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Hartford Schroders Emerging Markets Multi-Sector Bond Fund

November 2017 Monthly Update

Performance (%)
% (as of 12/31/2017)
Average Annual Total Returns % (as of 12/31/2017)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Emerging Markets Multi-Sector Bond  I 13.72 13.72 7.18 --- --- 4.86
BENCHMARK 11.13 11.13 5.35 --- --- ---
Morningstar Emerging Markets Bond Category 10.14 10.14 4.79 --- --- ---
Performance (%)
% (as of 12/31/2017)
Average Annual Total Returns % (as of 12/31/2017)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Emerging Markets Multi-Sector Bond  I 13.72 13.72 7.18 --- --- 4.86
BENCHMARK 11.13 11.13 5.35 --- --- ---
Morningstar Emerging Markets Bond Category 10.14 10.14 4.79 --- --- ---
SI = Since Inception. Fund Inception: 06/25/2013
Operating Expenses:   Net 0.90% |  Gross  0.94%

Performance prior to 10/24/16 for Class I-shares reflects the performance, fees, and expenses of the Investor Class of the predecessor fund Schroder Emerging Markets Multi-Sector Bond Fund. If Class I fees and expenses were reflected, performance would have differed. SI performance is calculated from 6/25/13.

Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s 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.

 

Market Review

Emerging market debt (EMD) once again turned in mixed results in the month of November. The J.P. Morgan EMBI Global Diversified Index, which represents sovereigns, rose 0.05% for the month. The J.P. Morgan GBI-EM Global Diversified Index, which represents local currency, rebounded 1.68%, while the J.P. Morgan CEMBI Broad Diversified Index, which represents corporates, returned 0.03%. Money moving into emerging market funds rose in all but one week during the month, which was only the third week this calendar year with aggregate outflows, as reported by J.P. Morgan.   

 

Portfolio Positioning 

The Fund (Class I Shares) returned 0.40% in November, underperforming its blended benchmark (an equal weighting of the J.P. Morgan EMBI Global Diversified, J.P. Morgan CEMBI Broad Diversified, and J.P. Morgan GBI-EM Global Diversified Indices), which returned 0.59%, mainly due to security selection within Argentinian and Brazilian local currency bonds, as well as underweights to the South African rand and Mexican peso, both of which strengthened in November.

We began to increase our exposure to local currency issues, ending the month at 34% after a healthy correction in that segment. In local currency issues, we prefer either improving credits (Argentina or the euro-related complex) or lower volatility stories (Indonesia and Peru). Our cash level was 2.9% at month end. We’re maintaining our portfolio duration1 overweight relative to that of the blended benchmark and ended the month at 6.06 years versus 5.61 for the blended benchmark. The portfolio’s credit quality, in our estimation, remains below investment-grade as we now hold approximately 34% of the portfolio in investment grade issues, and we continue to hold reduced exposure to investment-grade sovereign names with high correlations to US Treasuries. 

 

Market Outlook

EMD can be both inefficient and misperceived. As we enter the last month of a second consecutive year of strong performance it is worthwhile to put those returns into context. If you blend the three main EMD indices for sovereign, corporate and local currency, the past two years have generated barely sub-10% returns, consecutively. Yet to us the odds of outperforming the rest of the global fixed income opportunity set next year seem high.

First, as long as the US dollar remains stable-to-lower we think emerging markets (EM) should not be significantly more affected by any negative event than any other fixed income asset class. It is a common misperception that any negative scenario would result in poor relative EM performance against other asset classes under the assumption that it is automatically more volatile. Historically, only scenarios that result in a prolonged stronger dollar period draw capital from EM and have led to extended underperformance and deteriorating fundamentals.

Second, the starting point in the race for income already has EMD in the lead, based on current yields. The J.P. Morgan EMBI Global Diversified Index spread over the Barclays Global Aggregate Index is over 3%. To imagine that EMD loses this race is to imagine an asset class-specific event leading to poorer relative performance.   

 

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1Duration is a measure of the sensitivity of an investment’s price to nominal interest-rate movement.

Important Risks: 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 because interest rates are at, or near, historical lows. Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. Privately placed, restricted (Rule 144A) securities may be more difficult to sell and value than publicly traded securities, thus they may be potentially illiquid. 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 and more volatile 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 (e.g., “Brexit”). 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. The Fund may be adversely affected when certain large shareholders purchase or redeem large amounts of shares of the Fund.

The views expressed herein are those of Schroder Investment Management North America Inc. (Schroders) are for informational purposes only, and are subject to change based on prevailing market, economic, and other conditions. They may not reflect the views of Hartford Funds or any other sub-adviser to our funds and should not be construed as research or investment advice or as an offer or solicitation to buy or sell any security.

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