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Hartford Schroders Tax-Aware Bond Fund

February 2018 Monthly Update

Performance (%)
% (as of 3/31/2018)
Average Annual Total Returns % (as of 3/31/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Tax-Aware Bond  I -1.37 1.92 2.21 3.37 --- 4.82
BENCHMARK -1.11 2.66 2.25 2.73 --- ---
Morningstar Muni National Intermediate Category -1.07 1.99 1.61 1.80 --- ---
Performance (%)
% (as of 3/31/2018)
Average Annual Total Returns % (as of 3/31/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Tax-Aware Bond  I -1.37 1.92 2.21 3.37 --- 4.82
BENCHMARK -1.11 2.66 2.25 2.73 --- ---
Morningstar Muni National Intermediate Category -1.07 1.99 1.61 1.80 --- ---
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

Financial markets were broadly weaker in February. Early in the month, higher-than-expected US wage data put bond markets under pressure as investors priced in the potential for a more proactive Federal Reserve (Fed). Concerns then spilled over into the equity market, which resulted in most major US indices approaching “correction” territory, defined as a decline in excess of 10%, throughout the month. The weakness was exacerbated when leveraged short volatility products and strategies had to close their short positions after the spike in volatility.  After fifteen months of risk assets grinding steadily higher, volatility, as measured by the VIX (CBOE Volatility Index), abruptly entered the market increasing to levels last seen in 2015. However, strong economic data provided stability to the financial markets and preventing a more sizable correction.

US Treasury yields continued to rise at a robust pace as strong jobs data gave further fuel to growth and inflation expectations. Treasuries were impacted by the volatility spike early in the month, with yields oscillating significantly over the first few days. They rose steadily thereafter, reaching an intra-month high of 2.95%. For the month overall, 10-year yields increased from 2.70% to 2.86%, with similar rises in five and two-year yields. Corporate bonds posted negative total returns and underperformed government bonds. Front-end investment-grade corporate spreads came under pressure due to significant investor selling, both overseas and US corporate investors, as well as other front-end investors concerned about the coming liquidation of corporate cash positions previously held abroad. The municipal index, as represented by the Bloomberg Barclays Municipal Index, posted a -0.30% return. Returns were positive only in the shortest maturities, while the long bond index (22 years and longer) posted a return of -0.42%. The municipal market fared better than other fixed-income sectors due to a strong technical backdrop, firm demand coupled with lower issuance.  

 

Performance And Positioning Review

The Fund (Class I Shares) returned -0.53% in February, underperforming its benchmark, the Bloomberg Barclays Municipal Bond Index. The Fund’s allocation to longer-dated municipals detracted from returns as longer-dated credits underperformed short and intermediate paper. The allocation to investment-grade corporate bonds detracted from returns as credit spreads widened. Issuance within financials weighed on spreads in the sector, however we expect this trend to slow going forward. Further, hard data on rising inflation materialized in the January data which sparked fears that the Fed could move faster on monetary policy resulting in higher volatility across asset classes and wider credit spreads.

We continue to maintain a defensive sector posture in the Fund. We reduced ~10% in tax-exempt municipals, variable-rate-demand-notes (VRDNs) and longer-dated zero coupon bonds, and reallocated to US Treasuries. Additionally, reducing our “barbell” allowed us to rotate into the intermediate part of the curve where we currently believe the yield curve structure is more attractive. The dry powder and higher quality paper should allow us to be opportunistic in the new issue market when attractive deals are priced. 

 

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 state and local (SALT) 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 about 78% and given the current level of spreads in the corporate 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: 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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