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Hartford Schroders International Stock Fund

February 2018 Monthly Update

Performance (%)
% (as of 3/31/2018)
Average Annual Total Returns % (as of 3/31/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I -0.68 18.17 6.44 7.03 3.78 7.65
BENCHMARK -1.18 16.53 6.18 5.89 2.70 ---
Morningstar Foreign Large Blend Category -0.85 15.40 5.56 6.09 2.36 ---
Performance (%)
% (as of 3/31/2018)
Average Annual Total Returns % (as of 3/31/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I -0.68 18.17 6.44 7.03 3.78 7.65
BENCHMARK -1.18 16.53 6.18 5.89 2.70 ---
Morningstar Foreign Large Blend Category -0.85 15.40 5.56 6.09 2.36 ---
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.

 

Performance Review

In February, global equities saw their most volatile month of trading in nearly three years as investors took profits before piling back into equities on supportive fundamentals. The correction was instigated by January’s higher-than-expected US wage inflation data which raised concerns that potentially weaker productivity amid higher wages could pressure corporate margins. Investors also seemed concerned about the high levels of corporate debt coupled with potentially tighter credit conditions. This put bond markets under pressure as market participants priced in a more proactive Federal Reserve (Fed), and equities followed suit.

Despite the abrupt shift in sentiment, fundamentals remained intact. Economic growth and earnings remained supportive and stocks bounced from their lows mid-month. With rate pressures particularly high on the investor agenda, more cyclical stocks—with the exception of energy names—outperformed rate-sensitive bond proxy sectors. While all sectors finished the month down, technology, consumer discretionary, and financials stocks were the most resilient amid the increased volatility.   

 

Portfolio Positioning

The Fund (Class I Shares) returned -6.41% in February, underperforming its benchmark, the MSCI EAFE Index, which returned -4.51%%, due to stock selection. In particular, our positions in the consumer discretionary, telecoms, and industrial sectors detracted. Our overweights in the information technology and consumer discretionary sectors contributed modestly to relative returns. By region, the portfolio exposure to Europe and the UK weighed most notably on performance. This was partially offset by our positions in Canada and Asia ex Japan.

As far as specific holdings, our position in SMC declined after its Q3 results failed to match the market’s elevated expectations. Fundamentally, we see SMC as strongly geared into the rising phase of the capital expenditure (capex) cycle with an undemanding valuation. The firm continues to capture market share by generating faster organic growth than peers. We continue to engage with management on its capital allocation policies to ensure that its cash heavy balance sheet is utilized more efficiently to drive shareholder returns, which we believe could also lead to a rerating of the stock. Our holding in Shiseido rallied in February after the firm raised its FY17 profit guidance. Much of the improvement has been driven by Shiseido’s drive towards the high growth China market and duty-free sales. The company’s new CEO is effecting positive cultural change and the firm’s clear plan to manage costs in the US business while adjusting its marketing strategy to appeal to a younger audience–a key aspect of our thesis–is progressing.   

 

Market Outlook

The recent market correction was driven predominantly by sentiment and technicals rather than any meaningful deterioration of fundamentals. With valuations at elevated levels, investors have become increasingly concerned about the potential for more restrictive monetary policy to slow global growth. Following the release of the January US employment data which indicated an acceleration of average hourly earnings to 2.9%, the highest level since 2009, fears of increased inflationary pressures driving monetary policy became more acute. The sharp fall in indices was further exacerbated by extreme technical selling pressure from low-volatility and momentum strategies being forced to unwind positions. 

We believe that emerging inflationary pressures are likely to be a key market focus all year. We expect a modest rise in inflation, consistent with a strong labor market and output running above trend in the US, Europe, and Japan. However, we do not expect inflationary pressures to become extreme and we expect a rational and measured response from central banks. 

Valuations in many regions have become more demanding on a cyclically adjusted basis on the back of the continued strong equity market performance. We have been cognizant of the increased risk that relatively high valuations bring to equities yet our stance is constructive for the following reasons:

  • The macroeconomic backdrop is supportive, with synchronized global growth contributing to an environment of strong top-line growth and company profitability.
  • Earnings revisions are supportive: corporate earnings, in aggregate, continue to beat expectations significantly, and company management guidance remains upbeat.
  • Secular drivers of subdued inflation remain in place, such as ever-increasing price transparency and widespread disruption of industry incumbents.
  • Other signs of an approaching cyclical peak, such as rising credit spreads, are benign.

Our medium-term outlook therefore remains substantially in place. While risk aversion and the rise in volatility may put the market under further pressure in the short term, strong company operating and financial performance should provide fundamental support. We fully expect to see strong positive earnings growth through 2018 and, all else equal, this should drive the market higher. However, we will continue to carefully monitor indicators of credit risk, inflation, and valuation extremes for threats to this core scenario.

 

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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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