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Hartford Schroders Tax-Aware Bond Fund

August 2018 Monthly Update

Performance (%)
% (as of 9/30/2018)
Average Annual Total Returns % (as of 9/30/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Tax-Aware Bond  I -1.12 -0.36 2.43 4.66 --- 4.50
Benchmark -0.40 0.35 2.24 3.54 --- ---
Morningstar Muni National Intermediate Category -0.46 -0.06 1.69 2.52 --- ---
Performance (%)
% (as of 9/30/2018)
Average Annual Total Returns % (as of 9/30/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Tax-Aware Bond  I -1.12 -0.36 2.43 4.66 --- 4.50
Benchmark -0.40 0.35 2.24 3.54 --- ---
Morningstar Muni National Intermediate Category -0.46 -0.06 1.69 2.52 --- ---
SI = Since Inception. Fund Inception: 10/03/2011
Operating Expenses:   Net 0.47% |  Gross  0.59%

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

August was a typical quiet month with summer vacations preoccupying market activity. The U.S. Treasury curve continued to flatten, hitting a low of 21 basis points (bps)1 between 2-year notes and 10-year bonds, which is near the narrowest since the 2008 financial crisis. Although the US dollar weakened modestly and gave some relief to emerging markets, the impact on investment grade spreads was muted. Corporate spreads, measured by the Bloomberg Barclays US Corporate Bond Index2, were wider by 5 bps on the month and had a positive absolute return of 0.49% as rates declined. Spread widening can be attributed to selling at the margin and positioning in anticipation of the supply coming in September, as August volume was low but in line with a typical August.

The Bloomberg Barclays Municipal Bond Index posted its fourth consecutive positive monthly return in August, although still lagging other fixed-income sectors. Net negative supply was a tailwind during the month as gross issuance returned to more normal levels paired with positive inflows to long-term mutual funds, per J.P. Morgan. The rebound in demand for the asset class continued into August with positive weekly mutual fund inflows since May (post tax-time); however, inflows did slow from highs seen in July. In a reversal of last month, the shorter end of the curve had flat to negative performance while the long-end had stronger performance, as did high yield segments (Puerto Rico in particular).    

 

Performance And Positioning Review

The Fund (Class I Shares) returned 0.29% in August, outperforming its benchmark, the Bloomberg Barclays Municipal Bond Index, which returned 0.26%. Duration3 and yield curve were positive contributors for the month as the Fund’s overweight at the long-end of the curve outperformed shorter-dated municipals. The out-of-benchmark allocation to investment-grade corporates and corresponding underweight to tax-exempts detracted from performance given the move wider in corporate spreads for the month. Security selection was modestly positive versus the benchmark, with select issues in the pre-refunded sector standing out. During the month, we deployed some dry powder, most of which were new issues, to increase general obligation and housing bond exposure given the tone of the market.  

 

Market Outlook 

With the supportive technical conditions over the summer for municipals potentially reversing course to positive net supply, performance could be pressured in the near-term. We continue to monitor shifts in demand from various buyers who have historically participated in the market. Since the beginning of the year, there have been changes to municipal demand from institutional investors due to changes with the tax reforms passed at the end of 2017. The appeal of holding municipals has declined for banks and property and casualty insurers, who have started selling out of holdings. Going forward, individual investors and mutual funds will be the driving force behind municipal performance.

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. 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
Portfolio Manager Julio Bonilla  

A basis point a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security. 

Bloomberg Barclays US Corporate Bond Index is representative of publicly issued, investment-grade, fixed rate, dollar-denominated, non-convertible, US corporate debt securities that have at least $250 million par amount outstanding. 

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

Indices are unmanaged and not available for direct investment.

 

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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