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Hartford Schroders Tax-Aware Bond Fund

December 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 Tax-Aware Bond  I 4.13 4.13 3.09 3.65 --- 5.25
BENCHMARK 5.45 5.45 2.98 3.02 --- ---
Morningstar Muni National Intermediate Category 4.46 4.46 2.23 2.09 --- ---
Performance (%)
% (as of 12/31/2017)
Average Annual Total Returns % (as of 12/31/2017)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Tax-Aware Bond  I 4.13 4.13 3.09 3.65 --- 5.25
BENCHMARK 5.45 5.45 2.98 3.02 --- ---
Morningstar Muni National Intermediate Category 4.46 4.46 2.23 2.09 --- ---
SI = Since Inception. Fund Inception: 10/03/2011
Operating Expenses:   Net 0.46% |  Gross  0.55%

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 Broad Tax-Aware Value Fund. If Class I fees and expenses were reflected, performance would have differed. SI performance is calculated from 10/03/11.

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

Most investors experienced a rewarding year of returns with remarkably little volatility. Markets continue to benefit from global growth momentum, as expanding investment, employment and trade have supported growth across the globe. The primary factors contributing to the healthy quarterly returns in risk assets were a solid earnings season and the passage of the long anticipated tax reform bill. Several central banks, including the European Central Bank (ECB), Bank of England (BoE) and the U.S. Federal Reserve (Fed) have begun to take steps to move away from the fully accommodative policy stance that has been in place since the Global Financial Crisis. The Fed raised the Fed Funds rate in December as economic conditions continued to improve and unemployment remained at its lowest level since 2000. The rate hike was well-anticipated and marked the third increase in 2017, in line with the Fed’s projections at the end of 2016. The Fed reaffirmed their commitment to allow the balance sheet to shrink by up to $20 billion per month as assets mature. It was also announced that Jerome Powell will lead the Fed when Janet Yellen steps down in February. Powell is unlikely to deviate from the course that Janet Yellen has laid out, however the several new Fed members to be appointed in 2018 could alter the path and will warrant close attention.

Front and intermediate US Treasury yields rose over the month with longer maturity Treasury yields lower. The yield curve has flattened to decade lows, as 10-year yields were flat while two-year yields rose 0.10%, from 1.78% to 1.88%. Corporate bonds capped a good year with positive total returns, easily outperforming government bonds. Investment grade corporate spreads tightened 0.04%, as measured by the Bloomberg Barclays U.S. Corporate Index, reaching pre-crisis levels. The passage of US tax reform and strong economic data supported risk assets in December. Municipal bonds were also a beneficiary despite elevated supply in December as issuers rushed deals ahead of the January 1st effective date for the tax law changes. The municipal bond index, measured by the Bloomberg Barclays Municipal Bond Index, delivered a total return of 1.05% in December and 5.45% for the year.

 

Performance And Positioning Review

The Fund (Class I Shares) returned 0.99% during the month, underperforming its benchmark, the Bloomberg Barclays Municipal Bond Index. Sector selection was the main detractor from returns as the Fund’s underweight to tax-exempt municipals, which outperformed US Treasuries and corporates. The excess returns in corporates mitigated some of the underperformance from the municipal underweight as corporates posted a strong month of returns. Yield curve contributed to returns as the Fund benefitted from a flattening Treasury and municipal yield curve and its modest overweight at longer maturities.

We took advantage of attractively priced new municipal issues came to market before year-end. We reduced some of the “dry powder” in the Fund, namely variable rate demand notes (VRDNs), to purchase tax-exempt fixed rate municipals out the curve. The allocation to VRDNs has reduced from 21% to 8% over the month.

 

Market Outlook 

Heading into 2018, the market will adjust to the most significant changes in over three decades. The focus will be on municipal supply, which we expect to decline drastically. Anticipated issuance is expected to be $270-280 billion for the year, and issuance is expected to be muted early on due to the fact a large amount of deals were rushed to market in December 2017. We are also watching for a shift in demand from various buyers that have historically participated in the market.  Individual demand should increase, especially for those investors in high tax states, given the elimination of the SALT (state and local taxes) deduction. However, with a lower corporate tax rate, corporate bonds may be more attractive than municipals on a tax-adjusted basis. Credit and security selection continue to be key as the dichotomy between stronger and weaker state and local governments will continue. Pensions, rising health care costs, and possible federal reductions (Medicaid) will require strong fiscal management as well as the political will to make tough decisions going forward.  Research is more critical than ever. Our current tax-exempt municipal exposure is 88%, which is the highest it has been all year 2017. Given the current level of spreads in the credit sector, it’s hard to justify adding exposure to this sector. Credit spreads are near the tightest levels since the financial crisis, leaving little opportunity. 

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Quarterly Fund Outlook & Commentary
Investment Director Whitney Sweeney

 

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. Mortgage- and asset-backed securities’ risks include credit, interest-rate, prepayment, and extension risk. 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. The purchase of securities in the To-Be-Announced (TBA) market can result in additional price and counterparty 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 specific country, regional, and economic developments (e.g., “Brexit”). Municipal securities may be adversely impacted by state/local, political, economic, or market conditions. Investors may be subject to the federal Alternative Minimum Tax as well as state and local income taxes. Capital gains, if any, are taxable. The Fund may have high portfolio turnover, which could increase the Fund’s transaction costs and an investor’s tax liability. 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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