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Securitized Credit: A True Diversifi er

T he securitized credit market is an enormous

segment of the bond market that receives

little attention and isn’t well understood. Assets

in securitized credit have grown to more than

$13 trillion*, yet we believe most individual

investors remain signifi cantly underexposed to it.

Exploring the who, what, where, why, and when

of securitized credit can help you understand

the unique characteristics that can make it

an attractive investment option and how to

incorporate it into a diversifi ed portfolio.

In simple terms, securitization is the process of bundling diff erent kinds of cash-fl ow producing assets and transforming them into an investable security. For example, when mortgages are securitized, investors receive interest and principal payments over time as the underlying loans are paid off by the borrowers. But the securitized credit universe goes beyond mortgages. It’s individual loans from everyday life—auto loans, credit card obligations, mobile devices, and more.

Securitized credit allows individual investors to potentially benefi t from the strength of US consumers and provides access to securities that are typically only available to large institutions.

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What?

*As of 6/30/19. Source: Schroders and SIMFA. Based on the most recent data available.

We believe active management is essential to successfully investing in securitized credit. Because the investment opportunities in this asset class primarily reside outside of traditional fi xed-income benchmarks, it takes in-depth knowledge and specialized resources to uncover the opportunities.

The Hartford Schroders Securitized Income strategy leverages the expertise of the Schroders Securitized Credit Team, a group of 15 dedicated investment professionals who’ve been managing securitized strategies for more than 20 years—since the inception of the non-agency market.

Led by Michelle Russell-Dowe, the team manages more than $13 billion of assets under management across a range of institutional and retail strategies, and they’re supported by Schroders’ global macro and credit resources. The team uses proprietary models with a best-in-class library of individual securitized bonds; they strive to exploit ineffi ciencies and add value across the full range of securitized credit opportunities.

Who?

When? Securitization dates back to the late 18th century when farm railroad mortgage bonds were issued to help expand the US rail system. The fi rst modern residential mortgage-backed security was created a half century ago by the Government National Mortgage Association, commonly known as Ginnie Mae. Bonds issued by Ginnie Mae became popular with fi xed-income investors because the principal and interest repayments are backed by the full faith and credit of the US government.

After the subprime mortgage crisis, banks put higher lending standards in place for mortgages. As a result, people who qualifi ed for mortgages were much better able to aff ord them. And when people can better aff ord their mortgages, they’re more likely to make their mortgage payments. This raises the credit quality of mortgage-backed securities.

More recently, additional types of securitized debt, such as small-business loans and auto leases, have emerged. This has expanded the opportunities available to investors. Securitized credit has become an important part of the global economy.

Types of Securitized Credit

Asset-backed securities (ABS):Debt securities backed by a loan, lease, or receivables against assets that don’t consist of real estate or mortgage-backed securities. Examples include: home equity loans, credit card receivables, and car loans.

Collateralized loan obligations (CLO): Consolidated debt obligations that are primarily backed by leveraged bank loans (i.e., loans made by banks to corporations that typically have high levels of debt).

Commercial mortgage-backed securities (CMBS): Asset-backed securities in which cash fl ows are backed by the principal and interest payments of groups of commercial loans, such as mortgages for shopping malls or offi ce complexes.

Residential Mortgage-Backed Securities (RMBS): Asset-backed securities in which cash fl ows are backed by the principal and interest payments from residential home loans (usually single family homes). They are placed into two categories by the issuer:

Agency MBS are issued or guaranteed by one of three agencies: Government National Mortgage Association (known as GNMA or Ginnie Mae), Federal National Mortgage (FNMA or Fannie Mae), and Federal Home Loan Mortgage Corporation (Freddie Mac).

Non-Agency MBS are issued by private entities, such as fi nancial institutions.

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“We believe from a fundamental, technical, and valuation perspective, securitized products offer a unique opportunity today to provide income.” —Michelle Russell-Dowe, Head of Securitized Credit, Schroders

In the aftermath of the Great Recession, the Federal Reserve made it easier for nonfi nancial companies to gain access to the credit markets. Today, the supply of corporate debt is at record highs, with approximately half of the market in BBB-rated debt—the lowest level of debt that still qualifi es as investment grade.

By contrast, the supply of consumer debt has decreased and its credit quality has increased since the Great Recession. For example, single-family mortgage debt, the largest segment of consumer debt, is below pre-crisis levels.

The bottom line: Securitized credit can off er investors higher credit quality and better valuations relative to corporate credit.

Enhanced Diversifi cation and Income Potential

Securitized credit allows investors to diversify beyond corporate credit and government bonds—and it has off ered a better risk-adjusted yield (i.e., a higher yield per unit of risk) than either of these investments. This can make it a worthwhile option to consider for income-seeking investors who are concerned about risk.

1.16%

0.51%

0.78%

-0.20

0.10

0.74

$5k

$10k

$15k

$20k

9/04 9/06 9/08 9/10 9/12 9/14 9/16 9/18 9/19

$5

$10

$15

$20

9/04 9/05 9/06 9/07 9/08 9/09 9/10 9/11 9/12 9/13 9/14 9/15 9/16 9/17 9/18 9/19

Why?

Securitized Credit US Treasuries Investment-Grade Corporate Bonds

Non-fi nancial business debt Single-family mortgage debt

For illustrative purposes only. Source: Bloomberg, 9/19. Based on the most recent data available.

Past performance does not guarantee future results. For illustrative purposes only. Source: Morningstar, 1/20. Yield per unit of risk is measured by dividing an index’s yield to maturity (total return anticipated on a bond if held until maturity) by its 10-year standard deviation (measure of how much an investment’s returns can vary from its average return. It is a measure of volatility and in turn, risk.). Asset classes are represented by the following indices: Securitized Credit (Bloomberg Barclays US Securitized Index); US Treasuries (Bloomberg Barclays US Treasury Index); and Investment-Grade Corporate Bonds (Bloomberg Barclays US Corporate Bond Index). Indices are unmanaged and not available for direct investment. See the back page for representative index defi nitions.

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A Consumer-Driven Alternative to Corporate Credit

Corporate Debt at Record High While Mortgage Debt Is Below 2007 LevelsCorporate vs. Consumer Debt (in trillions) (9/30/04-9/30/19)

Securitized Credit Offers Better Risk-Adjusted YieldYield per Unit of Risk (2010-2019)

Complement a Traditional Fixed-Income Portfolio

Diversify and Rebalance a Growth-Oriented Portfolio

Where?

The Bloomberg Barclays US Aggregate Bond Index (the Agg) is a common benchmark for fi xed-income investors. Although securitized assets comprise nearly 30% of the Agg, almost all of it is concentrated in a single sector: Agency MBS.

Traditional fi xed-income investors may be missing out on the full potential of securitized credit since some of its sectors are not adequately captured in most publicly available indexes or ETFs.

The long bull market may have left investors who haven’t rebalanced overexposed to US equities. Because securitized credit performs quite diff erently than US equities (i.e., it has a negative correlation to US equities), it can help to mitigate this unintended risk and can be a true diversifi er for an equity-heavy portfolio.

For illustrative purposes only. Source: Morningstar, 1/20. A correlation of 1.0 indicates the investments have historically moved in the same direction; -1.0 means the investments have historically moved in opposite directions. Asset classes are represented by the following indices: US Equities (S&P 500 Index); Securitized Credit (Bloomberg Barclays US Securitized Index); Investment-Grade Corporate Bonds (Bloomberg Barclays US Corporate Bond Index); and High-Yield Corporate Bonds (Bloomberg Barclays US Corporate High-Yield Bond Index). See the back page for representative index defi nitions.

29.6% 27.0%2.1%0.5%

Securitized Assets Agency MBS CMBS Non-Agency MBSFor illustrative purposes only. Source: Barclays Live, 1/20.

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1.16%

0.51%

0.78%

-0.20

0.10

0.74

Securitized Credit Investment-Grade Corporate Bonds

High-Yield Corporate Bonds

Nearly All of the Securitized Assets in the Agg Are in Agency MBSAsset Class Exposure (12/31/19)

Securitized Credit Has Been Less Correlated to US EquitiesCorrelation (2010-2019)

Powered by a Combination of Investment Expertise

Founded in 1996, Hartford Funds has grown into a leading asset manager with more than $117 billion in assets under management.* Our line-up includes more than 50 mutual funds and ETFs in a variety of styles and asset classes.

By combining Hartford Funds’ advisory services with the capabilities of our world-class sub-advisers, investors enjoy the benefi ts of multiple layers of knowledge, risk management, and oversight.

Schroders is a world-class asset manager with a unique 215-year family-ownership history and a pioneering investment philosophy.

Global heritage. Advanced thinking. Diff erentiated alpha. That’s Schroders.

Assets under management: $649.6 billion**

A truly global business, managed locally across over 30 countries

Diff erentiated fundamental research enhanced by alternative sources of insights via data science and decades-long ESG research

An ownership structure which allows them to think long term, and always on behalf of the client

41%

31%

42% 17%

29% 19% 9%12%

42%

35%

41% 17%

24% 19% 9%13%

Equities 31%Multi-Asset 29%Fixed Income 19%Wealth Management 12%Private Assets & Alternatives 9%

� Equities � Multi-Asset � Fixed Income � Wealth Management � Private Assets & Alternatives

*As of 6/30/20. Includes discretionary and non-discretionary assets. Assets under management is for Hartford Funds Management Company, LLC and its wholly owned subsidiary, Lattice Strategies LLC., excluding affi liated funds of funds.

**As of 6/30/20. Schroders refers to Schroders plc and its affi liates.

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hartfordfunds.com 888-843-7824

Index Defi nitions

Bloomberg Barclays US Aggregate Bond Index is composed of securities from the Bloomberg Barclays Government/Credit Bond Index, Mortgage-Backed Securities Index, Asset-Backed Securities Index, and Commercial Mortgage-Backed Securities Index.

Bloomberg Barclays US Corporate Bond Index measures the investment-grade, fi xed-rate, taxable corporate bond market. The index includes US dollar-denominated securities that are publicly issued by industrial, utility, and fi nancial issuers.

Bloomberg Barclays US Corporate High-Yield Bond Index is an unmanaged broad-based market-value-weighted index that tracks the total return performance of non-investment grade, fi xed-rate, publicly placed, dollar denominated and nonconvertible debt registered with the Securities and Exchange Commission.

Bloomberg Barclays US Securitized Index is comprised of predominantly MBS Agency securities, but also includes ABS, CMBS and covered securities.

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

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

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 affi liates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affi liates, “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 fl uctuate in value depending on general market and economic conditions and the prospects of individual companies. • Fixed income security risks include credit, liquidity, call, duration, event and interest-rate risk. As interest rates rise, bond prices generally fall. • The risks associated with mortgage-related and asset-backed securities as well as collateralized loan obligations (CLOs) include credit, interest-rate, prepayment, liquidity, default and extension risk. • Foreign investments may be more volatile and less liquid than U.S. investments and are subject to the risk of currency fl uctuations and adverse political and economic developments. • 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. • 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. • Restricted securities may be more diffi cult to sell and price than other securities. • The purchase of securities in the To-Be-Announced (TBA) market can result in additional price and counterparty risk. • The Fund may use repurchase agreements, or reverse repurchase agreements, which can increase risk and volatility. • Use of leverage can increase market exposure, magnify investment risks, and cause losses to be realized more quickly. • Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. Diversifi cation does not ensure a profi t or protect against loss.

Mutual funds are distributed by Hartford Funds Distributors, LLC (HFD), Member FINRA. Advisory services are provided by Hartford Funds Management Company, LLC (HFMC). Certain funds are sub-advised by Schroder Investment Management North America Inc. Schroder Investment Management North America Ltd. serves as a secondary sub-adviser to certain funds. HFD and HFMC are not affi liated with any sub-adviser

Investors should carefully consider a fund’s investment objectives, risks, charges and expenses. This and other important information is contained in a fund’s full prospectus and summary prospectus, which can be obtained by visiting hartfordfunds.com. Please read it carefully before investing.

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1 An attractive alternative to corporate credit 2 Enhanced income potential 3 Exposure to the balance

sheets of US households

A low duration, multi-sector fi xed-income fund that seeks to provide:

Contact your fi nancial professional to see how an allocation to securitized credit can work for you.

HARTFORD SCHRODERS SECURITIZED INCOME FUND