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Hartford Schroders International Stock Fund

February 2019 Monthly Update

Performance (%)
% (as of 3/31/2019)
Average Annual Total Returns % (as of 3/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I 11.04 -1.96 8.49 3.59 9.93 7.35
BENCHMARK 10.31 -4.22 8.09 2.57 8.85 ---
Morningstar Foreign Large Blend Category 10.23 -5.05 6.62 2.07 8.42 ---
Performance (%)
% (as of 3/31/2019)
Average Annual Total Returns % (as of 3/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I 11.04 -1.96 8.49 3.59 9.93 7.35
BENCHMARK 10.31 -4.22 8.09 2.57 8.85 ---
Morningstar Foreign Large Blend Category 10.23 -5.05 6.62 2.07 8.42 ---
SI = Since Inception. Fund Inception: 12/19/1985
Operating Expenses:   Net 0.85% |  Gross  0.85%
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 made further gains in February. The end to the US government shutdown and the suspension of increased tariffs on $200 billion of Chinese goods—slated for March 1—were among the principal supports for risk appetites. European stocks were also lifted by the suggestion that the European Central Bank could restart its targeted long-term refinancing operations. Earnings reports also remained largely supportive as companies reported more positive earnings surprises than negative. In aggregate, most companies provided lower forward guidance, but markets had already seemingly discounted much of the anticipated slower growth in the fourth quarter.

Gains were broad based across most sectors. Information technology, healthcare, and industrial stocks led the way, reflecting both stronger earnings progress than the broader market, and the recovery in share prices following the extensive selloffs across these sectors in Q4. Regionally, the signs of progress in US-China trade talks buoyed Asia ex Japan, with Chinese stocks further boosted by MSCI's plans to increase the weight of China-listed shares in its benchmark indices. Japan was weaker, with corporate results season generally interpreted negatively, combined with a cautious outlook in light of its sensitivity to global growth.

 

Performance Review

The Fund (Class I Shares) returned 2.81% in February due to the positive effect of stock selection. It outperformed its benchmark, the MSCI ACWI ex USA Index, which returned 1.95%. Our positions in communication services and consumer staples contributed the most to relative returns, while materials detracted.

Schneider Electric SE was a supportive position, with its recent results confirming progress on a number of our key thesis points. Company revenues grew ahead of expectations given that the company's cyclical exposure is lower than the market appreciates. Pricing power also remains robust, with its quarterly product price increases two times higher than raw material cost inflation. Capital allocation also improved, with a significant buyback announced and ongoing streamlining of its product portfolio. Schneider remains a balanced global business with diverse exposure to major long-term themes of electrification and power efficiency, as well as digitization and decentralization.

AIA Group Ltd. contributed in February, with the stock lifted by news that its Beijing branch office had been granted approval to begin preparations for the establishment of sales and service centers in Tianjin and Shijiazhuang, Hebei. The development boosts AIA China's potential market size by over 20% and supports our thesis that strong growth in China and Hong Kong should be sustained by AIA's significant scale advantages, supported by solid structural growth trends. It is led by a management team with a great track record on capital allocation, operational excellence, and pursuit of genuine incremental opportunities.

GEA Group AG was amongst the portfolio's weaker positions. In its most recent earnings release, the firm reported softer 2018 profits —attributed to ongoing cost control issues and weaker pricing power due to soft Q4 orders—and issued a profit warning for 2019. GEA's previous management has unarguably failed, on several occasions now, to deliver on its promises to address operational issues and expand margins. We believe that the new CEO Stefan Klebert has the experience and ability needed to correct the previous managements' mistakes. Klebert joins from Schuler, a similar but smaller business, where he worked successfully for eight years. Klebert has already aligned his interests with GEA shareholders by committing to a significant personal shareholding. While the risks involved in integrating new management are not insignificant, we believe that the potential for upside surprise is material from this point. We remain confident in the turnaround potential, but recognize it will take time for delivery and continue to monitor the company's progress closely.

Nintendo Co., Ltd. also detracted. Its Q3 results reported solid profits, beating consensus estimates. Guidance, however, cut full year sales forecasts for its Switch console, while at the same time upgrading forecasts for Switch games. Our investment thesis that software sales, which—alongside growth in China—will be the primary long-term driver of Nintendo's growth and margin expansion, remains intact. Nintendo's digital revenues are comparatively low next to leading peers, EA and Activision, and with profit margins considerably higher from software sales earnings expectations, Nintendo should enjoy a significant uplift. We believe the market remains preoccupied by the Switch hardware lifecycle and is underappreciating the key growth drivers in software and China.   

 

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 US Federal Reserve has recently 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 largely 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 2018—particularly evident in high growth areas of the market—means that valuations now reflect a higher level of caution. The strong market rally seen year-to-date has provided some evidence of the market finding valuation support and reflects increased confidence in the US and China achieving a trade resolution. Despite the market's recent strong recovery, stocks, in aggregate, continue to trade close to long-term averages.

The market, however, 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 from exposed stocks 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.

We believe that identifying the companies 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, 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. 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.

 

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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