Off With His Head? Why Cash Won't Always Be King

When Apple’s Doing Great, Is Concentration Really A Risk?

Concentration works in an investor’s favor when the top-performing stocks perform well, but history suggests this strong performance likely won’t last.

While it’s true that 2022 was a memorable year for investors, and not in a good way, it may also serve as a valuable reminder why we invest in equities and bonds in the first place.

In an unusual turn of events, cash was king in 2022—the strongest-performing asset class for the year (though outperformance is easy when all your competition is negative). With so much volatility in the markets, it may be tempting to chase that glimmer of outperformance and increase your allocation to cash, even if just to avoid further losses.

But that’s where perspective can help. The last time cash outperformed, it solidly returned to last place the following year, which is much more typical than its outstanding performance so far: Over the long term, cash is usually the worst performer with an average of just 0.63% return in the last 15 years (FIGURE 1). Though different asset classes take turns in the lead, cash is almost always reliably underwhelming.

FIGURE 1

Performance Leadership Changes Frequently
Asset Class Returns % (2008–2022)

As of 12/31/22. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. See below for representative index definitions. For illustrative purposes only. Source: Morningstar, 4/23.

Any history scholar will tell you no throne room is complete without background scheming from courtiers. While cash was adjusting its newfound crown in 2022, the continued volatility in the financial markets was quietly setting the stage for potential long-term opportunities in other asset classes, such as equities and fixed income.

Focus on Fixed Income

For some of us, the dismal performance in 2022 made it easy to forget why we typically invest in certain asset classes (looking at you, fixed income). But sometimes lackluster performance is like hitting a reset button: after extended volatility and underperformance, investing after a downturn could be likened to hitting the clearance section.

While rising interest rates were one of the causes for recent underperformance, they’ve also set up two important conditions going forward. First, since bond prices fall when yields rise, today’s prices are somewhat depressed, creating attractive entry points for investors.

Second, it means bond yields, which have been near zero for years, are now looking the most attractive they have in a decade (FIGURE 2). As the Federal Reserve (Fed) raised interest rates in its effort to combat inflation, yields also continued to rise. As of this writing, expectations for the peak federal funds rate were between 5-6%.¹

FIGURE 2

Bonds Yields Are the Most Attractive They’ve Been in a Decade

Index	Yield to Worst (3/31/23)	Yield Percentile (Last 10 years)^*
Bloomberg US Aggregate Bond Index	4.40%	96^th
Bloomberg US Treasury Index	3.83%	95^th
Bloomberg Municipal Bond Index	3.25%	94^th
Bloomberg US Corporate Index	5.17%	96^th
Bloomberg US Corporate High Yield Index	8.52%	92^nd

As of 3/31/22. Past performance does not guarantee future results. Yield to worst is the minimum yield that can be received on a bond assuming the issuer doesn’t default on any of its payments. *For yield percentile, 100th is most attractive and 1st is least attractive. See below for representative index definitions. Sources: Bloomberg and ICE BofA Indices.

An Eye on Equities

As is the case with fixed income, all the downward pressure in 2022 and volatility in 2023 may have done some favors for those who know where to look in equities, too. For example, many corporate valuations have been pushed down. Like bonds, this may provide investors an attractive entry point.

There are many things weighing on equities these days, from the war in Ukraine to inflation and the collapses of the Silicon Valley Bank and Signature Bank. But if the Fed succeeds in taming inflation in a meaningful way and avoids a recession in the process, it should help confidence return to the equity markets.

That, in turn, will help improve underlying fundamentals—stock earnings could resume a growth trajectory, margins would improve, and labor costs could slow.

Once some of the stresses are removed from equities, the recovery could kick in surprisingly strong. Even after some of the deepest market declines, equities have historically made solid recoveries—often double-digit gains within just six months of hitting a bottom (FIGURE 3).

It may still take months or years to break even from losses, but the advantage of staying invested is that you take part in the momentum of a rebound from day one.

FIGURE 3

After Significant Drawdowns, Equities Have Tended to Make Strong and Swift Recoveries
10 Worst Market Drawdowns Since the 1960s

				Returns (%) After Reaching Bottom
Cause	Max Drawdown	# of Months To Hit Bottom	# of Months To Break Even	After 6 Months	After 1 Year	After 3 Years
Kennedy Slide/Flash Crash (1961–1962)	-27.97	6	14	20.45	32.66	16.65
Vietnam Worries (1968–1970)	-36.06	18	21	22.80	43.73	15.92
Nixon Shock (1973–1974)	-48.15	21	69	29.74	39.36	15.49
Rate Hikes to Fight Inflation (1980–1982)	-27.11	20	3	44.14	58.33	22.35
Black Monday (1987)	-33.51	3	20	19.26	22.78	13.69
Iraq Invaded Kuwait (1990)	-19.92	3	4	27.81	29.10	15.97
Asian Financial Crisis (1998)	-19.34	2	3	29.36	37.93	5.66
Dot-com Bubble Burst (2000–2002)	-49.15	31	56	11.49	33.73	15.47
Global Financial Crisis (2007–2009)	-56.78	17	49	52.75	68.57	26.54
COVID-19 Pandemic (2020)	-33.93	1	5	44.67	74.78	20.86
Average	-35.19	12	24	30.25	44.10	16.86

Past performance does not guarantee future results. Data shown is for the S&P 500 Price Index as of 3/31/23 and does not include the reinvestment of dividend payments. A drawdown measures a peak-to-trough decline in the market. Returns for less than one year are not annualized. Indices are unmanaged and not available for direct investment. Data Sources: Morningstar and Hartford Funds, 4/23.

Conclusion

All this said, there’s no telling when cash will be dethroned. Inflation has proved tricky to tame, and it’s unclear if the Fed will be able to engineer a gentle end to inflation without pushing the economy into recession. With the recent bank collapses, the possibility of tightening credit conditions may also add pressure to the economy. All this uncertainty is likely to continue to feed volatility for both equities and bonds.

But if nothing else, cash’s brief reign may help investors step back and examine their portfolios. Cash can serve an important role in a portfolio, whether as a source of liquidity or as a cushion against volatility. But as a source of return, its outperformance vs. other assets classes is likely to be brief, slim, and probably not worth giving up long-term growth or income prospects that its peers have historically provided.

Working with a financial professional today can help set up a portfolio that’s allocated for tomorrow’s opportunities, whether it’s in equities, bonds, or cash—or a combination of all three.

Talk to your financial professional to help make sure your portfolio is properly allocated for your goals and risk tolerance.

Select Hartford Funds Equity and Fixed-Income Funds

Morningstar ratings for Mutual Fund I-Shares

Hartford Balanced Income Fund (HBLIX)

OVERALL

(as of 5/31/2023)

Overall, 5 stars, 3-Year, 4 stars, 5-Year, 5 stars, and 10-Year, 5 stars, rated against 433, 433, 410 and 294 products, respectively. Morningstar Rating^TM is calculated for products with at least a 3-year history, based on a risk-adjusted return measure (excluding any applicable sale charges) and accounts for variations in a product's monthly performance. 5 stars are assigned to the top 10%; 4 stars to the next 22.5%, 3 stars to the next 35%, 2 stars to the next 22.5% and 1 star to the bottom 10%. ETFs and mutual funds are considered a single population. The Overall Rating is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. For more information about these ratings, including their methodology, please go to global.morningstar.com/managerdisclosures . Ratings for other share classes may vary and are subject to change monthly. Past performance is no guarantee of future performance.
©2023 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/ or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

433 Products | Moderately Conservative Allocation Category

Based on Risk-Adjusted Returns

Hartford Dividend and Growth Fund (HDGIX)

OVERALL

(as of 5/31/2023)

Overall, 5 stars, 3-Year, 4 stars, 5-Year, 5 stars, and 10-Year, 5 stars, rated against 1136, 1136, 1086 and 809 products, respectively. Morningstar Rating^TM is calculated for products with at least a 3-year history, based on a risk-adjusted return measure (excluding any applicable sale charges) and accounts for variations in a product's monthly performance. 5 stars are assigned to the top 10%; 4 stars to the next 22.5%, 3 stars to the next 35%, 2 stars to the next 22.5% and 1 star to the bottom 10%. ETFs and mutual funds are considered a single population. The Overall Rating is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. For more information about these ratings, including their methodology, please go to global.morningstar.com/managerdisclosures . Ratings for other share classes may vary and are subject to change monthly. Past performance is no guarantee of future performance.
©2023 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/ or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

1136 Products | Large Value Category

Based on Risk-Adjusted Returns

Hartford Equity Income Fund (HQIIX)

OVERALL

(as of 5/31/2023)

Overall, 4 stars, 3-Year, 3 stars, 5-Year, 5 stars, and 10-Year, 4 stars, rated against 1136, 1136, 1086 and 809 products, respectively. Morningstar Rating^TM is calculated for products with at least a 3-year history, based on a risk-adjusted return measure (excluding any applicable sale charges) and accounts for variations in a product's monthly performance. 5 stars are assigned to the top 10%; 4 stars to the next 22.5%, 3 stars to the next 35%, 2 stars to the next 22.5% and 1 star to the bottom 10%. ETFs and mutual funds are considered a single population. The Overall Rating is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. For more information about these ratings, including their methodology, please go to global.morningstar.com/managerdisclosures . Ratings for other share classes may vary and are subject to change monthly. Past performance is no guarantee of future performance.
©2023 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/ or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

1136 Products | Large Value Category

Based on Risk-Adjusted Returns

Hartford Schroders International Stock Fund (SCIEX)

OVERALL

(as of 5/31/2023)

Overall, 5 stars, 3-Year, 4 stars, 5-Year, 5 stars, and 10-Year, 5 stars, rated against 685, 685, 625 and 413 products, respectively. Morningstar Rating^TM is calculated for products with at least a 3-year history, based on a risk-adjusted return measure (excluding any applicable sale charges) and accounts for variations in a product's monthly performance. 5 stars are assigned to the top 10%; 4 stars to the next 22.5%, 3 stars to the next 35%, 2 stars to the next 22.5% and 1 star to the bottom 10%. ETFs and mutual funds are considered a single population. The Overall Rating is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. For more information about these ratings, including their methodology, please go to global.morningstar.com/managerdisclosures . Ratings for other share classes may vary and are subject to change monthly. Past performance is no guarantee of future performance.
©2023 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/ or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

685 Products | Foreign Large Blend Category

Based on Risk-Adjusted Returns

Hartford International Value Fund (HILIX)

OVERALL

(as of 5/31/2023)

Overall, 4 stars, 3-Year, 5 stars, 5-Year, 3 stars, and 10-Year, 5 stars, rated against 329, 329, 307 and 194 products, respectively. Morningstar Rating^TM is calculated for products with at least a 3-year history, based on a risk-adjusted return measure (excluding any applicable sale charges) and accounts for variations in a product's monthly performance. 5 stars are assigned to the top 10%; 4 stars to the next 22.5%, 3 stars to the next 35%, 2 stars to the next 22.5% and 1 star to the bottom 10%. ETFs and mutual funds are considered a single population. The Overall Rating is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. For more information about these ratings, including their methodology, please go to global.morningstar.com/managerdisclosures . Ratings for other share classes may vary and are subject to change monthly. Past performance is no guarantee of future performance.
©2023 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/ or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

329 Products | Foreign Large Value Category

Based on Risk-Adjusted Returns

Hartford Municipal Opportunities Fund (HHMIX)

OVERALL

(as of 5/31/2023)

Overall, 4 stars, 3-Year, 3 stars, 5-Year, 3 stars, and 10-Year, 4 stars, rated against 271, 271, 236 and 182 products, respectively. Morningstar Rating^TM is calculated for products with at least a 3-year history, based on a risk-adjusted return measure (excluding any applicable sale charges) and accounts for variations in a product's monthly performance. 5 stars are assigned to the top 10%; 4 stars to the next 22.5%, 3 stars to the next 35%, 2 stars to the next 22.5% and 1 star to the bottom 10%. ETFs and mutual funds are considered a single population. The Overall Rating is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. For more information about these ratings, including their methodology, please go to global.morningstar.com/managerdisclosures . Ratings for other share classes may vary and are subject to change monthly. Past performance is no guarantee of future performance.
©2023 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/ or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

271 Products | Muni National Interm Category

Based on Risk-Adjusted Returns

Hartford Short Duration Fund (HSDIX)

OVERALL

(as of 5/31/2023)

Overall, 4 stars, 3-Year, 4 stars, 5-Year, 4 stars, and 10-Year, 4 stars, rated against 532, 532, 478 and 354 products, respectively. Morningstar Rating^TM is calculated for products with at least a 3-year history, based on a risk-adjusted return measure (excluding any applicable sale charges) and accounts for variations in a product's monthly performance. 5 stars are assigned to the top 10%; 4 stars to the next 22.5%, 3 stars to the next 35%, 2 stars to the next 22.5% and 1 star to the bottom 10%. ETFs and mutual funds are considered a single population. The Overall Rating is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. For more information about these ratings, including their methodology, please go to global.morningstar.com/managerdisclosures . Ratings for other share classes may vary and are subject to change monthly. Past performance is no guarantee of future performance.
©2023 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/ or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

532 Products | Short-Term Bond Category

Based on Risk-Adjusted Returns

¹ Economic Analysis & CME Group, as of 4/23.

Balanced Portfolio is represented by 50% S&P 500 Index/50% Bloomberg US Aggregate Bond Index. US Equities are represented by the S&P 500 Index. The S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks. Bonds are represented by the Bloomberg US Aggregate Bond Index. The Bloomberg US Aggregate Bond Index is composed of securities that cover the US investment-grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. Cash is represented by the Bloomberg US Treasury Bill 1-3 Month Index, which is designed to measure the performance of public obligations of the US Treasury that have a remaining maturity of greater than or equal to 1 month and less than 3 months. Corporates are represented by the Bloomberg US Corporate Index, a market-weighted index of investment-grade corporate fixed-rate debt issues with maturities of one year or more. High Yield is represented by the Bloomberg US Corporate High Yield Total Return Index, an unmanaged broad-based market-value-weighted index that tracks the total-return performance of non-investment grade, fixed-rate, publicly placed, dollar-denominated and nonconvertible debt registered with the Securities and Exchange Commission. International equities are represented by the MSCI World ex USA Index, a free float-adjusted market-capitalization index that captures large- and mid-cap representation across developed-markets countries excluding the United States. MSCI performance is shown net of dividend withholding tax. Mortgage backed-securities (MBS) are represented by the Bloomberg US MBS Index, which tracks fixed-rate agency mortgage-backed passthrough securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). Municipal bonds are represented by the Bloomberg Municipal Bond Index, an unmanaged index that is considered representative of the broad market for investment-grade, tax-exempt bonds with a maturity of at least one year. Treasuries are represented by the Bloomberg US Treasury Index, an unmanaged index of prices of US Treasury bonds with maturities of one to 30 years.

“Bloomberg^®” and any Bloomberg Index are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the indices (collectively, “Bloomberg”) and have been licensed for use for certain purposes by Hartford Funds. Bloomberg is not affiliated with Hartford Funds, and Bloomberg does not approve, endorse, review, or recommend any Hartford Funds product. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to Hartford Fund products.

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.

Important Risks: Investing involves risk, including the possible loss of principal. • Fixed-income security risks include credit, liquidity, call, duration, event and interest-rate risk. As interest rates rise, bond prices generally fall. • Foreign investments may be more volatile and less liquid than US 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. • Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. • Obligations of US Government agencies are supported by varying degrees of credit but are generally not backed by the full faith and credit of the US Government. • Municipal securities may be adversely impacted by state/local, political, economic, or market conditions. Although the Fund primarily invests in municipal securities that are exempt from federal income taxes, investors may be subject to the federal Alternative Minimum Tax as well as state and local income taxes. Capital gains, if any, are taxable. • Mortgage-related and asset-backed securities’ risks include credit, interest-rate, prepayment, and extension risk.

The views expressed here are those of the authors. They should not be construed as investment advice. This material and/or its contents are current as of 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 Hartford Funds.

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