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Hartford Schroders Emerging Markets Multi-Sector Bond Fund

August 2019 Monthly Update

Performance (%)
% (as of 9/30/2019)
Average Annual Total Returns % (as of 9/30/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Emerging Markets Multi-Sector Bond  I 7.24 6.15 3.28 2.93 --- 3.43
Benchmark 10.52 10.83 4.30 3.89 --- ---
Morningstar Emerging Markets Bond Category 9.33 8.47 3.66 2.78 --- ---
Performance (%)
% (as of 9/30/2019)
Average Annual Total Returns % (as of 9/30/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Emerging Markets Multi-Sector Bond  I 7.24 6.15 3.28 2.93 --- 3.43
Benchmark 10.52 10.83 4.30 3.89 --- ---
Morningstar Emerging Markets Bond Category 9.33 8.47 3.66 2.78 --- ---
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) posted mixed results in August, weighed down by negative headlines out of Argentina and the markets’ general risk-off tone. Hard-currency EMD eked out positive performance, with the 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) adding 0.55% and 0.13%, respectively. Local currency sovereigns (represented by the J.P. Morgan GBI-EM Global Diversified Index) sank -2.64% for the month, as the US dollar remained persistently strong. Within dollar-denominated sovereigns, Qatar and Uruguay were the top-performing countries, while Argentina and Lebanon were the notable laggards. The dispersion between investment-grade and high-yield segments was significant given the selloff of single B’s during the month. Within corporates, infrastructure stood out as the top-performing sector, while the oil and gas sector lagged for the month. Regionally, Latin America underperformed due to the sell-off in Argentina.

 

Portfolio Positioning 

The Fund (Class I Shares) returned -5.31% in August, underperforming its blended benchmark, which returned -0.59%, largely due to our overweight to Argentina and single-B names. Argentine sovereigns sold off sharply following the surprise primary victory of leftist candidate Alberto Fernandez. Prior to the election, we held an overweight to Argentina of approximately 9%. We continue to hold on to these bonds for the time being, although we expect continued uncertainty leading up to the election on October 27. There are strong incentives among all parties to avoid a coercive default scenario at all costs and we expect greater clarity following the election. Our overweight to dollar-denominated Lebanese sovereigns was also a notable detractor in August, as they returned -11% as measured by the J.P. Morgan EMBI Global Diversified Index. During the month, we reduced our exposure to Lebanon, ending the month with an approximate 1% overweight. Single-B names like ABM, Vendanta, and CSN were among the leading detractors within the corporate sector during the month. Our overweight to Mexico, underweight to local currencies, and long duration1 positioning all contributed in August, however they were not enough to offset the impact from Argentina. We continue to maintain a duration overweight against the blended benchmark, ending the month 1.7 years overweight.

 

Market Outlook

We think the Jackson Hole central banker meeting in August was something of an inflection point. Given the tariff tit-for-tat that preceded the meeting, the belief (or more accurately, the hope) was that the US Federal Reserve (Fed) would use the potential impact to growth as an excuse to more aggressively ease policy. After Jerome Powell’s Jackson Hole speech was released, the dollar dropped sharply. However, that knee-jerk reaction was quickly reversed. We believe that the more accurate reading is that the Fed is unwilling to under-write the trade war, and markets should assume an easing "cycle"—if it is a cycle—will be predicated on growth relative to potential growth, which at 2% for last quarter, is about right, and inflation, which seems nearly spot on target.

Truly, all we know about the impact of trade wars is they are bad for future and potential growth, but accurately dimensioning their impact as tariffs bob around is impossible. We are sympathetic to the danger that pre-emptive easing just encourages a deepening of the tariff battle on the assumption that lower rates cure all, and we would potentially be left with damaged growth prospects and no fiscal or monetary policy bullets left to respond. With this backdrop, the dollar seems poised to continue to rise. We believe this to be troublesome for emerging markets, as the 2.64% drop in local currency sovereigns this month reflects. 

The U.S. Dollar Currency Index2 is currently just above 98.5. When Janet Yellen, in February 2016, cited the strong dollar and international stresses as a reason to delay a hiking cycle for what turned out to be a year, the Index was around 99. It nevertheless rose as high as 103 at the end of that year before falling sharply, to the great benefit of emerging markets (EM) assets.

So while we cannot today broadly recommend EM assets as the dollar rises further and the Fed remains reluctant, an accumulation of evidence on trade war damage and a more responsive Fed, which at least dollar levels suggest might not be far away, would make for a very supportive EM environment if history is any guide.

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

2 The U.S. Dollar Currency Index (DXY) measures the relative value of the U.S. dollar against a basket of other foreign currencies.

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. ● 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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