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Hartford Schroders International Stock Fund

January 2019 Monthly Update

Performance (%)
% (as of 1/31/2019)
Average Annual Total Returns % (as of 1/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I 6.64 -11.87 8.19 3.46 9.64 7.26
BENCHMARK 7.56 -12.58 9.59 3.11 8.35 ---
Morningstar Foreign Large Blend Category 7.15 -12.80 7.06 2.45 7.79 ---
Performance (%)
% (as of 12/31/2018)
Average Annual Total Returns % (as of 12/31/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I -12.31 -12.31 3.91 1.13 7.96 7.07
BENCHMARK -14.20 -14.20 4.48 0.68 6.57 ---
Morningstar Foreign Large Blend Category -14.59 -14.59 2.55 0.12 5.84 ---
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

Global equities rose in January 2019. Economic data continued to indicate a broader trend of moderation, with Italy notably slipping into recession and Chinese economic growth at its slowest since 1990. However, optimism that US-China trade relations could soon thaw, as well as increasingly dovish messaging from the US Federal Reserve (Fed), improved risk appetites. Numerous companies reporting quarterly earnings have largely been striking a more cautious tone with their guidance statements reflecting the increasingly challenging environment.

All major regions and areas of the market gained, with more cyclically exposed areas generally posting the most significant advances. Eurozone equities bounced back partly due to the positive news on trade, but also European Union (EU) proposals for a zero-tariff trade deal with the US on industrial goods, including cars, contributed. A softening of the US dollar supported emerging market (EM) performance, while in Asia, only India failed to close higher (due principally to growing fiscal concerns).

 

Performance Review

The Fund (Class I Shares) returned 6.64% in January, underperforming its benchmark, the MSCI ACWI ex USA Index, which returned 7.56%. By sector, communication services, consumer discretionary, and healthcare detracted the most. This was partially offset by stronger performance in our consumer staples holdings. Regionally, our United Kingdom (UK) and EM holdings lagged the most, while European names were more supportive.

HDFC Bank LTD pulled back in January after a particularly strong close to 2018. We continue to view HDFC as among the best banking franchises globally. The firm boasts industry-leading innovation and customer service combined with strong cost and risk management. This has created a virtuous circle leading to sustainable, supernormal growth and returns in a significantly underpenetrated market. Its focus on digitization is translating to lower operating expenses. While financial results remain impressive, our focus on sustainability research helped identify reports of “poor work-life balance” and “sales pressure” on the company’s Glass Door employee reviews. We have held several recent engagements with management to better understand the issues and the management response. We remain pleased with the management team’s efforts to address these issues and concerns and will continue to monitor closely.

Ocado Group plc, a leading provider of online grocery delivery, was a supportive position. Positive momentum in the shares in December following its Q4 trading update continued into January, with the stock finding further impetus from media reports that the company was in talks with Marks & Spencer Group plc regarding a deal for its online grocery and distribution business. This potential deal and other strategic partnerships recently announced continue to serve as endorsements to the strength of Ocado’s business model and proprietary technology in managing online grocery fulfillment centers. Ocado offers the lowest-cost operating model in the space, making it the partner of choice for managing fulfillment centers. We believe that that the meaningful cost and time savings offered by Ocado’s solutions will continue to drive major strategic partnerships. Furthermore, as the penetration of online grocery shopping continues to grow across most developed markets, we expect the rising number of completed fulfillment centers to deliver wider profit margins for the group. More recently, a major fire in early February significantly damaged one of its large distribution centers, which accounts for 10% of the company’s warehouse capacity. We continue to like the company’s long-term growth story but recognize that short-term sales growth may be impaired as they work to increase capacity elsewhere.   

 

Market Outlook

For some time now, signs have been emerging that markets are entering a new phase. While the US economy remains generally benign, the Fed has grown far more cautious, signalling expectations for weaker growth and a more dovish outlook for monetary policy. Data in China, the Eurozone, and Japan are already more overtly sluggish. At the same time, global monetary policy is still tightening. Central banks are stepping back from their long-standing market support, while corporate debt remains elevated.

Arguably, the sharp correction at the end of the year—particularly evident in high growth areas of the market—means that valuations now reflect a higher level of caution. The strong market rally seen in January provided some evidence of the market finding valuation support, and early Q4 earnings announcements in January were frequently met with positive share price reaction for all but the most disappointing results. Despite the market’s strong recovery in January, stocks, in aggregate, continue to trade close to long-term averages.

However, the market remains delicately poised, with notable concerns still very much apparent. Higher borrowing costs are not the only risk to profitability and valuations. Other input costs, notably labor, energy, and other business costs are generally rising. At the same time, a trend toward protectionism is potentially creating less efficiency and less certainty across supply chains. It is an unusually difficult environment for companies to plan, and introduces additional pressure on margins.

Consequently, we anticipate ongoing risk of earnings disappointment in the year ahead. The aggressive trade stance that the US has struck in recent months remains a significant threat to smooth economic function and the frictionless flow of goods around the world.

Identifying the companies we believe are best prepared to weather­—or indeed prosper—from the new phase of the business and economic cycle, will require an active approach and thorough understanding of company fundamentals. We are generally cautious toward companies with high debt levels or those that cannot raise prices in order to offset the higher costs they face. We retain our quality bias and are aiming to take a high active share in firms we believe have stable growth profiles and healthy balance sheets.

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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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