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Core Bond Fund —
Fourth Quarter Manager Commentary
1st Quarter, 2019
"Allocation shifts were made on the margin over the quarter, as we took advantage of spread tightening by monetizing tighter-trading corporate bonds, and increased the Fund's exposure to attractive securitized sectors. "

Economic Overview
Following a volatile December, in which risk assets broadly underperformed, market sentiment rebounded during the first quarter of 2019. Domestic economic data indicated that the economy was growing at a solid pace; however, inflationary pressures were still muted, and growth outside the U.S. had stalled. The Federal Reserve (Fed) not only held rates steady, but signaled that rates could be held lower for longer – an unexpectedly dovish tone. Core personal consumption expenditure (PCE) inflation, the Fed’s preferred measure, came in at 1.8%, below the Fed’s 2% target. While the U.S. economy looked to be on solid footing, data elsewhere pointed to slowing global growth. The International Monetary Fund cut its growth forecast for the global economy to 3.5%, the slowest pace in three years. The dovish Fed, low inflation, and slowing global growth caused investors to price in the potential for a rate cut in 2019. The market-implied probability of a rate cut rose above 75% as a result, and Treasury yields fell by as much as 0.26% across the curve, pushing the 10-year yield below the three-month bill yield for the first time since 2007.
Portfolio Review
In the first quarter of 2019, the Harbor Core Bond Fund (Institutional Class) returned 3.03%, outperforming its benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index, which returned 2.94%.
Relative outperformance was driven by the Fund’s underweight to Treasuries and overweight to corporate bonds, particularly in the Financials and Industrials sectors. Detractors to performance included the Fund’s security selection within Industrials.
On a credit quality basis, the Fund’s underweight to AAA-rated securities and overweight to BBB-rated securities contributed to relative performance.
The Fund’s out of-benchmark allocation to Small Business Administration bonds (SBAs) detracted from performance.
Since the beginning of the year, the most significant shifts in positioning have been a decrease in exposure to Treasuries, with a corresponding increase in exposure to securitized sectors with better yield advantages, such as asset-backed securities (ABS), collateralized mortgage-backed securities (CMBS), and residential mortgage-backed securities (RMBS). We purchased four deals in the new-issue ABS market during the quarter, a sector where security selection aided our relative performance. Our overweight to CMBS benefited performance during the quarter. More modest changes were made in banking and transportation, increasing our overweight in each subsector, both of which outperformed the broader index and added to relative performance.
The largest contributors to the Fund’s performance were General Electric, Charter Communications, and Anheuser-Busch InBev. The largest detractors from the Fund’s performance included Ferguson, Delta Airlines, and Apollo Management.
Overall, views and themes were largely unchanged over the quarter. We do not forecast interest rates and rely on our bottom-up selection skills to build a portfolio that is duration-neutral to its benchmark. Allocation shifts were made on the margin over the quarter, as we took advantage of spread tightening by monetizing tighter-trading corporate bonds, and increased the Fund’s exposure to attractive securitized sectors.
Entering the second quarter of 2019, questions remain on the health of the global economy. Central banks across Europe and China are bracing for slowing growth, and have indicated that they plan to keep yields low to help spur expansion. As a result, the yield on 10-year German bonds fell into negative territory for the first time since 2016. However, domestic economic data suggests that the U.S. is still on solid footing, even with muted inflation. Despite this backdrop, investors are becoming increasingly wary, some viewing the temporary yield curve inversion as proof of overly tight financial conditions. At IR+M, we are continuing to monitor credit fundamentals for broad signs of weakness, which we have yet to see. We will remain surgical in our bottom-up approach, while being mindful of potential risks.

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.