- Most fixed income sectors posted negative total returns as government bonds sold off following Donald Trump’s win in the US presidential election
- OPEC’s decision to cut output for the first time in eight years caused a jump in oil and commodity prices and pushed US market-based inflation expectations to the highest level in a year and a half
- The US dollar (USD) surged on expectations of expansionary fiscal policy and stronger US growth, while emerging market assets suffered on concerns about trade protectionism
US inflation expectations have spiked following Trump's electionMarket-based measure of US inflation expectations (%)
Sources: Bloomberg, Wellington Management
USD inflation 5-Year/5-year forward swap is a measure of expected inflation (on average) over the five-year period that begins five years from today.
- Relative to the benchmark, the Hartford World Bond Fund’s lower duration1 contributed to bench-mark relative performance
- The Hartford World Bond Fund’s returns were negative over the course of the month as both global government core exposure and opportunistic strategies detracted from performance
- In global government core exposure, our holdings detracted as global bond markets sold off in the wake of the US presidential election. In core currency (FX), our allocation to Japanese yen (JPY) detracted from performance as the currency suffered following the Trump victory and the ensuing USD rally.
- Macro-driven currency strategies detracted. Our overweight in the JPY versus a basket of currencies (primarily the euro, British pound and USD) was the main detractor as the yen was the worst-performing currency in the G102. The yield differential between the US and Japan continued to widen and the USD continued to rally versus the yen. Our underweight position to the British pound detracted as the currency was largely unaffected by Trump’s victory and the subsequent rally in the USD.
- Quantitative strategies detracted. Our contrarian long US 10-year versus short Canada and Germany 10-year positions negatively contributed as spreads widened over the month. Trend strategies also underperformed. Our aggregate long-duration position at the overall portfolio level hurt performance as yield levels increased across the board.
Expenses3 % (Class A) Net Op. Exp.: 1.05% Gross Op. Exp.: 1.08%
Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of the investment will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For more current performance information to the most recent month-ended, click here.
Portfolio Positioning & Market Outlook
- Portfolio duration increased slightly over the course of the month now standing at 2.02 years largely due to a reduction in our active short positions. We remain bearish on duration broadly as valuations on government bonds continue to look rich. Some central banks are acknowledging the limits of monetary policy and the emphasis is shifting towards fiscal stimulus. We remain bullish on the USD broadly and were once again fully hedged at month end as we expect longer term USD strength in expectation of further US fiscal policy and impending rate hikes from the Fed.
- We believe that global yields have yet to catch up with the US-led rate sell-off post Trump’s election victory. We have underweight duration positions in the UK, Germany, and Japan.
- We think the JPY is undervalued, especially if the positive narrative of US fiscal stimulus and protectionist-lite stance is retraced. We are tactically overweight the yen.
- The UK’s Brexit negotiations on the key issue of access to the single market will raise uncertainty again. We remain underweight the British pound.
Currency Exposure (%)
|As of 11/30/16||Fund||Benchmark4|
|New Zealand Dollar||-1.38||0.00|
|Hong Kong Dollar||-2.14||0.00|
A Word About Risk
All investments are subject to risk, including the possible loss of principal. There is no guarantee the Fund will achieve its stated objective. The Fund’s share price may fluctuate due to market risk and/or security selections that may underperform the market or relevant benchmarks. Fixed Income risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall; these risks are currently heightened due to the historically low interest rate environment. Obligations of U.S. Government agencies are supported by varying degrees of credit but are generally not backed by the full faith and credit of the U.S. Government. Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. Mortgage- and asset-backed securities’ risks include credit, interest-rate, prepayment, and extension risk. Derivatives may be riskier or more volatile than other types of investments because they are generally more sensitive to changes in market or economic conditions; risks include currency, leverage, liquidity, index, pricing, and counterparty risk. Foreign investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as political and economic developments in foreign countries and regions. These risks are generally greater for investments in emerging markets. The Fund may have high portfolio turnover, which could increase the Fund’s transaction costs and an investor’s tax liability. The Fund is non-diversified, so it may be more exposed to the risks associated with individual issuers than a diversified fund. Privately placed, restricted (Rule 144A) securities may be more difficult to sell and value than publicly traded securities, thus they may be potentially illiquid.
1 Duration is a measure of the sensitivity of an asset or portfolio’s price to nominal interest rate movement.
2 The Group of Ten (G10) is made up of eleven industrial countries: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States.
3 Expense ratios are as shown in the most recent prospectus. Net expenses reflect contractual expense reimbursements in instances when these reductions reduce the fund’s gross expenses. Contractual reimbursements remain in effect until February 28, 2017 and automatically renew for one-year terms unless terminated.
4 Benchmark is the Citigroup World Government Bond Index.
Citigroup World Government Bond Index is a market-capitalization weighted index consisting of government bond markets. Country eligibility is determined based on market capitalization and investability criteria. All issues have a remaining maturity of at least one year.
Barclays U.S. Aggregate Bond Index is composed of securities from the Barclays Government/Credit Bond Index, Mortgage-Backed Securities Index, Asset-Backed Securities Index, and Commercial Mortgage-Backed Securities Index.
Indices are unmanaged and not available for direct investment.