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Hartford Schroders International Multi-Cap Value Fund

February 2020 Monthly Update

Performance (%)
% (as of 2/29/2020)
Average Annual Total Returns % (as of 2/29/2020)
Hartford Schroders International Multi-Cap Value  I -13.07 -6.60 0.42 1.13 4.68 3.72
Benchmark -10.38 -0.69 4.15 2.18 4.34 ---
Morningstar Foreign Large Value Category -11.63 -4.48 1.26 0.33 3.42 ---
Performance (%)
% (as of 12/31/2019)
Average Annual Total Returns % (as of 12/31/2019)
Hartford Schroders International Multi-Cap Value  I 18.57 18.57 7.34 5.07 5.94 4.86
Benchmark 21.51 21.51 9.87 5.51 4.97 ---
Morningstar Foreign Large Value Category 18.03 18.03 6.92 4.03 4.19 ---
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 the coronavirus was the main driver of market activity during February. The month began in risk-on mode as global economic data was still modestly improving. Although the coronavirus was increasingly in the headlines, the situation was initially largely isolated in China, and markets held up through a period of cautious optimism that the virus would be contained due to the prompt actions of the Chinese authorities. Sentiment deteriorated mid-month, however, due to the swift rise in cases outside of mainland China, particularly in Korea, Japan, and Italy. As we have observed over the past few years, investors had been pricing in excessive optimism, which meant that equities were already vulnerable to a large correction. The outbreak of the coronavirus acted as the catalyst.

Global equities, as measured by the MSCI All Country World Index,1 fell 8.08% in February. Country performance was uniformly negative, with the exception of China, which recovered slightly from its January decline as infection rates appeared to stabilize and significant policy response was applied. The US market, represented by the S&P 500 Index,2 entered correction territory, down 12.70% from its peak on February 19th, and closed at -8.23% for the month. International markets, as measured by the MSCI ACWI ex USA Index, slightly outperformed the US market, returned -7.90% on the month. The UK was the hardest hit market globally, followed by Japan, while Europe, despite worries that reduced travel and business activity could send the fragile eurozone economy into recession, performed roughly in line with the US, and the Pacific region slightly bettered other developed markets. Emerging markets (EM)—represented by the MSCI Emerging Markets Index3—sold off by less, closing at -5.27.%. Within that was a wide dispersion, however, with Latin America and Europe, the Middle East, and Africa lagging due to their higher exposure to commodities. Asia, helped by China, also lagged, but to a lesser extent. South Korea, with the largest number of coronavirus cases outside of China, as well as Thailand and Indonesia, saw sharp drawdowns. South Africa and Brazil, where currency weakness amplified negative returns, both underperformed. Russia also lagged as crude oil prices fell sharply. The US dollar strengthened on the month, as normally occurs when investors seek safe havens.

From a style perspective, momentum exhibited the best relative performance, with quality, minimum volatility, and growth also outperforming. Value underperformed, while high dividend yield stocks were the laggard despite the backdrop of falling global bond yields. While no sector remained unscathed, the best relative performance was in less economically-sensitive telecommunications, utilities, technology, and real estate. Energy was the biggest pain trade by far (as oil posted a double-digit correction on deteriorating demand outlook), followed at some distance by materials, industrials, and staples.

The market correction in February was unusually swift, with US stock markets experiencing one of the sharpest sell-offs in history, led by energy and financials. We note that market breadth did pick up on some of the more significant down days, when the largest and most liquid stocks served as a source of funding, which allowed our value-oriented approach to outperform in some of those most extreme moments, but overall market breadth has still remained surprisingly narrow given the size of market moves, which we attribute to the continued performance of popular growth stocks and the crowding into defensives. This presents a headwind for a more diversified approach.

While the direct impact of the coronavirus fears on a number of exposed areas has been quite pronounced, most notably the selloff in commodity-related stocks (particularly oil), industrials (transport), entertainment, luxury goods, semis and autos, there has also been a broader impact via weaker sentiment towards global growth resulting in defensive stocks performing well, particularly those with the perception of being bond-proxies, such as utilities and real estate.

However, despite many of the most crowded and popular growth stocks being very exposed to China, either directly or via their supply chains (e.g., Apple and Microsoft downgrading earnings), they have, for the most part, continued to perform quite strongly over the year to date, some by a considerable margin. In short, the coronavirus has not yet led to a more broad-based rotation in market leadership.    

Performance Review

Hartford Schroders International Multi-Cap Value Fund (IMCV) vs. MSCI ACWI ex USA Index

The Fund (Class I Shares) returned -8.30% in February, underperforming its benchmark, the MSCI ACWI ex USA Index. From an attribution perspective, there were three notable themes throughout the month which, in aggregate, accounted for this lag.

  • The continued outperformance of expensive large-cap growth stocks in EM Asia. The portfolio’s underweight to the BANTs stocks—Baidu, Alibaba Group, NetEase, and Tencent Holdings—detracted an estimated 30 basis points4 (bps), most of which was from not holding Tencent and Alibaba.
  • The direct impact of coronavirus-driven volatility on resources holdings (oil and gas, mining) as well as other industries disproportionately impacted (autos, semiconductors, airlines, luxury goods). Stock selection detracted significantly in European and Australian energy (overweight integrated and exploration and production oil & gas, some -60 bps); Irish, Thai, and Korean banks (overweight), and some media and telecommunications names in Europe (overweight Publicis, Telenor, Proximus). An overweight in Japanese industrials also detracted.
  • The indirect impact of the risk-off move via our exposure to the bond-proxy and other more defensive areas. The portfolio benefitted from positioning in UK staples, as well as an overweight in Hong Kong real estate, but this was offset by positioning in healthcare across several regions, including Europe and Japan, as well as from our underweight in utilities in Europe.

IMCV vs. MSCI ACWI ex USA Value Index5

The Fund (Class I Shares) outperformed the ACWI ex-USA Value Index, which returned -8.54% in February. From an attribution perspective, there were several notable themes that drove performance.

  • The direct impact of coronavirus-driven volatility on resources holdings (oil and gas, mining) as well as other industries disproportionately impacted because of their economic sensitivity. Stock selection detracted more materially in European and Australian energy (overweight and off-index positions) and European, Japanese and EM Asian media and telecom (Publicis, Telenor, and Proximus overweight), and to a lesser degree in EM Asian banks (overweights in Korea, Thailand, underweights in China, Taiwan). Industrials holdings in Japan also detracted (overweight Central Japan Railway). Partly offsetting this was the positive contribution in UK energy, from an underweight to names like Royal Dutch Shell.
  • The indirect impact of the risk-off move via our exposure to the bond-proxy and other more defensive areas. European utilities (underweight or not held) were the biggest negative contributor in this category, together with real estate names not held in China.
  • Stock selection in China, which outperformed all other regions. The portfolio benefitted on the month from positioning in EM Asia consumer discretionary, industrials, and technology (especially overweights in Chinese and Taiwanese online retail, autos, machinery, building products, construction and electrical equipment, semiconductors, and tech hardware).

Portfolio Positioning

We increased our focus on financial strength in our approach to stock selection during 2019, which has assisted in this episode of volatility. Looking ahead, we are stress testing our portfolios in order to take into account a number of scenarios for earnings downgrades for the most exposed stocks, which may lead to some adjustments to positioning. However, we are also being cautious about making material changes so that we do not miss a buying opportunity, particularly if markets overreact in the short run.

Notwithstanding February’s volatility, we would note that many positive drivers are still in place, especially with the ongoing support of central banks. Further monetary stimulus to counteract the coronavirus impact has already been initiated by China, the US, Australia, and several others, and is being discussed by Japan, Europe, and the UK. Fiscal stimulus, from China and now Italy, is also being applied, and other impacted countries may follow suit in due course.

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1 MSCI ACWI is a free float-adjusted market capitalization index that measures equity market performance in the global developed and emerging markets, consisting of developed and emerging market country indices.

2 S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks.

3 MSCI Emerging Markets Index is a free float-adjusted market capitalization-weighted index that is designed to measure equity market performance in the global emerging markets.

4 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.

5 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.

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.