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Hartford Schroders International Multi-Cap Value Fund

March 2020 Monthly Update

Performance (%)
% (as of 4/30/2020)
Average Annual Total Returns % (as of 4/30/2020)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Multi-Cap Value  I -21.54 -17.01 -4.21 -1.58 3.07 2.90
Benchmark -17.55 -11.51 -0.25 -0.17 2.89 ---
Morningstar Foreign Large Value Category -22.18 -17.51 -4.40 -2.88 1.66 ---
Performance (%)
% (as of 3/31/2020)
Average Annual Total Returns % (as of 3/31/2020)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Multi-Cap Value  I -27.83 -21.89 -6.28 -2.18 2.20 2.29
Benchmark -23.36 -15.57 -1.96 -0.64 2.05 ---
Morningstar Foreign Large Value Category -27.31 -21.11 -6.01 -3.18 0.81 ---
SI = Since Inception. Fund Inception: 08/30/2006
Operating Expenses:   Net 0.87% |  Gross  0.87%
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 Multi-Cap Value Fund. If Class I fees and expenses were reflected, performance would have differed. SI performance is calculated from 8/30/06.

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.

 

Market Summary

The spread of COVID-19 and its far-reaching impact on economic and social activity in all parts of the world continued to be the main driver of investor sentiment during March. In addition, a stand-off between Saudi Arabia and Russia and consequent breakdown in the Organization of Petroleum Exporting Countries (OPEC) supply restraints battered oil markets, all the more so because it coincided with a collapse in demand.

The direct impact of the COVID-19 fears on a number of exposed areas was very pronounced, most notably the significant selloff in commodity-related stocks (particularly oil), transport, leisure, luxury goods, semis, and autos. Indirectly, via the impact on growth and interest rates, the financials and cyclical sectors such as materials and industrials were also hit hard. Finally, there was a broader impact via weaker sentiment toward global growth, resulting in defensive stocks such as healthcare and consumer-staples companies performing well on a relative basis.

The violent market correction has not yet led to a more broad-based rotation in market leadership, as many of the most crowded and popular growth stocks have continued to outperform quite strongly over the year to date, some by a considerable margin. From a style perspective in international markets, quality, momentum, and minimum volatility exhibited the best relative performance, with growth also outperforming. High dividend yield stocks lagged on a relative basis, despite the backdrop of falling global bond yields, but value remained the chief laggard.

We note that while market breadth did pick up on some of the more significant down days, it remained surprisingly narrow given the size of market moves. We attribute this to the continued performance of the largest stocks and the crowding into the more defensive areas. This presents an ongoing headwind for our more diversified approach.

    

Performance Review

The Fund (Class I Shares) returned -16.98% in March, underperforming its benchmark, the MSCI ACWI ex USA Index, which returned -14.48%. The Fund did outperform the MSCI ACWI ex USA Value Index,1 which returned -18.25%. In this context, it is worth noting that the spread between the MSCI ACWI ex USA Growth2 and Value indices remained high, at 729 basis points (bps)3 in favor of Growth.

Against the MSCI ACWI ex USA Value Index, the positive contributions to portfolio performance have been broad-based, reflecting the Fund’s focus on higher-quality companies (financial strength and stability in particular). The biggest contributors to outperformance have been overweights and off-benchmark exposures in European and Japanese healthcare (pharmaceuticals) and wireless and integrated telecom. Significant underweights to European and Australian banks also contributed, although the positive impact was partially offset due to overweights in a number of Canadian life and health-insurance names. We are very selective within this sector, given our focus on balance-sheet strength, but these companies have clearly been penalized due to their sensitivity to lower interest rates and market volatility, as well as the broader exposure to economic growth. Other significant contributors were overweights and off-index exposures in Japanese industrials (transportation infrastructure), materials (paper, chemicals), and tech hardware, as well as in European business software and IT services.

Several areas detracted, including overweights and off-index positions in UK homebuilders, and stock selection in energy, where the benefit of underweights to Canadian and Latin American oil and gas was offset by a drag from our overweights to names in Australia and stock selection in European and UK names. While we focus the portfolio on attractively-valued and better-quality oil and gas companies, the energy price collapse weighed on returns across the industry.

Against the MSCI ACWI ex USA Index, for the month of March, the biggest detractors have been overweights to consumer discretionary names in the UK (homebuilders), as well as stock selection in this sector in Japan (autos, durables) and Europe. Our underweights to expensive staples, mainly home products and food and drink in Europe/UK/Japan, also detracted. In technology, underweights to the likes of Samsung and Taiwan Semiconductor Manufacturing Co., as well as similarly expensive hardware and semiconductor names in Japan and Europe, were a drag on relative performance. Results in the energy sector were mixed—while we have only a small energy overweight to the benchmark, the losses from our overweights in European and Australian energy offset the benefit of underweights in Canadian and Latin American names. Finally, not holding Tencent and Alibaba, on valuation grounds, detracted as, despite the scale of the correction, there has been little evidence so far of a rotation away from the prior market darlings, even though they are an obvious source of liquidity.

On the other hand, in financials, we saw strong contributions to performance from our underweights to weaker banks in Australia and Latin America, and good stock selection in emerging-market (EM) Asian banks; however, this was partially offset by a drag from overweights to a number of Canadian insurance companies. Other areas supportive of performance were Japanese industrials (transportation infrastructure) and wireless/integrated telecom.

 

Portfolio Positioning

During the market turbulence of March, we cautiously made incremental changes to the portfolio, taking advantage of buying opportunities. The quality bias in the portfolio was a considerable support to relative performance over the period. The focus on value and quality, as the two key drivers of long-run equity returns, offers diversification during times of market stress due to the more defensive nature of higher quality companies. The recent correction has been no exception. Stocks with superior financial strength (particularly robust balance sheets), greater stability in their earnings, and robust governance standards clearly outperformed.

Our investment team had already increased its focus on financial strength during 2019, most notably by selling selected stocks with weaker fundamentals (e.g. Japanese banks and small cap energy) and were well positioned in high quality and reasonably priced areas such as healthcare (primarily pharmaceuticals). For some time, we have also been very selective within the deep-value areas (resources, financials), balancing cheap valuations with less robust quality characteristics.

During this volatile period, we continued to focus on selling stocks with weaker fundamentals and identifying opportunities to top up stocks which we regard as “quality on sale.” We also selectively trimmed some of our large healthcare names—such as Roche, Novartis, and Sanofi—when they approached our maximum stock holdings. This highlights the disciplined nature of the process, allowing us to recycle these profits into other high-quality and stable names within healthcare (e.g. Smith & Nephew) or consumer staples (e.g. Unilever and Danone), which became better value during the selloff.

Within more cyclical sectors, we have found several opportunities, both in less-cyclical business and in several deeper-value names with solid balance sheets that were on sale. This has included several tech hardware companies, as the global workforce looked to buy additional PCs and other equipment for remote working. Many of these names are within EM Asia, where we are also seeing more stabilization, especially as the virus cases level off in China, Taiwan, and South Korea, so we do expect that emerging markets may offer earlier and better upside.

On the other hand, we are more cautious on energy names, and continued our due diligence on exposures, given the fall in oil prices resulting from the tensions between Saudi Arabia and Russia. We were already light in this area leading into the quarter, with the Fund underweight energy versus the MSCI ACWI ex USA Value Index, and only slightly overweight versus the broader MSCI ACWI ex USA Index. We continue to focus on the most financially strong, higher-quality names.

We have also continued to review our financials exposure, where we already have a higher-quality bias, in order to better determine the underlying exposure of banks and insurers to the oil and gas sector and to leisure sectors, while also avoiding any banks with any signs of potential liquidity issues. The Fund is 13% underweight financials relative to the MSCI ACWI ex USA Value Index and about 1.5% underweight relative to the MSCI ACWI ex USA Index as well, which is largely due to underweights (or avoidance of) the weaker European names, which are more leveraged and less profitable.

Looking ahead, we expect heightened levels of market volatility to persist and believe that our process works well in providing us the opportunity to lean against the wind when we feel that prices have overreacted, creating opportunities for active management to generate alpha.4

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1 MSCI ACWI ex USA Value Index is a free-float adjusted market-cap weighted index designed to capture large- and mid-cap securities that exhibit overall value style characteristics across developed and emerging market countries, excluding the US.

2 MSCI ACWI ex USA Growth Index is a free-float adjusted market-cap weighted index designed to capture large- and mid-cap securities that exhibit overall growth style characteristics across developed and emerging market countries, excluding the US.

3 A basis point is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security.

4 The measure of the performance of a portfolio after adjusting for risk. Alpha is calculated by comparing the volatility of the portfolio and comparing it to some benchmark. The alpha is the excess return of the portfolio over the benchmark.

Important Risks: Investing involves risk, including the possible loss of principal. 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 or if the Fund focuses in a particular geographic region or country. Small- and mid-cap securities can have greater risks and volatility than large-cap securities. Different investment styles may go in and out favor, which may cause the Fund to underperform the broader stock market.

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.

Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI's express written consent.

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