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Hartford Schroders Tax-Aware Bond Fund

February 2020 Monthly Update

Performance (%)
% (as of 2/29/2020)
Average Annual Total Returns % (as of 2/29/2020)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Tax-Aware Bond  I 2.09 7.90 4.42 3.66 --- 5.08
Benchmark 3.11 9.46 5.32 4.01 --- ---
Morningstar Intermediate Core Bond Category 3.39 10.41 4.57 3.29 --- ---
Performance (%)
% (as of 12/31/2019)
Average Annual Total Returns % (as of 12/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Tax-Aware Bond  I 7.59 7.59 3.98 3.41 --- 4.92
Benchmark 7.54 7.54 4.72 3.53 --- ---
Morningstar Intermediate Core Bond Category 8.29 8.29 3.78 2.85 --- ---
SI = Since Inception. Fund Inception: 10/03/2011
Operating Expenses:   Net 0.49% |  Gross  0.61%
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

What started as a quiet rumble last month turned into a loud roar as the spread of COVID-19 outside of China roiled markets. Fears of a global pandemic have directly resulted in a material sell-off in risk assets and a massive rally for Treasury yields. Equity markets seemed to bear the brunt of it, having just reached historical peaks only weeks ago—the Dow Jones Industrial Average1 saw the biggest weekly point drop ever, falling over 3500 points in the last week of the month. Investment-grade corporates and especially high-yield corporates also saw material repricing. Globally, markets reacted in a similar fashion as investors were left to consider the magnitude and duration of the virus’s economic damage given the quarantines, school closures, travel bans, and other fallout. The scope and breadth of the impact on global supply chains remains unknown and with many issuers warning on earnings, investors decided the time to shed risk was now.

For the month, spreads as measured by the Bloomberg Barclays US Corporate Bond Index2 were wider by 20 basis points.3 Industrials fared the worst, being most impacted by the virus (i.e., transportation, energy). However, utilities and financials were also negative, reflecting the breadth of the fallout. Among the broader sectors of the Bloomberg Barclays US Aggregate Bond Index,4 securitized assets held up very well as the asset class becomes more attractive in the low-yield environment as did taxable municipals, which had been an attractive alternative to corporates. Tax-exempt municipals performed better than corporates, but still trailed Treasuries despite favorable supply measures and benefited modestly from safe-haven demand. Given the safe-haven demand, Treasuries rallied to record levels with the 10-year tenor reaching an all-time low and ending the month at 1.15%. The market has already priced in a strong possibility of multiple rate cuts by the Federal Reserve at meetings later this month which is strong sign of the magnitude of the risk-off event.

 

Performance And Positioning Review

The Fund (Class I Shares) returned 0.88% in February as a result of the material drop in yields offsetting the negative performance from wider spreads. The Fund underperformed its benchmark, the Bloomberg Barclays Municipal Bond Index, which returned 1.29%. The risk-off sentiment drove spreads wider as expected; however, the flight to safety demand for Treasuries drove yields to record lows and hence modestly positive returns. For reference purposes only, the Bloomberg Barclays US Aggregate Bond Index returned 1.80% for the same period. The Fund’s duration5 is close to the lowest it has been historically and with rates materially lower on the month, it lagged longer-duration indices. The allocation to corporates resulted in positive returns given the drop in yields, although wider spreads offset a large portion of that impact. Tax-exempt municipals fared better than corporates in terms of spreads and specific Federal Agency bonds within the Fund were materially positive contributors. That sector, in addition to tax-exempt housing bonds, was notable for out-performing other tax-exempts as the yields are attractive in the low-rate environment.  

 

Market Outlook 

Although valuations have improved given the selloff, the portfolio allocations did not change materially. We continued the recent themes of adding commercial mortgage-backed securities in exchange for tax-exempts but the Fund’s allocations are largely the same. Opportunistically, we may add select credits that have repriced to more attractive values. However, this will not take place until volatility returns to more typical levels. Given the unknown impact and extent of the virus, it’s difficult to feel adequately compensated for the risk. We have adequate supply of dry powder in the form of Treasuries to exchange for risk assets should the opportunity arise.

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Dow Jones Industrial Average is an unmanaged, price-weighted index of 30 of the largest, most widely held stocks traded on the NYSE.

2 The Bloomberg Barclays US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market.

3 A basis point is 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.

4 Bloomberg Barclays US Aggregate Bond Index is composed of securities from the Bloomberg Barclays Government/Credit Bond Index, Mortgage-Backed Securities Index, Asset-Backed Securities Index, and Commercial Mortgage-Backed Securities Index.

5 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.The purchase of securities in the To-Be-Announced (TBA) market can result in additional price and counterparty 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. 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. 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. 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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