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Hartford Schroders Emerging Markets Multi-Sector Bond Fund

July 2019 Monthly Update

Performance (%)
% (as of 7/31/2019)
Average Annual Total Returns % (as of 7/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Emerging Markets Multi-Sector Bond  I 12.03 9.33 5.36 3.24 --- 4.27
Benchmark 10.76 9.58 5.04 3.53 --- ---
Morningstar Emerging Markets Bond Category 10.38 8.19 4.71 2.47 --- ---
Performance (%)
% (as of 6/30/2019)
Average Annual Total Returns % (as of 6/30/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Emerging Markets Multi-Sector Bond  I 10.60 10.61 5.51 2.97 --- 4.11
Benchmark 9.65 10.62 5.12 3.28 --- ---
Morningstar Emerging Markets Bond Category 9.32 9.55 4.95 2.18 --- ---
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

Emerging market debt (EMD) continued to post positive returns in July with dollar-denominated sovereigns, represented by the J.P. Morgan EMBI Global Diversified Index, and corporates, represented by the J.P. Morgan CEMBI Broad Diversified Index, returning 1.21% and 0.89%, respectively. The investment grade segment underperformed high-yield bonds as July proved to be a strong month for risk assets. Within the sovereign segment, the Middle East was the top performing region. Zambia, Oman, and Bahrain were the top performing countries. Transport as well as oil and gas were the top performing corporate sectors during the month. Moldova and Zambia performed positively while Jamaica and Indonesia were the notable laggards. Local currency sovereigns, represented by the J.P. Morgan GBI-EM Global Diversified Index, also performed well for the month, returning 0.93%, although Argentina and the Euro complex bucked the trend with negative returns. Turkey was the top local currency performer during the period.

 

Portfolio Positioning 

The Fund (Class I Shares) returned 1.29% in July, outperforming its blended benchmark, which returned 1.01%. Outperformance was due to security selection within dollar-denominated sovereigns, with corporates' foreign exchange and hedging also contributing, albeit to a lesser degree. The Fund’s notable overweight to single B-rated bonds benefited excess returns, with higher beta1 segments of the asset class outperforming as spreads tightened during the period. In particular, the overweight to Argentine sovereigns was the largest individual contributor, as measured by the J.P. Morgan EMBI Global Diversified Index. This was partially offset by the negative contribution from our overweight to Ecuador sovereigns, which lagged the Index. Within the corporate sector, single-B names like Credivalores, Alpha Holdings, and First Quantum stood out as outperformers. Our local currency and hedging selection also aided returns for the period. Specifically, local currency underweight to Hungary and Poland were the largest contributors as they lagged the Index in July. We continued to maintain a duration2 overweight posture against the blended benchmark, ending the month 2.3 years overweight the benchmark.

 

Market Outlook

After the US Federal Reserve meeting at the end of July, markets were somewhat disappointed at signs that the first rate cut in 11 years would not be the start of a steady rate cutting cycle. That was quickly followed by a surprise boost to US tariffs on Chinese imports which constituted an even clearer blow to market bullishness. Now, much of the market believes that more tariffs correspond to slower growth prospects and, subsequently, more rate cuts. What comes next is what likely determines second-half returns not just for EMD but for assets in general. If the (nearly unquantifiable, but certainly negative) trade war damages growth just enough, it is entirely possible that a more aggressive rate-cutting cycle leads to optimism that keeps assets in their current still-elevated state. If the additional tariffs become the tipping point for entry into a global recession, then widening credit spreads and weaker equity prospects may overwhelm a rate cutting cycle and become a self-fulfilling part of the downturn.

For emerging markets (EM), the uncertainty surrounding that question could be ameliorated if a falling dollar, spurring inflows into EM, were to accompany the growth slowdown and rate cut anticipation. While we would like nothing better than to suggest with certainty that is likely, it has not happened yet.

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

2 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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