In a year that felt like a decade for many investors due to challenging performance across all asset classes, investors were left with few places to hide in 2022. International equities ended the year sharply lower as the market contended with slowing economic growth, inflationary pressures, and tightening monetary policy. Russia’s invasion of Ukraine further exacerbated conditions and exerted significant pressure on energy prices and supply, particularly in Europe.
The UK’s revolving door of prime ministers finally found some stability with the appointment of the more fiscally conservative Rishi Sunak. Geopolitical tensions between China and the west remained high as Xi Jinping’s consolidation of power raised concerns about increased government interference in the private sector and China’s ambitions toward “reunification” with Taiwan. The euro, yen, and pound fell to near multidecade lows against the US dollar.
How Did the Hartford Schroders International Stock Fund Fare?
Against a challenging backdrop, the Hartford Schroders International Stock Fund closed the year down and underperformed its benchmark for just the third time in a decade (based on Class I shares). While there were a couple of stocks that were a drag on performance, analysis of the Fund’s return shows that the vast majority of underperformance was attributable to the style and macro factors that dominated market returns. The Fund’s approach is focused around identifying unanticipated growth in companies and favors a tilt toward quality and growth styles in the portfolio (FIGURE 1). The Fund has historically delivered strong performance through a wide range of market conditions.
The Stocks We Look for: The Growth Gap
Source: Schroders. For illustrative purposes only. Not representative of an actual investment.
However, the Fund has tended to experience the most performance challenges during extremes in investor sentiment, when fundamentals and market performance often decouple. For example, during periods of heightened risk aversion, markets often react indiscriminately to macro events without accounting for company specifics. The Fund has struggled when investors seek value without consideration of quality, as in those instances when lower quality, highly indebted, and often cyclically exposed businesses lead the market. These are companies the Fund does not typically own. Late 2016 illustrates this type of environment (FIGURE 2).
However, these periods of market leadership historically tend to be short lived as earnings fundamentals have tended to re-exert themselves and, over the long term, the Fund’s approach has delivered through most conditions.
Calendar Year Performance Over the Last Decade (%)
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 International Alpha Fund. If Class I fees and expenses were reflected, performance would have differed.
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. For more current performance information to the most recent month ended, please visit hartfordfunds.com. Please see below for important performance information including standardized performance. Indices are unmanaged and not available for direct investment.
We believe slowing growth, rising costs, and weaker sentiment will be much more apparent in company financial results.
Not Just A Mean-Reversion Story: International Equities May Be Positioned To Outperform In 2023
We believe the market is likely entering a phase in which the impact of slowing growth, rising costs, and weaker sentiment will be much more apparent in company financial results. High inflation is forcing global growth lower and may continue to put earnings under further pressure. While corporate balance sheets broadly remain healthy, tighter credit conditions may begin to reveal cracks in companies that are unprepared to weather the more challenging environment.
In 2022, the market de-rated Europe, assuming that Russia’s Vladimir Putin would turn off the gas taps and Europe would plunge into a deep recession. Yet the winter in Europe proved remarkably warm, and gas inventory levels are a full 20% higher than their 10-year average. This also means that gas storage is unlikely to fall to the seasonal low levels many feared and will help reduce the risk of restocking, which is supportive to current accounts, fiscal balances, inflationary pressures, and, ultimately, the euro. This will also help reduce the credit risks for many of the Fund’s European bank holdings, which are trading at low multiples amid weak sentiment, yet have built stronger capital buffers than at any time in the last decade. They may be poised to see an earnings uplift from the rising interest-rate environment.
While the short-term picture remains challenging in terms of growth for Europe, the medium- to longer-term buildout of energy infrastructure remains quite positive. The portfolio has good exposure to climate technology and companies that we believe are well-positioned for the clean energy transition across the materials, industrial, technology, and utility sectors (FIGURE 3).
Sector Exposure (%)
Exposures are subject to change. Based on Global Industry Classification Standard (GICS), which was developed by and is the exclusive property and a service mark of MSCI Inc. (MSCI) and Standard & Poor's, a division of The McGraw McGraw-Hill Companies, Inc. (S&P). Excludes cash. May not total to 100% due to rounding and/or pooled vehicle allocations.
Supply-chain pressures are easing, which is good news for both shortages and inflation.
The team is also finding attractive opportunities in Japan. A decade of deflation and currency depreciation has helped make it one of the most cost-competitive markets globally. The Fund is exposed to a number of exporter companies that should see an earnings uplift against many of their global peers due to their favorable cost advantages. But the team also believes that a more stable yen is providing support to domestic-oriented companies and has increased exposure to banks and communications services. It appears that inflationary pressures may have forced the Bank of Japan to move away from its yield-curve control and provide greater support to the currency through higher interest rates.
Encouragingly, supply-chain pressures are easing, which is good news for both shortages and inflation. Some industries will continue to face challenges in 2023, and there is building momentum among companies to build more resilience into their supply chains to reduce their reliance on China. Given labor shortages in many western economies, new capacity will need to be highly automated, which will also present attractive opportunities for Southeast Asia and countries such as Mexico and Turkey, on the periphery of the US and European economies, respectively.
Overall, global equities remain under pressure entering 2023 against geopolitical tensions, high inflation, tightening monetary policy, and earnings risks that look inevitable as the economic cycle slows. The team believes that low expectations in many parts of the economy will create opportunities for patient and selective investors in 2023. The portfolio seeks to remain well diversified and reflect a fluid outlook with a wide range of possible outcomes. At a stock level, the team continues to emphasize revenue and earnings stability as well as balance-sheet strength, which has tended to be rewarding during periods of elevated risk.
For more information about the Hartford Schroders International Stock Fund, talk to your financial professional.
(as of 2/28/2023)
AVERAGE ANNUAL TOTAL RETURNS %
(as of 2/28/2023)
|Hartford Schroders International Stock I||6.25||-6.72||9.42||5.83||6.43||7.42|
|Morningstar Foreign Large Blend Category||5.07||-5.16||5.80||2.18||4.52||---|
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.
SI = Since Inception.
Fund Inception: 12/19/1985
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 International Alpha Fund. If Class I fees and expenses were reflected, performance would have differed. SI performance is calculated from 12/19/85.
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. • 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, economic and regulatory developments. These risks may be greater, and include additional risks, for investments in emerging markets or if the Fund focuses in a particular geographic region or country. • Small- and mid-cap securities can have greater risks and volatility than large-cap securities. • Integration of environmental, social, and/or governance (ESG) characteristics into the investment process may not work as intended. • To the extent the Fund focuses on one or more sectors, the Fund may be subject to increased volatility and risk of loss if adverse developments occur.
Diversification does not ensure a profit or protect against a loss in a declining market.
Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.
The views expressed herein are those of Schroders Investment Management (Schroders), are for informational purposes only, and are subject to change based on prevailing market, economic, and other conditions. The views expressed may not reflect the opinions of Hartford Funds or any other sub-adviser to our funds. The opinions stated in this document include some forecasted views. Schroders believes that they are basing their expectations and beliefs on reasonable assumptions within the bounds of what they currently know. The views and information discussed should not be construed as research, a recommendation, or investment advice, nor should they be considered an offer or solicitation to buy or sell any security. This information is current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Schroders or Hartford Funds.
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