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Hartford Schroders International Stock Fund

October 2018 Monthly Update

Performance (%)
% (as of 11/30/2018)
Average Annual Total Returns % (as of 11/30/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I -7.02 -5.92 5.54 2.82 9.16 7.28
BENCHMARK -10.13 -8.12 5.43 1.79 7.66 ---
Morningstar Foreign Large Blend Category -9.99 -8.58 3.71 1.53 7.12 ---
Performance (%)
% (as of 9/30/2018)
Average Annual Total Returns % (as of 9/30/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I -0.45 2.98 10.23 5.17 6.42 7.54
BENCHMARK -3.09 1.76 9.97 4.12 5.18 ---
Morningstar Foreign Large Blend Category -2.19 1.68 8.56 4.06 4.80 ---
SI = Since Inception. Fund Inception: 12/19/1985
Operating Expenses:   Net 0.91% |  Gross  0.91%

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.

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.

On 3/31/18, the Fund’s principal investment strategy and benchmark changed to reflect its increased flexibility to have a greater exposure in emerging markets.

 

Market Review

In October, global equities suffered the sharpest one-month decline since May 2012. The geopolitical factors that have periodically hindered markets this year remained active, primarily the escalating US-China trade war and uncertainty around Italy’s fiscal agenda. However, investor concerns over the durability of the economic and earnings cycle worsened over the month, particularly in light of the US Federal Reserve’s (Fed) late-September interest rate rise and comments indicating significant scope for further hikes.

So far, the vast majority of companies have continued to exceed earnings expectations in the third quarter. However, investors remain focused on growth and companies falling short on expected sales growth have been disproportionately punished as we saw with several tech bell weathers. Elsewhere, the sharpest falls were broadly in more economically sensitive sectors. Industrials and materials saw some of the most significant declines. Energy was also weaker, as oil prices fell after Saudi Arabia announced it would be raising production to a record high. Traditionally defensive areas such as utilities and consumer staples performed comparatively well. There was little regional disparity, with all geographies weaker.

 

Performance Review

The Fund (Class I Shares) returned -8.27% in October, underperforming its benchmark, the MSCI ACWI ex USA Index, which returned -8.13%. Stock selection in technology detracted the most, while our healthcare holdings offset some of this weakness. Similarly, while our regional exposure in Asia Pacific, Japan, and emerging markets lost ground, our North American exposure added value.

Philip Morris gained in October, after a Q3 earnings beat driven by more resilient sales of combustible products than anticipated and encouraging progress in heat-not-burn product “iQOS” in most of its markets.

B3, a vertically integrated exchange that dominates the Brazilian trading and clearing market for financial products was one of the portfolio’s strongest contributors. It benefits from high margins that appear sustainable, given the lack of notable competitors. We believe B3’s dominant market position and economies of scale lend the firm an almost unassailable edge in cash generation, margins and returns.

Asian tech stocks were sharply lower in the month and Tencent was one of the portfolio’s weakest positions. Tencent continues to contend with regulatory constraints preventing new game approvals and the monetization of existing games. However, we remain of the view that once the suspension of approvals is eventually lifted, the opportunity for revenue generation from monetized games remains significant.  

Japanese media and staffing company, Recruit was a weaker performer despite recent results confirming very strong sales growth driven by its recruitment platform, Indeed. Following a particularly strong period of performance, investors seemed to take profits amidst the market volatility.   

 

Market Outlook

The rise in global equity markets has primarily been attributable to continued corporate earnings momentum and a benign economic backdrop. This has been especially true for the US. As we approach the end of 2018, however, we believe this earnings expansion and economic growth may moderate somewhat. Numerous geopolitical uncertainties also remain in play to further support the case for a more cautious approach to equities in 2019. With a more volatile backdrop likely, a selective approach will remain paramount. This is especially true as we may be entering a period in which relative returns are more attractive than absolute returns.

The strength and length of the current US bull market—the longest on record—has been backed by resurgent corporate profitability, which has reached historically unprecedented levels. Within the S&P 500 Index1, earnings per share2 have risen by almost three times over the past 10 years. Valuations remain elevated, but have been supported by strong earnings growth and margins near all-time highs. That being said, investor tolerance for disappointment remains low.

The ongoing US-China trade war remains a major concern with wide-reaching ramifications. It remains unclear how aggressive the administration is willing to be and seems as though de-escalation will likely only begin when there are visible signs of economic, market, or political pain. Understanding the potential effects remains challenging for investors as a full blown trade war would lead to a major weakening of business sentiment and investment and disruption of supply chains.

Another factor in the US equity market’s strength has undoubtedly been a combination of US dollar strength and fiscal expansion, represented by the tax cuts imposed by the Trump administration. We believe these tailwinds will likely weaken in the coming 12 months as the benefits of the extensive tax-cuts will be more challenged by year-over-year comparisons. Further, the Fed’s tendency to telegraph its rate hikes means that much, if not all, of the Fed’s intended normalization is already reflected in the dollar’s valuation. Momentum in the greenback has recently shown signs of slowing, and may continue as other major economies also begin to consider tighter policy.

In Europe, the same concerns of peak margins and peak labor are not present. Even excluding banks, margins look thin relative to both history and the US market. Given growth in Europe has been slower than in the US and its labor market remains materially weaker, this is intuitive, but we believe expectations in Europe remain quite low and modest improvement would be quite supportive. However, ongoing Brexit concerns and fiscal strains in Italy continue to support the risk premium in Europe.

Overall, while we believe that fundamentals warrant an optimistic view for equities, we believe investors should expect a more muted period for returns and for bouts of volatility to become more common.

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Quarterly Fund Outlook & Commentary
Investment Strategist Jonathan Mackay

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

Earnings per share is the projected growth rate in earnings per share for the next five years.

Indices are unmanaged and not available for direct investment.

 

Important Risks: Investing involves risk, including the possible loss of principal. There is no guarantee a fund will achieve its stated objective. 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 and economic developments. These risks may be greater for investments in emerging markets. ● Small- and mid-cap securities can have greater risks and volatility than large-cap securities. ● The consideration of certain ESG factors may limit the number of investment opportunities available to the Fund, which may lead it to underperform funds that are not subject to such criteria.

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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