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Hartford Schroders Tax-Aware Bond Fund

February 2019 Monthly Update

Performance (%)
% (as of 3/31/2019)
Average Annual Total Returns % (as of 3/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Tax-Aware Bond  I 3.49 5.28 2.82 4.32 --- 4.88
Benchmark 2.90 5.38 2.71 3.73 --- ---
Morningstar Muni National Intermediate Category 2.67 4.56 2.06 2.79 --- ---
Performance (%)
% (as of 3/31/2019)
Average Annual Total Returns % (as of 3/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Tax-Aware Bond  I 3.49 5.28 2.82 4.32 --- 4.88
Benchmark 2.90 5.38 2.71 3.73 --- ---
Morningstar Muni National Intermediate Category 2.67 4.56 2.06 2.79 --- ---
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

The strong rally and positive sentiment marking the beginning of the year continued in February, albeit to a lesser degree relative to January. Given the speed and breadth of the rally in January, the market was left to wonder what could spur additional gains given the clear evidence of a divergence in global growth. This was answered, at least in the US, first by the shift in the US Federal Reserve (Fed) tone to a more dovish stance, and followed up by a surge in risk assets late in the month when President Trump delayed an increase in tariffs on China, which increased optimism of a diminishing trade war between the two nations. It was mildly surprising we did not see a stronger rally; however, this was also partially a symptom of the strong rally already seen in January. It appears much of the good news is now priced into spreads at current levels and the market is left looking for the next source of positive sentiment.

Municipal bonds performed well in February, especially toward the long end of the curve. The Bloomberg Barclays Municipal Bond Index returned a positive total return of 0.54% this month, with year-to-date returns at 1.30%. The Index outperformed the Bloomberg Barclays US Treasury Index1 by 81 basis points.2 Total return performance was positive across the curve, led by gains in the long end of the curve. Over the month, the best performing sectors were industrial development and pollution control revenue bonds (0.67%), special tax (0.60%), and electric (0.59%); those with lowest total return were resource recovery (0.29%), housing (0.41%), and hospitals (0.51%). Municipal bond issuance totaled $25 billion in February, up 39% year-over-year, with net issuance at -$2 billion. Fund flows were positive this month, with inflows averaging to $2.8 billion per week.

 

Performance And Positioning Review

The Fund (Class I Shares) returned 0.51% in February, underperforming its benchmark, the Bloomberg Barclays Municipal Bond Index. The Fund’s Treasury exposure detracted from relative performance, as well as the portfolio’s longer duration3 relative to the Bloomberg Barclays Municipal Bond Index. Underweighting the municipal sector and overweighting corporate financial and industrial sectors, however, had a positive impact on performance. Within municipals, issue selection, especially in the housing sector, also contributed positively to performance.

During the month, portfolio allocation moved away from the corporate sector due to tightening of spreads during the month. The Fund increased its exposure in agency mortgage-backed securities and the tax-exempt municipal sector, primarily increasing allocations within the general obligation space. A higher allocation to US Treasuries presents a strategy of hedging against any increase in volatility we may encounter in the market.  

 

Market Outlook 

February was the fourth consecutive month to post positive returns for municipal bonds, led mainly by reinvestment outpacing issuance and strong demand as taxpayers begin to realize the effects of tax reform. On the macroeconomic scale, more dovish Fed policy, continued concerns about Brexit, and doubt over development of the US-China deal pushed yields lower during the first three weeks of the month. Later in the month, positive developments on the trade front and better-than-expected Q4 2018 GDP print triggered rates to sell-off towards the end of the month, with yields reversing course higher. The beginning of this year also produced large inflows in municipal mutual funds, with gains of $12 billion, as we’ve seen higher demand from investors in high tax states, according to Lipper. This has almost offset the $13 billion in outflows in the fourth quarter of 2018.

A continued dovish stance from the Fed has led expectations for only one more rate hike in December and a halt of balance sheet normalization in the fourth quarter of 2019. Rate hikes will depend on inflation outcomes moving higher than their baseline, with New York Federal Reserve President Williams urging policymakers to be vigilant that inflation expectations not get to too low a level. Core personal consumption expenditures have averaged less than 1.6% over the recent expansion, with break-evens remaining significantly lower than pre-crisis periods. As volatility within equities return, corporate spreads continued to tighten during February. At present, market overvaluation continues to suggest a cautious long-term outlook and guarded expectations.

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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 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.

 

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