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Hartford Schroders Emerging Markets Multi-Sector Bond Fund

November 2018 Monthly Update

Performance (%)
% (as of 12/31/2018)
Average Annual Total Returns % (as of 12/31/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Emerging Markets Multi-Sector Bond  I -7.05 -7.05 6.13 2.46 --- 2.60
Benchmark -3.96 -3.96 5.51 2.78 --- ---
Morningstar Emerging Markets Bond Category -5.02 -5.02 5.29 1.66 --- ---
Performance (%)
% (as of 12/31/2018)
Average Annual Total Returns % (as of 12/31/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Emerging Markets Multi-Sector Bond  I -7.05 -7.05 6.13 2.46 --- 2.60
Benchmark -3.96 -3.96 5.51 2.78 --- ---
Morningstar Emerging Markets Bond Category -5.02 -5.02 5.29 1.66 --- ---
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

In November, the picture in emerging markets (EM) was mixed. China and the wider Asian economies are under pressure from trade tensions and softer tech demand, while in Latin America, Brazil is set to strengthen now that its elections are over. For emerging market debt (EMD), November was an outlier because traditionally reliable relationships temporarily broke down. The very tight historical correlation between the dollar and local currencies inverted, with the dollar up about 1% for the month, which would traditionally lead to lower, not higher, local currency returns.

In November, the J.P. Morgan EMBI Global Diversified Index, representing dollar-denominated sovereigns, returned -0.42%, while the J.P. Morgan CEMBI Broad Diversified Index, representing corporates, returned -0.16%, and the J.P. Morgan GBI-EM Global Diversified Index, representing local currency, returned 2.80%. Mozambique and Zambia were among the top-performing countries in the sovereign index while Venezuela and Nigeria were the worst performers. Asia was the best performing region within the sovereign index, returning 0.69% in November. Within the corporate index, Zambia and Barbados were the top-performing countries, while real estate and financials were the top-performing sectors. Pulp & paper and metals & mining were the worst-performing sectors driving negative returns in November. Within local currencies, Turkey and Indonesia were the best-performing countries as the lira and rupiah gained 7% and 6%, respectively, against the dollar in November.

 

Portfolio Positioning 

The Fund (Class I Shares) returned -1.03% 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 0.74%. Issue selection was negative, most notably within dollar-denominated corporates and sovereigns. Nostrum Oil (Kazakhstan) was among the worst-performing corporate issues as Kazakhstan corporates returned -4.64%, measured as a segment of the J.P. Morgan CEMBI Broad Diversified Index. Mexican and Colombian corporates also negatively impacted returns in November. Issue selection within dollar sovereigns was also negative, largely due to Ukraine, Mexico, and Argentina. Regional allocation was also negative for November due to the underweight to local currencies, which was the leading detractor during the month. Local currency returns were somewhat of an anomaly in November as the J.P. Morgan GBI-EM Global Diversified Index returned 2.80% despite the negative performance by the corporate and sovereign dollar indices. Within local currencies, the underweight in Turkey and Hungary were the largest detractors as they returned 9.20% and 2.05%, respectively, while our underweight in Mexico had a modest positive impact.

In November, we increased duration1 to bring it in line with the benchmark. Additionally, we continued to increase the Fund’s exposure to hard currency sovereigns while reducing corporate exposure. We still remain underweight local currencies against the benchmark. However, we increased the allocation during the month.

 

Market Outlook

The sell-off in US equities portends a more modest US Federal Reserve (Fed) hiking cycle, as the market has priced in only a 10% chance that the Fed hikes three times in 2019. Despite what should, in normal markets, be a positive sign for EM, dollar debt spreads have widened considerably, reaching an 18-month high of 385 in November. The correlation of these spreads to US equities is a relatively rare happening, and one that heralded the climax of the sell-off in the last period of EM weakness in 2014-early 2016. This time around shows a very similar picture. We don’t know where the bottom for equities and the top for spreads is, but the similarity between cycles is instructive. The Fed is unlikely to respond to market pressures in EM alone, but US equity sell-offs that represent tightening financial conditions and dwindling US growth prospects eventually get addressed. In that sense, the correlation should be welcomed by EMD investors. When the Fed does address the market volatility, history suggests EM assets may outperform, as the double-digit returns of 2016 and 2017 demonstrate. 

 

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Quarterly Fund Outlook & Commentary
Senior Investment Director John Mensack

Duration 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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