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Convertible Securities Fund —
The U.S. convertible securities market moved higher
2nd Quarter, 2017
"We believe the transition from monetary to fiscal stimulus could enhance opportunities in the convertible securities market. "
– Shenkman Capital Management, Inc.

The macroeconomic changes that we saw developing in the fourth quarter of 2016 have continued to play out thus far in 2017. The unexpected result of the U.S. presidential election brought about anticipation of a more business-friendly environment for U.S. companies, with a consequent boost to the economy. The Federal Reserve’s (Fed’s) decision to re-initiate 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.
In this environment, the Harbor Convertible Securities Fund posted a return of 2.04% for the second quarter of 2017, underperforming its benchmark, the BofA Merrill Lynch All US Convertibles Ex Mandatory Index, which returned 2.98%. The broad stock market, as measured by the S&P 500 Index, returned 3.09%. Investment-grade bonds, as represented by the Bloomberg Barclays U.S. Aggregate Bond Index, posted a return of 1.45%. 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 a July, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended June 30, 2017, unless otherwise indicated. All references to the year-to-date are for the period January 1 through June 30, 2017.

Interview Highlights

The Post-Election Rally Resumed in the Second Quarter
After a brief hiatus from March through mid-April, the post-election rally, buoyed by a strong earnings season for the first quarter of the year, resumed in the second quarter. During the quarter, equity performance was led by continued strength in the market’s two largest sectors: Health Care and Information Technology. Conversely, the Energy sector declined along with oil prices. Convertible securities with the most equity-like characteristics contributed significantly to the convertible securities market’s performance. As a matter of style, we tend to underweight or avoid convertibles of this type, as they have little to no bond characteristics and are closely correlated with equity risk and volatility.
We Continued to Position the Portfolio for a Growth Environment
The Fed’s decision to raise interest rates in June was well discounted by the markets ahead of time and had no material impact on the portfolio. We intend to continue to position the portfolio for a growth environment, with a focus on Information Technology and Health Care, the two main sectors of the convertible securities market.
We Saw Strength in New Issue Activity
During the second quarter, we saw continued strength in new issue activity. The strong new issue environment gave us ample opportunity to further diversify the portfolio through selective purchases. In addition, we added positions from the secondary market, which remained relatively liquid.
We Are Cautiously Optimistic
We believe the transition from monetary to fiscal stimulus could enhance opportunities in the convertible securities market. Looking forward, we believe prospects for convertible securities appear positive for several reasons: a growth-oriented equity environment, positive overall credit conditions, historical non-correlation to rising Treasury rates, and increased new issue activity. If we enter a period of higher interest rates, with associated periods of volatility, we believe the market is likely to favor more balanced convertible securities with a positive credit profile, placing a premium on downside protection.

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.