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Hartford Schroders Tax-Aware 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 Tax-Aware Bond  I 0.34 0.34 2.33 4.87 --- 4.56
Benchmark 1.28 1.28 2.30 3.82 --- ---
Morningstar Muni National Intermediate Category 0.75 0.75 1.64 2.73 --- ---
Performance (%)
% (as of 12/31/2018)
Average Annual Total Returns % (as of 12/31/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Tax-Aware Bond  I 0.34 0.34 2.33 4.87 --- 4.56
Benchmark 1.28 1.28 2.30 3.82 --- ---
Morningstar Muni National Intermediate Category 0.75 0.75 1.64 2.73 --- ---
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

After a short reprieve at the start of the month, mainly driven by strong corporate results, November saw a continuation of the elevated market volatility that began in October. Risk asset valuations have been facing a long list of issues, including the sell-off in GE, California wildfires, a continuing trade war with China, and a drop in the price of oil, all of which impacted the reaction witnessed in wider credit spreads. While a number of these factors have been present for some time, the sensitivity of the market to these factors has increased. Although fundamentals are still healthy for US corporations, it’s easy to see why investors may be feeling anxious. The market finally did regain its footing due to generally dovish comments by US Federal Reserve (Fed) Chairman Jerome Powell. However, the comments did not result in a rally in spreads, as might be anticipated, though equity markets did rally materially.

Municipal bonds posted strong returns in November as interest rates trended lower based on the Fed message suggesting a return to data-driven monetary policy as economic growth appears to be slowing. Gross issuance was $22.7 billion in November, 24% lower than the five-year average. However, selling in the secondary market appeared robust and generally well absorbed, as the market saw richer relative valuations versus Treasuries and investment-grade corporates. The Bloomberg Barclays Municipal Bond Index returned 1.11% this month, driven primarily by long-duration1 bonds and high credit quality issuers. Year-to-date performance also transitioned into positive territory at 0.08%, while performance on the long end of the curve remained negative.

 

Performance And Positioning Review

The Fund (Class I Shares) returned 1.07% in November, underperforming its benchmark, the Bloomberg Barclays Municipal Bond Index. Poor sector selection was the main driver of underperformance, especially in the financial institutions sector. Conversely, security selection had a positive impact on relative performance; however, not enough to offset the out-of-benchmark corporate allocation selection. Security selection within the transportation sector and general obligation bonds contributed the most to strong issue selection. Duration and yield curve contributed positively to relative performance as the Fund had a slightly longer duration and underweight at the short-end versus the benchmark. During the month, the Fund increased its exposure to the Treasury sector as a buffer to increased volatility within the market.  

 

Market Outlook 

After two years of increasing interest rates, 2018 likely marked a peak in US Treasury yields within the current business cycle. The Fed is expected to continue raising interest rates and reducing its balance sheet, leaving more leveraged and risky segments of the market open to price declines. The corporate sector will likely see higher volatility and re-pricing of riskier assets. Intermediate and long-term bonds will potentially hit a cyclical peak due to predictions that economic growth will moderate due to tighter global monetary policy, a strong U.S. dollar, and weak global growth exacerbated by trade conflicts. Markets will continue to be vulnerable to fears that a downturn is near as the effects of 2018’s fiscal stimulus decline, and portfolio allocations will remain stable but attempt to balance risk and reward as spread opportunities arise.

Overall, tax reform has dampened the growth in municipal bank holdings, with overall corporate holdings declining by 2.5% YTD and 0.9% from Q2 to Q3 in 2018. Despite the decline in tax rates for property and casualty (P&C) insurance companies, P&C holdings of municipals increased by 2.7% YTD and 1.1% from the Q2 to Q3 in 2018. The results of the US midterm elections contributed to a positive outlook for municipals, as a split Congress is unlikely to agree upon infrastructure changes or tax law changes, thus preserving current tax exemptions. With the assumption that future supply of municipal bonds remains manageable, strong performance should increase overall demand in the sector. However, year-end tax loss selling may extend the outflow cycle as investors look to offset equity gains between now and the year end.

 

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Quarterly Fund Outlook & Commentary
Portfolio Manager Julio Bonilla  

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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