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Hartford Schroders Emerging Markets Multi-Sector Bond Fund

May 2018 Monthly Update

Performance (%)
% (as of 6/30/2018)
Average Annual Total Returns % (as of 6/30/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Emerging Markets Multi-Sector Bond  I -7.06 -2.36 3.61 2.73 --- 2.86
Benchmark -4.81 -1.29 3.59 2.86 --- ---
Morningstar Emerging Markets Bond Category -5.21 -1.82 3.13 1.65 --- ---
Performance (%)
% (as of 6/30/2018)
Average Annual Total Returns % (as of 6/30/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Emerging Markets Multi-Sector Bond  I -7.06 -2.36 3.61 2.73 --- 2.86
Benchmark -4.81 -1.29 3.59 2.86 --- ---
Morningstar Emerging Markets Bond Category -5.21 -1.82 3.13 1.65 --- ---
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) delivered negative returns in May, as the dollar continued to strengthen after it broke out from trading range bound most of the year. The J.P. Morgan EMBI Global Diversified Index, representing hard currency/US dollar sovereigns, returned -0.94% for the month, while the J.P. Morgan GBI-EM Global Diversified Index, representing local currency, returned -4.98%, and the J.P. Morgan CEMBI Broad Diversified Index, representing corporates, was down -0.70% for the month. Flows across each emerging markets (EM) subsector were negative for the month, per J.P. Morgan. In the corporate segment, investment grade issues returned -0.10% while high yield issues fell -1.44%. Infrastructure and consumer were the top-performing sectors with returns of 0.64% and -0.29%, respectively. Meanwhile, transportation and pulp & paper lagged with returns of -2.17% and -1.88%, respectively. The Middle East and Asia corporates led all regions with returns of 0.22% and 0.10%, respectively. Latin America and European corporates lagged with returns of -1.85% and -0.75%, respectively.

We believe that the upward trajectory of the US dollar—an unambiguous negative for all emerging markets—that began on April 16 was triggered by the market's growing conviction that the divergence between central bank policies, namely the US Federal Reserve (Fed)'s steady tightening and the rest of world, was widening. The evidence for that was slower economic growth signs across Europe, the UK, and no real signs of pick-up elsewhere. There seems to be no real catalyst for a reversal in the dollar as long as the divergence remains or widens. Without a narrowing of that policy divergence, EM investors should, if history is any guide, remain defensive with little local currency exposure, and shorter duration1 exposure in credit risk bonds. 

 

Portfolio Positioning 

The Fund (Class I Shares) returned -2.21% in May, 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 -2.20%. Security selection within US dollar corporates and sovereigns detracted from returns. The Fund’s exposure to Latin America, in particular Argentina, Brazil, and Mexico, also negated returns. The underweight to local currency bonds was the primary contributor to returns as the US dollar strength continued in May amid concern over a potential de-synchronization of global growth.

In our view, there is value in dollar EM bonds as absolute yields are at their highest level since a 2015 peak, and since 2011 prior to that peak. Income generation opportunities are thus at their highest in years. However, a rising dollar implies low odds for capital gains beyond those returns. What then turns things around? The policy divergence sows the seeds of its own demise. History suggests we can stay at these very low levels for several months, but that a correction may be swift--the initiation of which would be a buy signal for EM under our policy divergence framework, as it would lead to a dovish Fed, if history is any guide.  

 

Market Outlook

While timing is a fool's errand, the signs are accumulating that the seeds of policy divergence have been planted. Global growth ex-US seems to be slowing, and we would particularly note much softer prospects in the large Latin economies of Brazil and Argentina, as well as in Asia with a gentler slope. That will feed back into the US. Positive economic surprises peaked in December and have trended down since, according to the Citi surprise index for the US. All of those are rather traditional leading indicators that a Fed tightening cycle is maturing, in our view almost certainly more rapidly than published Fed expectations for hikes beyond 2018 imply.

A new twist was added at the end of May with the broad first shots in a global trade skirmish. It is difficult to find a fact-based argument as to why this, too, should not be a meaningful impediment to overall US growth, especially given a now semi-permanent rise in business uncertainty. While the jobs number in May will certainly lead to commentary extolling US strength and firmer near-term Fed hiking probabilities, the higher current yields available in EM offer a reasonable cushion while we wait for additional evidence to confirm the signs we are seeing that this time is unlikely to be different. 

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Quarterly Fund Outlook & Commentary
Investment Director Jim Barrineau, CFA

 

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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