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Hartford Schroders Tax-Aware 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 Tax-Aware Bond  I -0.98 0.69 2.90 4.73 --- 4.70
Benchmark -0.25 1.56 2.85 3.53 --- ---
Morningstar Muni National Intermediate Category -0.30 1.07 2.18 2.60 --- ---
Performance (%)
% (as of 6/30/2018)
Average Annual Total Returns % (as of 6/30/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Tax-Aware Bond  I -0.98 0.69 2.90 4.73 --- 4.70
Benchmark -0.25 1.56 2.85 3.53 --- ---
Morningstar Muni National Intermediate Category -0.30 1.07 2.18 2.60 --- ---
SI = Since Inception. Fund Inception: 10/03/2011
Operating Expenses:   Net 0.47% |  Gross  0.59%

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

May was shaping up to be a fairly quiet month until the markets were rattled by heightened political risk in the last week of the month. Political developments in Italy triggered broader market concerns as the populist parties’ candidate for finance minister was vetoed by Italy’s president due to his strong anti-euro views. Both parties promised economic policies that would likely breach European Union financial strictures. In a turbulent final week of May, it briefly appeared that the coalition would be blocked, setting up the need for new elections. However, as the month ended, the populist parties appeared to reach a compromise to form a government, which brought relief to the markets as the prospect of a larger victory for the populist parties faded and mitigated concerns about an Italian departure from the Eurozone. The US administration’s approach to global trade, North Korea discussions, and uncertainty in Iran also contributed to the political uncertainty.

Despite the political noise, the macro backdrop remained broadly supportive in the US, but became more mixed in Europe and Asia. Unsurprisingly, the negative news flow resulted in US Treasury bond yields falling across the curve. Consequently, peripheral European government yields, Italy and Spain, were materially wider. Investment-grade corporate spreads, as measured by the Bloomberg Barclays Corporate Index, were 0.07% wider over the month. The sell-off was led by higher beta1 sectors, including communications, metals & mining, and telecommunications. The Bloomberg Barclays Municipal Bond Index posted a 1.15% return for the month of May. Returns were positive across the curve, with longer-dated bonds (22 years and longer) posting the best return (1.69%). The increased geopolitical uncertainty pushed interest rates lower and helped the municipal market post strong returns. After five consecutive weeks of outflows from municipal mutual funds during the tax-time period, demand rebounded and turned positive in May. Municipal supply has picked up from the extremely low levels earlier this year, but is still trending below normal levels.    

 

Performance And Positioning Review

The Fund (Class I Shares) returned 0.92% in May, underperforming its benchmark, the Bloomberg Barclays Municipal Bond Index. The Fund’s defensive posture, underweight to municipals, and allocation to US Treasuries detracted from returns on a relative basis. Additionally, the allocation to investment-grade corporates detracted from returns as the sector underperformed municipals. Duration2 and yield curve detracted from returns as the Fund’s underweight to the long-end of the curve underperformed with longer-dated municipals outperforming shorter-dated.

We reduced longer-dated California and New York bonds, which have experienced material spread compression, as demand for both has been strong in the wake of tax reform (these bonds are more attractive to wealthy residents of those states). As a result, we continue to hold dry powder, in the form of US Treasuries and pre-refunded municipals, while we are opportunistic and allocate risk when market dislocations arise.  

 

Market Outlook 

The market continues to adjust to the most significant changes in over three decades after the passage of tax reform. While many expect it to be a seasonally favorable period of net negative supply, June has been, on average, the third worst month of the year for municipal performance due to a large month-over-month increase in gross issuance. However, supply has increased more recently from the depressed levels earlier this year, so there is a possibility gross supply could pressure muni performance ahead of a favorable summer period. Near to long term, we are watching for a shift in demand from various buyers that have historically participated in the market, including both individuals and crossover buyers. 

Credit and security selection continue to be key as the dichotomy between stronger and weaker state and local governments will continue. Pensions, rising healthcare 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. Within the municipal market, we favor the non-cyclical nature of revenue sectors including, but not limited to, healthcare, toll roads, and colleges and universities. In our view, credit assets have benefitted disproportionately in recent years from a regime of low inflation, low volatility, and central banks reducing the free float of risk-free assets to the tune of several trillion dollars. This dynamic created a perfect storm of yield and risk seeking behavior. We expect markets to be characterized by a higher level of volatility as central banks allow market forces to dictate valuations. Although the economic growth outlook remains healthy, the valuation backdrop in many sectors is far less compelling than it has been in years.

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Quarterly Fund Outlook & Commentary
Associate Product Manager, Stephen Sciaraffo  

1 Beta is a measure of risk that indicates the price sensitivity of a security or a portfolio relative to a specified market index.

2 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. ● Mortgage related- 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 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. ● Municipal securities may be adversely impacted by state/local, political, economic, or market conditions; these risks may be magnified if the fund focuses its assets in municipal securities of issuers in a few select states. 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 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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