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Hartford Schroders Tax-Aware Bond Fund

December 2019 Monthly Update

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 --- ---
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  0.62%
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

In the fourth quarter we saw a continuation of the market’s insatiable risk appetite as spreads1 tightened, Treasury yields rose, and equity markets consistently made new all-time highs. Modestly positive economic data, including a strong December US jobs number, as well as subsiding geo-political fears, seemed to quiet concerns of an imminent global recession and the market reacted accordingly. In December the Federal Reserve (Fed) left rates unchanged, plotting a course to go on hold for a year or so. Although the Fed began the quarter with its third rate cut of the year, they indicated a high threshold to warrant any additional hikes moving forward. With the first phase of the US-China trade deal announced and the December 12th UK general election won by the Conservatives, the markets were increasingly comfortable adding risk. Further confirming the positive sentiment, the statement was adjusted to drop the prior reference to uncertainties remaining, and to add a reference to the current stance of monetary policy being appropriate. Globally, better than expected economic data from China improved the outlook for growth, indicating that global recession fears may have been overblown.

In December, the Bloomberg Barclays Municipal Bond Index posted a return of 0.31%, ending year with a return of 7.54%. The municipal index slightly lagged the Bloomberg Barclays US Corporate Bond Index,2 which returned 0.32%, but outperformed the Bloomberg Barclays US Treasury Index3 and the Bloomberg Barclays US Mortgage Backed Securities Index,4 which returned -0.56% and 0.28%, respectively. Total return performance was generally positive across the municipal curve; the 10-year municipal portion of the Bloomberg Barclays Municipal Bond Index performed the best, with the 7-year and 15-year tenors following behind. The 1-year and 3-year portions were the biggest relative underperformers. The best-performing revenue sectors from the municipal index were industrial development revenue and pollution control revenue, leasing, electric, and transportation; those with the lowest total returns were resource recovery, housing, and education. As the year wrapped up, municipal bond issuance totaled $418 billion and net positive issuance reached 51 billion (a contrast to last year’s net negative issuance of $45 billion). Municipal funds reported $92 billion of inflows in 2019, the highest absolute level since 1992.

 

Performance And Positioning Review

The Fund (Class I Shares) returned 0.13% in December, underperforming its benchmark, the Bloomberg Barclays Municipal Bond Index. While the Fund is not managed against the benchmark, the Index serves as a broad representation of the municipal bond universe and is used as a relative performance measurement. Issue selection of certain federal agency and housing bonds were the main source of underperformance in the Fund. This was somewhat offset by underweighting municipals in favor of corporates, specifically financials, against the benchmark. The Fund’s allocation toward agency mortgage-backed securities was also a positive contributor. Duration5 and curve placement had minimal impact on Fund performance relative to the benchmark.

In terms of sector allocation, we reduced tax-exempt municipal and corporate exposure in favor of increasing the Treasury allocation. We remain cautious on riskier segments of fixed income, with risk/reward balance in credit and municipals becoming less favorable than it has been in some time. We believe significantly better opportunities to redeploy capital will arise in the coming quarters.  

 

Market Outlook 

Although the recession fears prevalent a few months ago may have subsided, downside risk to the US economy persists. Projected 2020 global growth will be close to the lowest level in the post crisis era. Any cyclical upswing in 2020 is likely to be mild, as late cycle dynamics of rising wages, limited capital expenditure, and geopolitical headwinds weigh on economic growth and sentiment. Spreads—across both municipal and credit assets—are approaching multi-year lows. In this environment, investors need to tread carefully.

As a result, prudence and patience remain the predominant themes going into 2020, and allocations to higher-rated assets will enable us to take advantage of higher volatility and more attractive opportunities in the coming months. Current risk/reward in credit assets has become increasingly asymmetric. Combined with unappealing fundamentals, central bank reliance, and a technical environment supported by foreign demand, the opportunity for upside appears limited. Expectations for tax-exempt municipal performance also remains muted. Although we expect to see a slight improvement in ratios and spreads, we do not believe this will generate meaningful excess return. Technicals will likely deteriorate, as municipal supply swells, although most of the supply increase can be attributed to investors refinancing their debt using taxable bonds. We see more relative value in securitized assets. Valuations appear more reasonable, and fundamentals are stronger and geared to US consumers. The structural protection of the high-quality securitized assets also offers significantly more stability in times of volatility. Taxable bonds also seem attractive, although heavy supply will likely subdue a rally in spreads in the near future.

If investing through a number of cycles has taught us one lesson, it is that stretching for risk when opportunities are limited rarely ends well. Prudence and patience remain the predominant themes within our portfolios, and allocations to higher-rated liquid assets will enable us to take advantage of higher volatility and more attractive opportunities in the coming months.

Spreads are the difference in yields between two fixed-income securities with the same maturity, but originating from different investment sectors.

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

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

4 Bloomberg Barclays US Mortgage Backed Security Index measures the performance of investment grade fixed-rate mortgage-backed pass-through securities of GNMA, FNMA, and FHLMC.

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. ● 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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