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Hartford Schroders International Stock Fund

May 2018 Monthly Update

Performance (%)
% (as of 6/30/2018)
Average Annual Total Returns % (as of 6/30/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I -2.04 9.27 5.86 6.85 3.67 7.55
BENCHMARK -3.77 7.28 5.07 5.99 2.54 ---
Morningstar Foreign Large Blend Category -2.96 6.29 4.41 5.89 2.31 ---
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.

 

Performance Review

May was a volatile month for global equities, as investors’ anxiety about the length of the cycle persisted and geopolitical developments weighed on risk appetites. European markets were particularly weak as the new coalition government in Italy proposed a number of measures that were seen by the market as fiscally irresponsible and potentially economically harmful. Emerging markets were also lower with Brazil, Mexico, and Turkey posting the sharpest losses. The US withdrew from the Iran nuclear deal early in the month, before shifting to a more combative international trade stance. However, US macro data remained solid, particularly relative to international markets, putting upward pressure on the US dollar and supporting further outperformance of non-US markets. 

The ongoing strength in fundamentals remained supportive as first quarter earnings were strong and earnings per share (EPS) forecasts were supportive of valuations. The technology sector posted the strongest performance on the back of solid earnings, while the telecommunications, financials, and utilities sectors were the biggest laggards. Muted inflation data weighed on financials as did underwhelming earnings reports, particularly from the insurance sector. Overall, cyclical stocks tended to outperform defensives and growth stocks outperformed value.

 

Portfolio Positioning

The Fund (Class I Shares) returned -0.53% in May, outperforming its benchmark, the MSCI ACWI ex USA Index, which returned -2.31%, due to stock selection. By sector, our positions in the technology sector added materially to relative returns, as did our healthcare holdings. Our consumer discretionary stocks detracted slightly. Regionally, it was stock selection in emerging markets and Europe that drove the outperformance, while Asia ex Japan detracted somewhat.

Video streaming service iQIYI performed strongly again in May, maintaining momentum from strong results released in April; shortly after its IPO. iQIYI--majority-owned by Chinese search company Baidu--is generating solid subscriber growth through differentiated content, with recent results highlighting >70% year over year growth in paid subscribers. While the company operates in an extremely competitive industry with rising content costs, its management team has continued to prove their capability in content selection, development, and innovation—supporting its leading position within the space. Our position in Intesa Sanpaolo detracted in May due to Italy’s latest political events. While the risk/reward balance has certainly become less-favorable in the short term, Intesa continues to deliver robust operating performance, befitting their status as one of the best-managed banks in the region. Q1 results confirmed the bank’s ongoing improvement, with the company delivering on cost control, improvement in loan losses and operating performance across its divisions more broadly. That being said, we have been trimming our position to account for the current risk/reward balance.   

 

Market Outlook

Looking ahead, we expect earnings growth will continue to be strong in 2018, driven in part by the US tax cuts and rising share buybacks. However, there are numerous examples of corporate margin pressures emerging, and we believe earnings revisions more broadly are likely peaking.

We are moving into a new phase of the business cycle, in which strong economic growth increases the upside risks to inflation and likelihood that central banks become less accommodative. After nearly a decade of exceptionally low interest rates, there is plenty of complacency in equity markets about the downside risks to equity owners from high financial leverage. Most sectors show a rising trend in debt levels and are at, or close to, the highest levels of leverage from the past 10 years.

We are generally cautious toward companies that have high debt levels or do not have adequately strong pricing power to offset the higher levels of cost inflation they will face. There are areas that look more vulnerable overall—such as the consumer and healthcare sectors—but we recognize that pricing power varies widely within those sectors when looking at individual companies and selectivity remains particularly important.

After years of spending restraint, improving corporate confidence and higher manufacturing utilization warrants a positive view on the capital spending cycle. We maintain exposure to areas likely to benefit, such as factory automation, construction plant & equipment, and electrical infrastructure. This view also supports our materials exposure, which is focused more on materials also benefitting from structural trends, such as electrification of automotive powertrains, rather than traditional “bulk” commodities.

Consumer discretionary stocks are well-represented within our portfolio. The competitive landscape in content and media consumption is changing rapidly and represents a rich source of opportunity—particularly for social media, music, and gaming. Despite optically high valuations, the ability of a number of companies to expand their business activities into adjacent areas and/or monetize content supports a long-term growth trajectory that is, in a number of instances, materially under-estimated by the market.

We believe that the current period of disruptive change across many industries will be a powerful source of investment performance. There are many exciting disruptor companies that comprise our core portfolio holdings and have generated strong performance. However, the consistent inability of the stock market to factor in the true long-term growth prospects of high-quality growth businesses continues to make many of these stocks attractive. It remains critical for businesses and investors alike to ensure that they are on the right side of the disruption, and we are focussed on identifying those businesses that are willing to invest for the long-term, change, and create sustainable growth business models.

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Quarterly Fund Outlook & Commentary
Product Manager John Chisholm, CFA

 

 

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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