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Hartford Schroders Emerging Markets Multi-Sector Bond Fund

February 2019 Monthly Update

Performance (%)
% (as of 3/31/2019)
Average Annual Total Returns % (as of 3/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Emerging Markets Multi-Sector Bond  I 6.43 -0.83 6.01 3.37 --- 3.60
Benchmark 5.02 0.34 4.97 3.21 --- ---
Morningstar Emerging Markets Bond Category 5.47 0.51 5.21 2.33 --- ---
Performance (%)
% (as of 3/31/2019)
Average Annual Total Returns % (as of 3/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Emerging Markets Multi-Sector Bond  I 6.43 -0.83 6.01 3.37 --- 3.60
Benchmark 5.02 0.34 4.97 3.21 --- ---
Morningstar Emerging Markets Bond Category 5.47 0.51 5.21 2.33 --- ---
SI = Since Inception. Fund Inception: 06/25/2013
Operating Expenses:   Net 0.91% |  Gross  1.03%
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, emerging markets debt (EMD) posted mixed results as dollar-denominated debt continued to perform well, while local currencies were negatively impacted by a stronger dollar. The J.P. Morgan EMBI Global Diversified Index, representing dollar-denominated sovereigns, and the J.P. Morgan CEMBI Broad Diversified Index, representing corporates, returned 1.00% and 1.08% respectively. The J.P. Morgan GBI-EM Global Diversified Index, representing local currency sovereigns, returned -1.09%. Within the J.P. Morgan EMBI Global Diversified Index, Ecuador, Costa Rica, and Egypt were among the top-performing countries, while Mozambique and Argentina underperformed the index.

With the dollar at a still fairly elevated level and US data continuing to come in soft, EMD investors should be cautiously optimistic that a positive liquidity background is intact. With that liquidity background, we are seeing regular bond issuance from EMD corporates and countries, and as always, market access diminishes significant downside risks to price. Additionally, the International Monetary Fund (IMF) involvement across a broad swath of countries in Latin America and Sub-Saharan Africa has provided investors near-term protection against both significant fundamental deterioration and the need to issue in the market at punitive rates. We can never know the near or medium term price direction for emerging-market bonds, but the big picture remains supportive.

 

Portfolio Positioning 

The Fund (Class I Shares) returned 0.33% in February, performing in line with the blended benchmark (an equal weighting of the J.P. Morgan EMBI Global Diversified, J.P. Morgan CEMBI Broad Diversified, and J.P. Morgan GBI-EM Global Diversified Indices), which also returned 0.33%. The positive contribution from dollar sovereigns and corporates was offset by the negative impact of local currencies and hedging.

With regard to sector allocation, the overweight to dollar sovereigns and underweight to local currencies contributed to returns for the period as local currencies were the worst performing EMD segment during the month. Within corporates, several Latin American issuers were among the largest individual contributors. Within dollar sovereigns, our overweight to Ecuador and Egypt aided excess returns, as they returned 5.46% and 4.65%, respectively. Ecuador and the IMF agreed to a $4.2 billion program toward the end of the month, causing their sovereign bonds to rally. Our notable overweight to Argentina partially offset this positive contribution as Argentine sovereigns returned -1.15% in February, as measured by the J.P. Morgan EMBI Global Diversified Index. Within local currencies, the overweight to South Africa was the largest detractor as the currency depreciated almost 6% against the dollar in February. This negative contribution was partially offset by the Fund’s underweight to the Czech Republic and Thailand. Duration1 and yield curve positioning did not have a material impact on returns for the period. The Fund’s duration overweight was increased during the month, ending the period approximately one year overweight the blended benchmark.

 

Market Outlook

2019 has been a strong year for emerging markets; the J.P. Morgan EMBI Global Diversified Index has returned 5.45% year-to-date. Though we are taught to think in yearly terms, December was pretty satisfying as well with a 1.35% return. As we all know, the action is unlikely to continue at this pace. Looking forward, the likeliest outcomes will either be a retracement that leaves investors worse off from here, or a relatively stable, range-bound period without much in the way of fireworks but generating more positive returns than most of global income, thanks to higher yields. Macro factors suggest the latter is the likeliest outcome.

The factors that contributed to strong performance in the last three months are still in place, with a major role being played by the US Federal Reserve, which has defined the top of the risk-free rate in a very narrow range. Another important contributor has been the peak of US growth receding further in the rear view mirror, which moved relative US growth closer to rest of world and removed support for a stronger US dollar. With those two factors still in the picture, but with a more compressed spread structure relative to US treasuries for EMD, the stage seems set for a period of stable, unexciting carry.

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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. 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. ● Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. ● Restricted securities may be more difficult to sell and price than other 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. ● 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. ● 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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