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Hartford Schroders Tax-Aware Bond Fund

January 2019 Monthly Update

Performance (%)
% (as of 2/28/2019)
Average Annual Total Returns % (as of 2/28/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Tax-Aware Bond  I 1.80 3.93 2.74 4.14 --- 4.71
Benchmark 1.30 4.13 2.28 3.44 --- ---
Morningstar Muni National Intermediate Category 1.38 3.51 1.73 2.49 --- ---
Performance (%)
% (as of 12/31/2018)
Average Annual Total Returns % (as of 12/31/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Tax-Aware Bond  I 0.34 0.34 2.33 4.87 --- 4.56
Benchmark 1.28 1.28 2.30 3.82 --- ---
Morningstar Muni National Intermediate Category 0.75 0.75 1.64 2.73 --- ---
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

2019 got off to an impressive start for risk assets. Any hangover from the rout in December was largely ignored as risk assets rallied materially and equity markets set record gains for January. The factors that seemed to cause so much concern last month were quickly overlooked at the start of the year, at least for the time being. Of the headwinds weighing heavily on investor’s minds last quarter—slowing global growth, trade wars with China, balance sheet run-off, and a US government shutdown—still remain, with the exception of the government shutdown. Furthermore, the outcomes or paths toward remedies remain as unclear as ever. However, US Federal Reserve (Fed) Chair Jerome Powell’s remarks in January gave investors modest confidence that rates may be nearing a neutral point and a pause to the rate hiking cycle is likely if economic data indicates slower growth.

Municipal bonds performed well in January, especially toward the middle of the curve. Per J.P. Morgan, municipal bond issuance totaled $24 billion in January, up 9.0% month-over-month and 12.0% year-over-year, with net issuance at -$1 billion. Fund flows were positive this month for the first time since August 2018, with $5.2 billion of inflows during the month. The Bloomberg Barclays Municipal Bond Index returned 0.76% this month, outperforming the Bloomberg Barclays US Treasury Index1 by 29 basis points.2 Total return performance was positive across the curve, with the intermediate end performing the best in total return terms (the Bloomberg Barclay’s 7-Year UST Index3 performed best at 1.13%). Toward the end of January, longer maturity municipal bonds outperformed as investors extended duration4 due to surging inflows and a shift to a more patient Fed. Over the month, the best-performing sectors were leasing (0.89%), transportation (0.80%), and education (0.79%); the worst-performing sectors were housing (0.55%), electric (0.67%), and resource recovery (0.68%).

 

Performance And Positioning Review

The Fund (Class I Shares) returned 1.28% in January, outperforming its benchmark, the Bloomberg Barclays Municipal Bond Index. Sector selection, specifically overweighting the financials and industrial sectors against the benchmark, contributed most to our outperformance. The Fed’s message exhibited a strong positive impact on financial markets and became a mixed blessing for investment-grade spreads. Security selection within the tax-exempt muni sector, specifically within the transportation and general obligation (GO) sectors, further contributed to outperformance. Duration and yield curve continue to add positively to relative performance as the Fund had a slightly longer duration and underweight at the short-end versus the municipal benchmark.

During the month, portfolio allocation moved from the tax-exempt muni sector to other opportunistic sources of return. We increased the Fund’s exposure to the financials and industrials sectors, resulting in a spread advantage when the Fed released a dovish message on future interest rate increases. We also added an agency mortgage-backed security (MBS) allocation, as agency MBS tend to be a “safe haven” among spread products, and increased the portfolio’s Treasury allocation to counter volatility within the market. Within municipals, we decreased the Fund’s escrowed to maturity (ETM)/pre-funded and GO allocations.  

 

Market Outlook 

The beginning of 2019 exhibited strength in the municipal sector, spurred by increases in 2018 state collection revenues due to federal tax reform, continued robust economic activity, and tight labor markets. At the end of January, the Fed expressed a dovish message to US markets, stating that it “will be patient” in regard to hiking rates during the year. This was a reversal in tone from December’s meeting when the Fed’s expected policy path showed two hikes in 2019 and one hike in 2020. Although the Fed recognizes the deceleration of growth, they reasoned that the expansion is on track, backed by the strong labor market. The lack of forward guidance from the Fed likely means that monetary policy will be more reactive to market movements in the near future.

A modest level of municipal bond gross issuance was outpaced by reinvestment activity, creating a favorable net supply environment. Demand for the asset class rebounded from its late-2018 outflows, with four consecutive weeks of bond mutual fund inflows throughout January. Promising supply-and-demand dynamics, steady fundamentals, and stable interest rates will continue to present municipal bonds as an attractive investment. With the rally in January, corporate valuations have returned to expensive levels and will likely result in a pause to any increase in risk for the portfolio. Although the outlook is more favorable on the back of recent Fed statements and with on-going discussions with China to reach a trade deal, many risks remain unresolved and the impact from slowing global growth is yet to be measured.

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

2 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.

3 The Bloomberg Barclays 7-Year UST Index measures the performance of US Treasury securities that have a remaining maturity of seven years.

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. There is no guarantee a fund will achieve its stated objective. 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 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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