Income Research + Management: A Process That Prizes Consistency

Harbor was drawn to IR+M to subadvise Harbor Core Bond and Harbor Core Plus for several reasons, not the least of which is their pursuit of consistency. The investors at IR+M never lose sight of the role core and core plus funds play in a portfolio. As a result, they have a conservative mindset and believe that principle preservation is job number one. That’s why every aspect of their approach has been thoughtfully designed to foster consistency. Here are a few features of their process that we believe contribute to that aim:

Duration neutral
IR+M believes wagers on the direction of interest rates are low percentage bets. To make a profitable interest-rate call, not only do you have to correctly time the initial trade, but you also must correctly time when to unwind it. Furthermore, interest-rate bets are complex to position – it is not just about one interest rate but often requires getting calls correct at different points on the yield curve. Consequently, IR+M aims to keep its portfolios duration in line with the benchmark across the curve and instead focuses its efforts on security selection and sector rotations, which they believe allow for a far more diversified set of bets that have higher percentage odds. It is important to note that IR+M’s duration neutral stance doesn’t mean it has no flexibility when it comes to rates positioning. The team can express views across most maturities based on its assessment of valuations and fundamentals. For example, portfolio managers may favor long corporates over short Treasuries or intermediate term mortgage-backed securities over short corporates.

Bond by bond approach
Rather than spend time and energy trying to predict the path of interest rates, IR+M believes it can deliver more consistent results by focusing its efforts on rigorous bottom-up research. The firm’s 68person investment team combs through the universe, seeking individual bonds from fundamentally sound issuers trading at attractive valuations. In this way, IR+M believes that it can structure portfolios with a yield advantage over the benchmark without taking on low-probability interest-rate risk.

Bottom-up security selection is also a critical source of risk control, in IR+M’s view. The team believes it is better able to control and diversify risk by being aware of vulnerabilities at the individual bond level.

Furthermore, rigorous fundamental research informs not only security selection, but it also filters up to the PM team who work to make sector-allocation decisions based on what the sector analysts’ bottom-up research indicates about where the market’s best risk/rewards lie.

Cash bonds only
Unlike some competing bond firms, IR+M does not use derivatives. The team believes that it can deliver more consistent performance and avoid unpleasant surprises by focusing its attention solely on dollar denominated cash bonds. Not only do derivatives introduce different risks into a portfolio (counterparty risk for example), but they can also make it difficult to know what you really own, in our view. By focusing on cash bonds, IR+M works to deliver portfolios where exposures are clear, understandable, and more straightforward to explain.

Important Information

The views expressed herein may not be reflective of current opinions, are subject to change without prior notice, and should not be considered investment advice or a recommendation to purchase or sell a particular security.

There is no guarantee that the investment objective of the Fund will be achieved. Fixed income investments are affected by interest rate changes and the creditworthiness of the issues held by the Fund. As interest rates rise, the values of fixed income securities held by the Fund are likely to decrease and reduce the value of the Fund's portfolio. There may be a greater risk that the Fund could lose money due to prepayment and extension risks because the Fund invests, at times, in mortgage-related and/or asset backed securities.

A corporate bond is a bond issued by a corporation in order to raise financing.

Short-term corporate bonds typically have maturities of between 1 and 3 years.

Long corporate bonds generally have maturities of more than 10 years.

Intermediate term mortgage-backed securities typically have a durations between 4 and 10 years.

Short Treasuries have a maturity date no greater than 12 months.

Counterparty risk is the risk that the other party to a financial contract will default on its contractual obligation.

Diversification does not assure a profit or protect against loss in a declining market.

Duration is a commonly used measure of the sensitivity of the price of a debt security, or the aggregate market value of a portfolio of debt securities, to change in interest rates. Securities with a longer duration are more sensitive to changes in interest rates and generally have more volatile prices than securities of comparable quality with a shorter duration.

A yield curve is a line that plots yields, or interest rates, of bonds that have equal credit quality but differing maturity dates.

Income Research + Management is an independent subadvisor to the Harbor Core Bond Fund and Harbor Core Plus Fund.

Investors should carefully consider the investment objectives, risks, charges and expenses of a Harbor fund before investing. To obtain a summary prospectus or prospectus for this and other information, visit harborcapital.com or call 800-422-1050. Read it carefully before investing.

Distributed by Harbor Funds Distributors, Inc.

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