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Hartford Schroders Emerging Markets Multi-Sector Bond Fund

April 2020 Monthly Update

Performance (%)
% (as of 4/30/2020)
Average Annual Total Returns % (as of 4/30/2020)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Emerging Markets Multi-Sector Bond  I -18.38 -14.85 -3.42 -0.30 --- 0.70
Benchmark -9.94 -2.57 1.17 2.42 --- ---
Morningstar Emerging Markets Bond Category -12.03 -6.43 -0.64 1.58 --- ---
Performance (%)
% (as of 3/31/2020)
Average Annual Total Returns % (as of 3/31/2020)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Emerging Markets Multi-Sector Bond  I -19.61 -15.76 -3.35 0.34 --- 0.48
Benchmark -12.92 -5.53 0.46 2.16 --- ---
Morningstar Emerging Markets Bond Category -14.58 -9.11 -1.29 1.03 --- ---
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

Despite the appealing valuations of emerging market (EM) assets and the tentative stabilization in prices that followed the March panic selling, market participants continue to adopt a cautious stance towards EM bonds and currencies. This caution is not surprising given that market sentiment continues to be depressed by the sharp downward revisions to global growth expectations, the collapse in oil prices, continued US dollar strength, the rating downgrades of Mexico and South Africa, the political uncertainties that have reappeared in Brazil, and the possibility that key EMs could be the next epicenter of the coronavirus pandemic. Emerging market debt rebounded strongly in April on the back of massive amounts of stimulus and support from global central banks. Positive developments with regards to COVID-19 in terms of slowing rates of new infections and deaths also contributed to the positive market sentiment as did positive headlines surrounding clinical trials. Performance was positive across emerging markets with dollar-denominated sovereigns—measured by the J.P. Morgan EMBI Global Diversified Index1—and corporates, represented by the J.P. Morgan CEMBI Broad Diversified Index,2 returning 2.25% and 4.09%, respectively. Local currency sovereigns—represented by the J.P. Morgan GBI-EM Global Diversified Index3—also recovered, posting total returns of 3.92% for the month. In the dollar-denominated sovereigns index, higher-beta4 countries like Angola and Nigeria outperformed. Meanwhile, default candidates like Lebanon and Ecuador continued to sell off during the period. Within the corporate segment, pulp and paper along with industrials performed best, while oil and gas bonds continued to lag. Regionally, Africa significantly outperformed, led by Ghana and South Africa, respectively.

 

Portfolio Positioning 

The Fund (Class I Shares) returned 1.53% in April, underperforming the JP Morgan Emerging Markets Blended Index, which returned 3.42%. Security selection was the primary detractor with a modest negative impact from sector selection. At the sector level, our conservative positioning, namely increased cash levels, was the largest detractor given the rebound we saw in risk assets during the month. With regards to issue selection, corporates and quasi-sovereigns were the leading detractors. In the quasi-sovereign segment, Argentina issuers like Province of Cordoba and YPF Soceidad Anonima were the primary detractors given the potential effects of the COVID-19 shutdown on local government revenues. In the corporate segment, a mix of Mexican names such as Docuformas and Unifin led underperformance. The sovereign segment contributed on the whole as our overweight to Gabon and out-of-benchmark exposure to Brazil aided excess returns for the month. Finally, our long-duration5 bias did not have a material impact. The Fund remains overweight the benchmark by approximately 0.6 years.

 

Market Outlook

With developed market (DM) rates stuck at zero for the foreseeable future, it’s reasonable to assume that, all other things being equal, EM local rates should be able to come down as well, while preserving a yield cushion to DM. That has been the case. The question is where the endpoint of monetary policy easing for this asset class lies.

We can roughly break the group into thirds;  with one third having some meaningful space left to cut, one third with more marginal rate cuts likely, and one third having likely completed cutting cycles. The shared characteristics with DM are declining inflation, much slower growth prospects that support easing, and generally having a store of market credibility with which to maneuver.

The key point as we move closer towards terminal rates is how deep this reservoir of credibility runs. With very low or negative real rates, investors are less likely to choose to invest in EM currencies unless the US dollar is on a clear declining path or if they are comfortable with overall creditworthiness in that country. That is why countries in central Europe—tied at the hip to the EU and the European Central Bank—are likely to continue to be able to run negative or very low real rates. Alternatively, countries like Brazil, Colombia, Mexico, and South Africa will likely find that an endpoint for rates needs to be at least marginally positive, even in a very deflationary world.

Countries that can combine modestly positive real rates with solid policy frameworks, like Malaysia and Russia (despite the current oil woes), are likely to fare better. Like the dollar debt world, higher credit quality is likely to be the touchstone for local investing as we reach the endpoint for rate reductions in EM.

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

3 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.

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 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. 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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