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Hartford Schroders Tax-Aware Bond Fund

June 2019 Monthly Update

Performance (%)
% (as of 7/31/2019)
Average Annual Total Returns % (as of 7/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Tax-Aware Bond  I 6.36 7.57 2.66 3.92 --- 5.03
Benchmark 5.94 7.31 2.80 3.77 --- ---
Morningstar Muni National Intermediate Category 5.55 6.39 2.28 2.91 --- ---
Performance (%)
% (as of 6/30/2019)
Average Annual Total Returns % (as of 6/30/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders Tax-Aware Bond  I 5.89 7.30 2.48 3.97 --- 5.03
Benchmark 5.09 6.71 2.55 3.64 --- ---
Morningstar Muni National Intermediate Category 4.77 5.87 2.02 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

Spurred by strong dovish tones from central bankers, market sentiment in June took a dramatic pivot from the risk-off direction throughout May. Both the European Central Bank (ECB) and the US Federal Reserve (Fed) indicated easing monetary policy is on standby should growth slow, which was timely in easing investor concerns as many economic prints came in weaker during the month. In Germany, the Zew Indicator of Economic Sentiment fell to -21.1 and, in the US, the May jobs report (released in June) showed job growth slowed sharply (+75,000 jobs) from the previous month and far lower than the median 185,000 predicted. Additional relief resulted from expectations of a cooling trade war between the US and China, supporting higher prices and lower yields. In general, markets returned to levels last seen two months ago, with equity markets returning to near all-time highs (the S&P 500 Index1 up 7.05% in June) and investment-grade corporate spreads at 115 basis points (bps)2—just 4 bps higher than April 30th. However, gold rose 8% and interest rates declined (as indicated by the 10-year Treasury yield of 2.00%) which is converse to traditional market behavior in a risk-on environment.

June showed a continuation of absolute positive returns in the municipal bond market, with the Bloomberg Barclays Municipal Bond Index returning 0.37% for the month, and year-to-date returns at 5.09%. This index lagged the Bloomberg Barclays US Treasury Index,3 which posted 0.92% in June. Overall, municipal market data muni-to-treasury ratios became less expensive on a duration4 and quality-matched basis. Total return performance was positive across the curve, especially in the short end. The 5-year municipal tenor performed the best with 0.55% in absolute returns, followed by the 3-year (0.46%) and 7-year (0.44%) tenors; the biggest relative underperformers were the long-end (0.24%) and 20-year (0.32%) tenors. Over the month, the best-performing revenue sectors were industrial development revenue and pollution control revenue (0.57%), housing (0.48%), and leasing (0.44%); the worst were resource recovery (0.25%), special tax (0.28%), and water & sewer (0.30%). Puerto Rico (1.15%), South Dakota (0.69%), and Alabama (0.58%) were the best-performing municipal states (or commonwealths/territories); Guam (-0.05%), Idaho (-0.03%), and Vermont (0.07%) generated the lowest relative returns. Municipal issuance in June totaled $34 billion, up 21% month-to-month and 3% year-to-year, with net issuance at -$4 billion. Municipal fund flows were positive in June, with inflows of approximately $1.4 billion per week. As of June 19, 2019, ICI data show that fund inflows totaled $4 billion during the month, and $46 billion for the year.

 

Performance And Positioning Review

The Fund (Class I Shares) returned 0.82% in June, outperforming its benchmark, the Bloomberg Barclays Municipal Bond Index, on a net total return basis. Overall, underweighting tax-exempt municipals while overweighting corporate financials and industrials contributed most to outperformance. The dovish central bank environment which sent Treasury yields lower and risk assets higher helped fuel returns within the corporate sector. Duration and yield curve positioning overall contributed to returns due to the significant Treasury yield declines during the month.

Within the portfolio, US Treasury exposure was lowered in favor of investment opportunities within other sectors, as we believe that the current market pricing of multiple imminent rate cuts is probably exaggerated. Corporate bond exposure was increased, both in the financial and industrial sectors, as spreads look attractive in comparison to expensive municipal sectors. Exposure to agency municipal backed securities was slightly increased within the portfolio to maintain a degree of defensive positioning, as we feel that mortgages are attractive with valuations close to their cheapest levels in the post-crisis period. Fundamentals are also strong, as debt growth in the mortgage market has significantly lagged that of the corporate market.  

 

Market Outlook 

Central bank rhetoric continued to dominate the headlines in June, along with the US-China trade tensions. The June FOMC meeting strongly hinted at rate cuts on the horizon, with ECB President Draghi indicating that if inflation data did not improve, more stimulus would be appropriate. This caused safe haven yields to drop and re-energized investment in risky assets. As a result, rate cuts are expected in 2019, with an expected 50 bps cut in July 2019. The market is currently pricing in 100% probability of a rate cut in July and two additional cuts by mid-November.

Municipals returns will most likely not keep up with US Treasury yields in the second half of the year, if rates move lower as expected. While municipals massively outperformed US Treasuries through mid-May, this sector has shown a significant lag following the US Treasury rally. Muni technicals continue to be strong, as summer redemptions continue to support the market. Supply should increase as compared to the first half of the year, due to low rates, tax-exempt refundings of callable Build America Bonds, and an increase in new money issuance as the expectation of a federal infrastructure package fades until 2021 or later. Meanwhile, corporates look more attractive as the Fed and global yield environment is expected to lead to a strong technical backdrop within the sector. Leverage is more stable, although still elevated for a non-recessionary environment, but profit growth remains anemic, with some pickup expected in the second half of 2019. We believe the coming months will present more opportunity within the market and the bond market will continue to offer value in absolute terms, especially in an environment where volatility is likely to remain high and the Fed’s hiking cycle is firmly behind us.

S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks.

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

4 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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