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Hartford Schroders Tax-Aware Bond Fund

October 2019 Monthly Update

Performance (%)
% (as of 11/30/2019)
Average Annual Total Returns % (as of 11/30/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Tax-Aware Bond  I 7.45 8.86 4.24 3.54 --- 4.96
Benchmark 7.21 8.49 5.02 3.57 --- ---
Morningstar Intermediate Core Bond Category 8.37 9.76 3.90 2.83 --- ---
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 Intermediate Core Bond Category 8.16 9.10 2.86 3.05 --- ---
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

Calm returned to the markets in October after a relatively volatile third quarter. Changes in yields and spreads,1 although lower and wider initially, steadily marched higher (yields) and narrower (spreads) after the first week of the month. Geopolitical risks took a back seat as positive comments were made regarding phase 1 of a trade agreement with China and a Brexit resolution seemed more probable after an extension of the deadline. The influx of generally soft economic data—the September retail sales number, Institute for Supply Management (ISM) Manufacturing Index2 reading, and the consumer price index3 were all below consensus estimates—seemed to support the market’s belief that the US Federal Reserve (Fed) would again cut rates at the end of October. However, given stronger housing data (NAHB Housing Market Index4 at an 18-month high) and the Atlanta Fed’s Q3 GDP tracker pointing to an on-trend 1.8%, there was very little to suggest that a recession is imminent. True to form, the Fed did cut rates in October. However, the forward guidance signaled no further rate cuts were warranted. The market reacted accordingly, with Treasury yields dropping and spreads widening, showing investors’ concern with a Fed no longer willing to “act as appropriate.” Overall, October was a positive month for risk assets as the Fed continued to be a dominant force supporting investor sentiment.

In October, tax-exempt municipals, represented by the Bloomberg Barclays Municipal Bond Index, returned 0.18% in October, bringing year-to-date returns to 6.94%. The municipal index outperformed the Bloomberg Barclays US Treasury Index,5 which returned 0.07%, but underperformed the Bloomberg Barclays US Corporate Index6 and Bloomberg Barclays US Mortgage Backed Securities Index,7 which returned 0.61% and 0.35%, respectively. Total return performance was generally positive across the municipal curve; the 5-year municipal portion of the Bloomberg Barclays Municipal Bond Index performed the best with 0.51%, with the 3-year and 7-year tenors following behind at 0.44% and 0.33%, respectively. The 22+ year and 20-year portions of the curve performed the worst. Municipal bond issuance totaled $48 billion in October, up 32% compared to last month and up 30% compared to September of last year, with the second consecutive month of positive net issuance totaling $22 billion. Redemptions in October were $24 billion, in line with October redemptions since 2010. Municipal fund flows were positive, continuing a strong trend from the last nine months. As of October 23, 2019, Investment Company Institute (ICI) data showed that fund inflows totaled $5 billion for the month and $75 billion year-to-date.

 

Performance And Positioning Review

The Fund (Class I Shares) returned 0.25% in October, outperforming its benchmark, the Bloomberg Barclays Municipal Bond Index. While the Fund is not managed against the municipal index, it serves as a broad representation of the municipal bond universe and is used as a relative performance measurement. Overweighting federal agency and housing bonds were a major factor of outperformance. Overweighting corporate bonds, more specifically financials, was another major contributor to outperformance. A fall in US Treasury rates, and subsequently the municipal rates, on the shorter end was an overall benefit to Fund performance. However, the Fund’s short duration8 positioning relative to the municipal bond index detracted from returns.

In terms of sector allocation, tax-exempt municipal exposure increased in October, focused on specific tax-exempt municipal opportunities, like variable rate demand notes (VRDNs), which provide attractive short-term yields and are highly liquid, and planned amortization class (PACs) bonds, which are collateralized mortgage obligations secured by federally sponsored housing programs. Corporate exposure was reduced as we remain cautious on riskier segments of fixed income, in favor of exposure to highly liquid US Treasury bonds.  

 

Market Outlook 

Global growth has slowed sharply over the last year with global GDP in 2020 expected to be the lowest since the financial crisis. Despite some positive economic indicators, investors need to reconcile whether consumer momentum can continue to sustain the expansion in the face of global and manufacturing headwinds. Given the record low unemployment rate, modest consumer leverage, and continuing wage gains, we believe recession will likely be avoided through 2020. However, vulnerabilities are building and these are not being fully reflected in the elevated pricing of many risk assets.

As a result, we remain cautious on riskier segments of fixed income. With tax-exempt municipal issuance at $48 billion (the second largest October issuance since 1996) and seasonally low redemptions, net supply became positive for the second month in a row in October. As a result, tax-exempt municipals presented more buying opportunities. Despite this trend, we remain cautious on expanding our municipal allocation, since fund flows have remained elevated despite an uptick in supply, and tax-exempt municipals tend to perform poorly until December. Within the tax-exempt sector, we continue our favorable outlook on certain sectors like VRDNs and PACs. Taxable municipals are also becoming more attractive, with issuers taking advantage of low rates to refund and advance refund their debt—a trend that will continue if rates decrease. Taxable municipals yields tend to be comparable to investment-grade corporate bond yields, while typically maintaining a higher quality standing. Our allocations to highly liquid Treasuries and US agency mortgages within the Fund remain sizable, as we continue to move away from riskier corporate sectors in the face of tight spreads and unfavorable supply-demand dynamics.

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

2 ISM Manufacturing Index, also referred to as PMI (Purchasing Manager’s Index), is an indicator of the economic health of the manufacturing sector.

3 The CPI in the United States is defined by the Bureau of Labor Statistics as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”

4 The NAHB/Wells Fargo Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market.

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

6 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.

7 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.

8 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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