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Hartford Schroders Tax-Aware Bond Fund

April 2019 Monthly Update

Performance (%)
% (as of 5/31/2019)
Average Annual Total Returns % (as of 5/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Tax-Aware Bond  I 5.03 6.34 2.79 3.76 --- 4.97
Benchmark 4.71 6.40 2.96 3.58 --- ---
Morningstar Muni National Intermediate Category 4.34 5.54 2.35 2.70 --- ---
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

April saw a continuation of recent themes impacting investment grade credit markets. The insatiable yield appetite and supportive technicals led to the continuation of the risk-on tone from the first quarter. The recent announcement of first quarter US GDP growth of 3.2% made for good headlines, although it masked some weakness in the details (lack of inflation, inventory buildup). Overall, the positive news strengthened the notion that the economy is performing well enough to discourage any talk of recession, yet not too hot to stoke inflation. With this continuation of a “Goldilocks” scenario, it’s no wonder the market continued to rally and spreads continued to grind tighter.

Municipal bonds continued the streak of positive monthly returns for 2019. The Bloomberg Barclays Municipal Bond Index posted a 0.38% return, with year-to-date total returns rising to 3.28%. Municipals outperformed the Bloomberg Barclays US Treasury Index,1 which posted -0.28% in April. Total return performance was flat or positive across the curve. The long municipal index (+22 year) performed best (0.82%), followed by the 20-year (0.62%) and 15-year (0.46%) indices. The biggest relative underperformers were the 3-year (flat) and 5-year (0.03%) tenor indices. The best-performing municipal sectors were hospitals (0.59%), industrial development revenue/pollution control revenue (0.49%), and education (0.45%). Those with the lowest total returns were resource recovery (0.25%), housing (0.36%), and electric (0.37%). Gross municipal bond issuance totaled $28 billion in April (up 5% month-over-month, but down 12% year-over-year), with net issuance at $1 billion. Municipal fund flows were positive this month, with inflows averaging about $1.4 billion per week. As of April 24, 2019, ICI data show that fund inflows totaled $6 billion during the month, and $32 billion for the year.

 

Performance And Positioning Review

The Fund (Class I Shares) returned 0.21% in April, underperforming its benchmark, the Bloomberg Barclays Municipal Bond Index. Overall, underweighting the tax-exempt municipal sector against the benchmark detracted from performance, but issue selection within the sector offset some of these losses. Overweighting the agency mortgage backed securities and US Treasury sector further detracted from relative performance in terms of sector selection. This is mainly due to risk assets outperforming relative to Treasury holdings. The Treasury curve continued to flatten this month as the Federal Open Market Committee meeting dismissed the possibility of an “insurance cut,” and worries about inflation and monetary policy expectations continue. Although US-China and US-Europe trade relations continue to weight on future growth expectations and recent economic data has been a relatively slowing, risk assets continue to outperform.

During the month, portfolio allocations remained stable, as the Fund continues to maintain a fair amount of “dry powder” in the form of US Treasuries and Treasury Bills. The Fund continues underweighting tax-exempt municipals due to rich valuations within the sector. The 10-year Municipal/Treasury ratio at 74% indicates tax-exempt municipals are at historically high levels in relation to Treasuries and do not present attractive buying opportunities for the Fund.  

 

Market Outlook 

Looking forward, it’s hard to find a near-term catalyst to reverse the grind tighter in credit spreads we’ve witnessed year-to-date. The US Federal Reserve is on hold and most global central banks have tilted to a more dovish stance in the first quarter, fading the risk of higher rates at least in the short-term. Questions remain about the stability of global economic growth, especially in Europe, and further ability for central bank intervention. With this context in mind, we believe it’s not the time to add municipal and corporate risk, especially considering the absolute level of spreads. However, noting the strength of demand for yield globally, we expect spreads to be supported at these levels. Any changes to the portfolio allocations are likely to be driven by any spread widening with proceeds from Treasuries.

While US Treasuries sold off 4-12 basis points2 in April, municipals outperformed, especially in the intermediate and long ends of the curve. Five-year municipal market data/US Treasury ratios were 1 basis point cheaper, but the 10-year and 30-year ratios were 3 and 5 basis points richer, respectively, for the month. Strong performance in municipals can also be attributed to strong technicals, with slow supply and robust demand from funds, driving performance in those specific parts of the curve. Persistent rich market valuations continue to pose challenges when buying within the municipal space, and are unlikely to reverse unless or until fund flows reverse as well.

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

2 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.

Indices are unmanaged and not available for direct investment.

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.

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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