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Hartford Schroders International Stock Fund

August 2018 Monthly Update

Performance (%)
% (as of 8/31/2018)
Average Annual Total Returns % (as of 8/31/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I -1.21 5.04 8.66 6.30 4.81 7.53
BENCHMARK -3.53 3.18 8.08 5.43 3.44 ---
Morningstar Foreign Large Blend Category -2.62 3.31 6.86 5.36 3.26 ---
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

A degree of risk aversion returned to international markets in August amid escalating US-China trade tensions, Italian political uncertainty, and the currency crisis in Turkey. The combination of events posed headwinds for a number of major regions and, in addition to a stronger US dollar, prompted further declines in emerging markets. More broadly, global equities rose due to ongoing resilience in the US economy and a strong Q2 earnings season, which supported US equity gains. Indeed, the bull market in the US became the longest in history on August 22.

It was a positive month overall for information technology, with a number of large firms delivering better-than-expected results. Performance in other sectors was less exuberant. The energy sector was among the weakest, despite a higher oil price and improving earnings, given uncertainty surrounding China’s inclusion of US crude oil in its tariff-targeted products.

 

Portfolio Positioning

The Fund (Class I Shares) returned -2.24% in August, underperforming its benchmark, the MSCI ACWI ex USA Index, which returned -2.09% in August. Stock selection in the consumer discretionary and industrial sectors contributed, but this was offset by a weaker month for our healthcare and financial positions. Similarly, while our regional exposure in Asia, including Japan, was stronger, our European names detracted.

Whitbread plc contributed strongly, after the company agreed the sale of its Costa Coffee brand to Coca Cola for an enterprise value of £3.9 billion. The sale has been agreed at an attractive multiple and Whitbread’s CEO has indicated that the proceeds will allow the firm to focus on attractive growth opportunities in the UK and Germany for its hotel business, Premier Inn. We believe that consensus continues to underappreciate the value of the hotel franchise even after the recent sale.

Continental AG detracted, after the German tire and auto-parts manufacturer surprisingly warned on profits just three weeks after its Q2 results. Management cut revenue guidance in both automotive and tires, citing slower sales as well as higher costs and warranty claims. Our near-term forecasts for growth have fallen commensurately, but of more concern is the failure of management to anticipate these issues and guide the market accordingly. Despite this, the company is exposed to attractive growth markets and we expect the company to deliver double-digit earnings growth over the next few years with a low balance sheet risk and valuation support.  

 

Market Outlook

Looking forward, we believe global equity markets remain fundamentally supported. Corporate results remain largely positive and economic data remains benign. While some lead indicators have started to roll-over, they are doing so from significant highs and are still, in aggregate, pointing to expansion rather than contraction. Valuations, while still not cheap, now factor in more of the macro risks that have been dominating investors’ attention of late.

However, the number of risks has increased. Market participants have become increasingly nervous about the path of growth. The recent trend toward more protectionist economic policies continues to weigh on sentiment. Additionally, caution over undercurrents of populism in Europe–especially in the case of Italy but also in Spain–has the potential to trigger further bouts of weakness. Italy’s tribulations with its coalition government and investor concern about that government’s fiscal agenda have also induced increased market risk. Furthermore, the gradual tightening of global policy means that upward pressure on bond yields is also building. This introduces a number of factors pertinent to the equity market.

First, the low interest-rate environment has had a major effect on the pricing of risk. Consequently, equities with bond-like characteristics have been valued at a premium. This has started to reverse. Related to this, demand for equities has been supported by the relative attractiveness of equity yields compared to bond yields. This is also starting to reverse and may accelerate as bond yields climb further. Finally, as interest rates and bond yields rise, the consequence for leverage and free cash flows become more pronounced. We remain very cautious toward companies and countries with elevated debt burdens.

Earlier this year, we highlighted our expectations for an acceleration in capital expenditure underpinned by rising CEO optimism, a positive growth outlook, and aging capital stock, among other things. This has started to play out, driving an uptick in investment from depressed levels. Changes to the tax code and expansionary policies in the US have added further momentum and supported a significant improvement in capital expenditure intentions. However, recent trade war fears have weighed on business confidence and currently remain the biggest risk to corporate spending trends.

We remain positively disposed to the broader technology sector, but highlight that the opportunity set is disparate. Following several years of strong performance by the group as a whole, market expectations are high. Valuations do not, in some cases, reflect the risks posed by an earnings disappointment or change in sentiment. However, our approach is always stock specific, and we still believe there are several companies with prospects that warrant our overweight stance. There are numerous examples where multiples that appear high on a trailing, current, or one-year earnings basis, are justified when taking a three- to five-year view on earnings progression.

Overall, while we believe that robust fundamentals warrant an optimistic view for equities, we also think investors should expect periods of volatility to become more common than in 2017.

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Quarterly Fund Outlook & Commentary
Investment Strategist Jonathan Mackay

 

 

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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