the same issuer) and the selective purchase of new issues. We will look to enhance the current yield of the portfolio as the markets move toward a higher yield environment. There was no change to our outlook based on macroeconomic events during the quarter. We believe uncertainty and periodic volatility in a growth environment tend to favor our strategy by providing numerous opportunities to rebalance the portfolio.
Convertible New Issue Activity Has Been Encouraging
With equities trading near record highs at quarter end, the convertible new issue market, despite the recent seasonal slowdown, has been encouraging thus far in 2018, on pace to have the most new issuance since 2007. We believe convertible new issue activity could pick up at any sign of a prolonged backup in the corporate/high yield issuance calendars, as convertible issuers look to take advantage of the opportunity to sell into an apparent supply and demand imbalance. We believe additional catalysts for convertible new issue activity are continued improvement in underlying equity prices and the potential for higher interest rates.
Overall Prospects Remain Positive
We believe the overall prospects for the convertible securities market remain positive, including a growth-oriented equity environment, positive overall credit conditions and increased new issue activity, combined with a historical non-correlation to rising Treasury rates. We believe historical convertible securities market performance has been consistent with a negative correlation to U.S. Treasuries. Going forward, we believe Federal Reserve (Fed) activity and associated intermittent periods of volatility are likely to favor more balance convertible securities with a positive credit profile, which is endemic of our investment style. Given that we are in the early stages of Fed activity to normalize monetary policy, we currently have no specific interest rate level that would change our outlook.

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.