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Hartford Schroders Emerging Markets Multi-Sector Bond Fund

February 2018 Monthly Update

Performance (%)
% (as of 3/31/2018)
Average Annual Total Returns % (as of 3/31/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Emerging Markets Multi-Sector Bond  I -0.25 8.08 6.79 --- --- 4.55
BENCHMARK 0.51 6.95 5.49 --- --- ---
Morningstar Emerging Markets Bond Category -0.34 5.30 4.83 --- --- ---
Performance (%)
% (as of 3/31/2018)
Average Annual Total Returns % (as of 3/31/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Emerging Markets Multi-Sector Bond  I -0.25 8.08 6.79 --- --- 4.55
BENCHMARK 0.51 6.95 5.49 --- --- ---
Morningstar Emerging Markets Bond Category -0.34 5.30 4.83 --- --- ---
SI = Since Inception. Fund Inception: 06/25/2013
Operating Expenses:   Net 0.90% |  Gross  0.92%

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) retreated in February as volatility returned with a roar to financial markets. All three components of the blended benchmark (hard currency sovereigns, corporates and local currency) fell over the month. The J.P. Morgan EMBI Global Diversified Index (sovereigns), was the largest detractor, falling -1.99% for the month, followed by the J.P. Morgan GBI-EM Global Diversified Index (local currency), down -1.04%, and the J.P. Morgan CEMBI Broad Diversified Index (corporates), which lost -1.01% for the month. Flows overall for EMD were muted, with only $122mm in total flows. By subsector, inflows into blended and local currency funds ($1.3bn and $0.5bn respectively) were mostly offset by outflows from hard currency funds (-$1.7bn), per J.P. Morgan. 

 

Portfolio Positioning 

The Fund (Class I Shares) returned -1.50% in February, 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 -1.35%. Hard currency Ukrainian and Tajikistan sovereigns were the largest detractors while Egyptian sovereigns contributed. In local currency, the South African rand, Columbian peso, and Czech koruna contributed, while the Russian ruble and Indonesian rupiah were the most significant detractors. We moved underweight to local currency issues in February, ending the month at about 26% (compared to about 33% at the end of January) as volatility in the US dollar increased amid the market turmoil early in the month. In local currency issues, our overweights are to South Africa, Poland, Indonesia, and Turkey. We had a cash level of about 5.5% at month end. We reduced our portfolio duration1 overweight relative to that of the blended benchmark. The portfolio’s credit quality remains below investment grade as we currently hold approximately 33% of the portfolio in investment-grade issues.  

 

Market Outlook

With a broader range of plausible economic outcomes, more asset price volatility should be expected. The days of straight line 2%-ish growth and nearly 2% inflation for the US seem far behind. Perhaps the biggest near-term damage of the recent "trade war" narrative—apart from the, in our opinion, very likely medium-term economic damage—is that this twist further enlarges the range of outcomes, on top of heightened inflation uncertainty and the new Fed chair's "over-heating" comment. Markets will wait for details, then responses from affected countries, and then further central bank moves. So broadly, unsettled conditions for markets seem likely for the near term.

EMD still has the advantage of paying investors an appreciably higher yield than other fixed income assets to help endure the volatility. Nominal yields for the sovereigns (as represented by the J.P. Morgan EMBI Global Diversified Index) have risen by 0.45% year to date, while spreads to Treasuries have risen 0.14%. Given the move in US treasuries and overall asset price jitters, the spread increase has been remarkably measured.

Investors interested in or invested in emerging markets (EM) during periods where volatility picks up have to distinguish between episodes where that volatility is asset-class specific or macro driven. 

In the former case, reduction or removal of EM exposures is the right thing to do—when asset class fundamentals are markedly deteriorating or specific country risks are so large contagion to other emerging markets takes place. In the latter case, if history is any guide, emerging market valuations are such that investors are quite likely to be compensated more than in other markets for market drivers that may be inescapable except for retreating into cash. 

The only exception to this framework would be if the macro driver were to produce, as a by-product, a meaningfully stronger driver—like the taper tantrum of 2013 and the subsequent market pricing of a hiking cycle in 2014-2015. So far, there is no sign to us that is the case. 

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

Important Risks: Investing involves risk, including the possible loss of principal. There is no guarantee a fund will achieve its stated objective. Security prices fluctuate in value depending on general market and economic conditions and the prospects of individual companies. ● Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. ● 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 price than other securities. ● Derivatives are generally more volatile and sensitive to changes in market or economic conditions than other securities; their risks include currency, leverage, liquidity, index, pricing, and counterparty risk. ● Foreign investments may be more volatile and less liquid than U.S. investments and are subject to the risk of currency fluctuations and adverse political and economic developments. These risks may be greater for investments in emerging markets. ● The Fund may have high portfolio turnover, which could increase its transaction costs and an investor’s tax liability. The Fund may invest in a smaller number of issuers and focus on investments in particular geographic regions or countries, so it may be more exposed to risks and volatility than a more broadly diversified 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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