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Hartford Schroders Tax-Aware 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 Tax-Aware Bond  I 7.11 8.68 2.89 3.64 --- 5.02
Benchmark 6.75 8.55 3.19 3.66 --- ---
Morningstar Muni National Intermediate Category 6.23 7.52 2.57 2.86 --- ---
Performance (%)
% (as of 9/30/2019)
Average Annual Total Returns % (as of 9/30/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Tax-Aware Bond  I 7.11 8.68 2.89 3.64 --- 5.02
Benchmark 6.75 8.55 3.19 3.66 --- ---
Morningstar Muni National Intermediate Category 6.23 7.52 2.57 2.86 --- ---
SI = Since Inception. Fund Inception: 10/03/2011
Operating Expenses:   Net 0.49% |  Gross  0.62%
Performance prior to 10/24/16 for Class I-shares reflects the performance, fees, and expenses of the Investor Class of the predecessor fund Schroder Broad Tax-Aware Value Bond Fund. If Class I fees and expenses were reflected, performance would have differed. SI performance is calculated from 10/03/11.

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

Volatility returned to the markets in August as investors reacted to the growing list of stresses. Safe haven demand for US Treasuries resulted from a number of factors, including escalating rhetoric in the trade war with China, rising probability of a “hard Brexit” with political tricks from Boris Johnson, and surprise election results in Argentina unsettling the emerging markets. Despite meaningful, relatively positive domestic economic data showing the US consumer is still strong and supporting the economy, risk-off sentiment was evident across global fixed income and equity markets while US Treasury yields approached or surpassed all-time lows. Yields dropped across the board in August, with the 10-year Treasury yield falling more than 50 basis points1 to end the month at 1.50%. The yield curve continued to flatten in August with the spread between the 2- and 10-year note ending the month flat after briefly inverting earlier in the month.

August was another month of positive returns for municipal bonds, with the Bloomberg Barclays Municipal Bond Index returning 1.58%, bringing year-to-date returns to 7.61%. The municipal index lagged the Bloomberg Barclays US Treasury Index,2 which returned 3.40% during the month, as well as the Bloomberg Barclays US Corporate Index,3 which returned 3.14%. Performance was positive across the municipal curve, led by the long end given the rate rally; the 22+ year municipal portion of the Bloomberg Barclays Municipal Bond Index performed best with 2.54%, with the 20-year and 15-year following behind at 2.29% and 2.12%, respectively. The best-performing revenue sectors were hospitals, education, and transportation; sectors with the lowest total returns were resource recovery, electric, and industrial development revenue/pollution control revenue. Municipal bond issuance totaled $38 billion in August, up 34% compared to last month and 13% compared to August of last year, with net issuance totaling -$2 billion. Redemptions in August were $41 billion, slightly lower than the $42 billion median level over the past few years. Municipal fund flows were positive, continuing the trend of positive fund flows over the last seven months. As of August 28, 2019, Investment Company Institute (ICI) data showed that fund inflows totaled $8 billion for the month and $64 billion year-to-date.

 

Performance And Positioning Review

The Fund (Class I Shares) returned 1.24% in August, underperforming its benchmark, the Bloomberg Barclays Municipal Bond Index. As a reminder, the Fund is not managed against the municipal index; however, the index is a broad representation of the municipal bond universe and is being provided for relative performance measurement. Exposure to US Treasuries contributed strongly to performance relative to its weighting in the Fund, as Treasury yields dropped substantially during the month. Corporates, primarily financials, and US agency mortgage-backed securities allocations also contributed to positive returns. While municipals had the largest contribution to positive returns given the approximately 60% weighting in the Fund, the sector did underperform compared to other sectors. Richer valuations and weaker-than-expected supply-and-demand-dynamics in August dampened municipal returns relative to US Treasuries, corporates, and US agencies.

On a relative basis versus the municipal index, lower returns were primarily attributed to the Fund’s shorter duration4 position in municipal bonds. Longer-duration municipal bonds garnered significantly higher returns during the month of August, and municipal bond sectors with significantly lower duration relative to the Index detracted most from performance.

In terms of sector allocation, exposure within municipal sectors saw modest changes. Federal agency and other revenue sectors increased through new issue purchases and exposure to higher education bonds also increased. Treasuries decreased over the month to increase municipal exposure. However, the Fund does maintain a degree of dry powder, in the form of Treasury Bills, which provides a liquid safe haven while the team explores deployment opportunities within the market.  

 

Market Outlook 

The first half of 2019 saw remarkable gains across a variety of fixed-income asset classes. A large part of this rally is attributable to the notable pivot made by global central banks to assure markets that they would be willing to intervene to sustain the economic expansion. Although the US Federal Reserve (Fed) has acted, the market is discounting further cuts into the year. This has led to tremendous returns in US Treasury markets (with rising prices and falling yields), in addition to continued momentum driving credit markets. Municipals have also benefited, with investors’ hunger for after-tax yield pickup producing favorable supply-and-demand dynamics.

Although spreads did weaken in August across the Fund’s sectors and created more attractive valuations overall, weakness in the global economy and uncertainty regarding the Fed and future rate cuts makes it hard to justify adding more risk to the Fund at this time. One bright spot remains the US consumer, who has benefited from an unemployment rate at generational lows in addition to lower taxes and modest wage gains. Consumer leverage remains modest, and a still-elevated household savings rate suggests that consumption growth will remain elevated. The strength of the consumer in the face of this uncertainty makes us confident in asset classes that rely on the consumer (such as securitized assets). Municipals also reset their valuations at more attractive levels, with August supply slightly higher than average, which may present entry opportunities in the sector. As we go farther into the second half of 2019, we expect to add risk to the margins when the right opportunities are presented but remain cautious in the face of potential downside risk.

A basis point 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.

2 The Bloomberg Barclays US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.

3 Bloomberg Barclays US Corporate Index is a market-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more.

4 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. ● Mortgage related- and asset-backed securities’ risks include credit, interest-rate, prepayment, and extension risk. ● Obligations of U.S. Government agencies are supported by varying degrees of credit but are generally not backed by the full faith and credit of the U.S. Government. ● The purchase of securities in the To-Be-Announced (TBA) market can result in additional price and counterparty risk. ● 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. ● Municipal securities may be adversely impacted by state/local, political, economic, or market conditions; these risks may be magnified if the Fund focuses its assets in municipal securities of issuers in a few select states. Investors may be subject to the federal Alternative Minimum Tax as well as state and local income taxes. Capital gains, if any, are taxable. The Fund may have high portfolio turnover, which could increase its transaction costs and an investor’s tax liability. 

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.

Additional Information Regarding Bloomberg Barclays Indices Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

 

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