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Core Bond Fund —
Fourth Quarter Manager Commentary
4th Quarter, 2018
"Allocation shifts were made on the margin during the quarter, as we took advantage of outperformance by trimming tight-trading bonds. "

Economic Overview
Geopolitical concerns, falling oil prices, and a continuation of tightening monetary policy pushed market volatility higher during the fourth quarter of 2018. Economic data remained solid, with fourth quarter Gross Domestic Product (GDP) estimates averaging around 2.7%, unemployment at 3.7%, and inflation hovering above the 2% target. At its December meeting, the Federal Reserve (Fed), as expected, raised the federal funds target range by another 0.25%. This marked the fourth rate increase in 2018 and the ninth since December 2015. The Treasury curve flattened as the rate hike put upward pressure on shorter maturities. The policy-sensitive two-year Treasury yield reached as high as 2.97%, surpassing the five-year yield for the first curve inversion of 2018. Meanwhile, oil prices, which fell from $75 to $45 a barrel, dragged down future inflation expectations and yields of longer maturities. As a result, the 10-year breakeven inflation rate fell over the quarter from 2.14% to 1.71%.
Portfolio Review
In the fourth quarter of 2018, the Harbor Core Bond Fund (Institutional Class) returned 1.29%, underperforming its benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index, which returned 1.64%.
Relative underperformance was driven by the portfolio’s underweight to Treasuries and overweight to corporate bonds, specifically in Financials and Industrials. Corporates underperformed Treasuries as credit spreads widened. Contributors to performance included the Fund’s security selection within the Industrials sector and among collateralized mortgage-backed securities, as well as an out-of-benchmark allocation to bonds issued by the Small Business Association (SBAs). On a credit quality basis, the portfolio’s underweight to AAA-rated securities and overweight to BBB-rated securities detracted from relative performance.
The largest contributors to portfolio performance during the fourth quarter were AbbVie Inc and Celgene Corporation. The largest detractors from portfolio performance included General Electric, Anheuser-Busch InBev, and Charter Communications.
From the inception of the Fund in June through the end of the year, we took advantage of strong performance by trimming outperforming, tight-trading bonds in sectors such as banking and real estate investment trusts and deploying some of the proceeds into high-quality asset-backed securities (ABS) as well as SBAs and municipals. The portfolio’s overweight to ABS, and selection among those securities, aided relative performance during the second half of the year. Similarly, the portfolio’s out-of-index allocation to SBAs benefited relative results during the time period since inception.
Overall, our views and themes were largely unchanged over the quarter. We do not forecast interest rates. Instead, we rely on our bottom-up selection skills to build a portfolio that is duration-neutral to its respective benchmark. Allocation shifts were made on the margin during the quarter, as we took advantage of outperformance by trimming tight-trading bonds. In addition, we began to deploy built-up liquidity into opportunities amid spread widening toward the end of the quarter.
Entering 2019, the spread between the 10-year Treasury yield and the two-year Treasury yield is at one of its lowest levels since 2007. The Fed continues to tighten monetary policy but lowered its forecast to two additional rate hikes in 2019. Current market expectations, however, are inconsistent with the Fed’s estimate; the market is now pricing in zero rate hikes in 2019 and even a rate cut in 2020. The divergence in opinion between the Fed and market has created an environment of uncertainty for investors. At IR+M, we continue to believe that it is a good time to leverage our years of experience and security selection skills. Periods of uncertainty can lead to volatility, and we stand ready to opportunistically deploy our dry powder as volatility picks up.

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.