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Hartford Schroders Emerging Markets Multi-Sector Bond Fund

February 2020 Monthly Update

Performance (%)
% (as of 2/29/2020)
Average Annual Total Returns % (as of 2/29/2020)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Emerging Markets Multi-Sector Bond  I -0.55 4.85 3.98 4.77 --- 3.74
Benchmark --- --- --- --- --- ---
Morningstar Emerging Markets Bond Category -0.11 7.04 4.23 4.03 --- ---
Performance (%)
% (as of 12/31/2019)
Average Annual Total Returns % (as of 12/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Emerging Markets Multi-Sector Bond  I 11.52 11.52 5.64 5.00 --- 3.92
Benchmark --- --- --- --- --- ---
Morningstar Emerging Markets Bond Category 12.22 12.22 5.49 4.17 --- ---
SI = Since Inception. Fund Inception: 06/25/2013
Operating Expenses:   Net 0.90% |  Gross  1.00%
Performance prior to 10/24/16 for Class I-shares reflects the performance, fees, and expenses of the Investor Class of the Predecessor Fund. If Class I fees and expenses were reflected, performance would have differed. SI performance is calculated from 6/25/13.

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

In February we saw a continuation of the theme of market volatility as investors fled to safe haven assets as the coronavirus case count has steadily grown. Performance was negative across emerging markets (EM) led by dollar-denominated sovereigns— measured by the J.P. Morgan EMBI Global Diversified Index1—and local currency sovereigns— represented by the  J.P. Morgan GBI-EM Global Diversified Index2—which returned -0.97% and -3.41% in February, respectively. Corporates, represented by the J.P. Morgan CEMBI Broad Diversified Index,3  performed surprisingly well and were essentially flat for the month returning -0.01% in February. Dollar-denominated sovereigns was led by Suriname, Paraguay, and China during the month, while notable laggards were higher-beta4 names like Ecuador and Lebanon. With regards to corporates, technology, media, and telecom and diversified sectors performed best while metal and mining names performed worst. Mining names lagged as the market priced in lower-than-expected demand resulting from the coronavirus spread. Local currency sovereigns were the worst performing emerging market debt subsector as a stronger US dollar and risk-off sentiment led to a sharp sell-off during the month. Argentina and India were the top performing names, while Turkey and Indonesia lagged.

 

Portfolio Positioning 

The Fund (Class I Shares) returned -2.05% in February, underperforming the blended index benchmark,5 which returned -1.46%. Positive sector selection within the dollar-denominated sovereign segment was offset by negative issue selection. At the sector level, our underweight to local currencies and hard currency sovereigns were the primary contributors as both segments lagged. Local currencies in particular underperformed on the back of a stronger US dollar and broader shedding of risk assets. Negative issue selection was driven by corporates as mining names like Mongolian Mining and Vedanta Resources were hit hardest. Within the quasi-sovereign segment, names like Petroleos Mexicanos and the Province of Cordoba were the notable underperformers for the month. Our underweight to local currencies like Brazil and Indonesia aided excess returns given the sell-off we saw during the month. Our long-duration6 bias was positive in February as demand for safe haven assets caused rates to continue to rally throughout the month.

 

Market Outlook

When uncertainty such as the coronavirus is injected into a complacent market, asset prices fall until some reasonably accurate measure of the fundamental damage is available.

In market episodes like this, EM is historically more volatile than developed markets, and asset price over-shooting is more prevalent (discernible only in hindsight, of course). However, Volatility + Dogmatism = Trouble, while Volatility + Humility + Patience = Opportunity. Respecting that market truism, we are not yet at a place to be emphatic in our views, however broad outlines are emerging.

The VIX Index7 shows that market volatility has reached an area where the Federal Reserve (Fed) has reacted in the past. Right on cue, the Fed announced a surprise cut of 50 basis points8 on March 3rd, which did not calm equity markets, at least initially.

  • Positioning probably matters more now than in normal market environments. The Mexican peso had a record long positioning going into the virus episode, and has subsequently fallen 6.3% in a week, despite the largest real interest rates in the asset class. Other currencies with high international investor participation like Indonesia, South Africa, and Russia have also been disproportionately punished. If the Fed move is taken as an all-clear signal, rebounds here are likely to be swift and strong, especially as developed market yields have ever more reason to remain low.
  • The dollar credit curve is steepening rapidly as non-investment grade assets are sold. This should be taken as a positive development, as appropriate pricing for credit risk rapidly returns.
  • For investment-grade credits, oil-related names in Middle Eastern Gulf countries are lagging. The Organization of the Petroleum Exporting Countries meets in early March, and with default risk nearly non-existent in this credit spectrum, a patient investor's probability of being rewarded here seems very high, in our view. Alternatively, much lower-rated oil credits should be the last item on a prudent investor's shopping list.

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1 J.P. Morgan EMBI Global Diversified Index tracks total returns for traded external debt instruments in the emerging markets. It limits the weights of those index countries with larger debt stocks by only including specified portions of these countries’ eligible current face amounts of debt outstanding

2 J.P. Morgan GBI-EM Global Diversified Index is a comprehensive global, local emerging-markets index, and consists of liquid, fixed-rate, domestic-currency government bonds.

3 J.P. Morgan CEMBI Broad Diversified Index is a global, liquid corporate emerging-markets benchmark that tracks US-denominated corporate bonds issued by emerging-markets entities.

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

5 The blended index consists of 33.4% J.P. Morgan EMBI Global Diversified Index, 33.3% J.P. Morgan GBI-EM Global Diversified Index, and 33.3% J.P. Morgan CEMBI Broad Diversified Index.

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

7 The Volatility Index, or VIX, is a real-time market index that represents the market's expectation of 30-day forward-looking volatility.

8 A basis point is 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.

Indices are unmanaged and not available for direct investment.

 

Important Risks: Investing involves risk, including the possible loss of principal. 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. 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. These risks may be greater for investments in emerging markets or if the Fund focuses in a particular geographic region or country. Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. 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. Restricted securities may be more difficult to sell and price than other securities. The Fund may have high portfolio turnover, which could increase its transaction costs and an investor’s tax liability. The Fund invests in a smaller number of issuers, so it may be more exposed to risks and volatility than a more broadly diversified 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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