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Hartford Schroders International Stock Fund

June 2019 Monthly Update

Performance (%)
% (as of 7/31/2019)
Average Annual Total Returns % (as of 7/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I 12.82 -2.10 7.96 3.51 6.43 7.33
BENCHMARK 12.23 -2.27 7.20 2.12 5.42 ---
Morningstar Foreign Large Blend Category 11.55 -4.04 5.94 2.07 5.28 ---
Performance (%)
% (as of 6/30/2019)
Average Annual Total Returns % (as of 6/30/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I 14.50 2.50 10.13 3.53 7.63 7.39
BENCHMARK 13.60 1.29 9.39 2.16 6.54 ---
Morningstar Foreign Large Blend Category 13.52 -0.09 8.06 1.93 6.43 ---
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.

 

Market Review

Global stock markets rebounded across the board in June, supported in part by indications that major central banks would ease monetary policy to support economic growth. The US Federal Reserve (Fed) did not cut rates at its June meeting, but its dot plot signals easier policy ahead. Investor sentiment was further buoyed by signs from the G20 Summit in Osaka that US-China trade tensions were thawing. The two countries subsequently agreed to a truce and will resume trade negotiations.

The S&P 500 Index1 reached a record high, with the materials and IT sectors among the strongest performers, but all sub-sectors in the US market gained. Eurozone shares also bounced back with materials and consumer discretionary stocks among the top gainers. In a strong month for Asia ex Japan equities, South Korea was also led higher by robust gains in the IT sector. Chinese equities climbed amid hopes that policymakers would introduce further stimulus measures to shore up growth.

 

Performance Review

The Fund (Class I Shares) returned 6.81% in June, outperforming its benchmark, the MSCI ACWI ex USA Index, which returned 6.02%. Financials and consumer discretionary contributed the most to the positive return, while communication services and materials detracted. Regionally, continental Europe contributed the most to relative returns while the United Kingdom detracted.

AIA Group Ltd. was a stronger position, as it grew new business by 18% over the first quarter of 2019 and also reported an increased profit margin. In line with our investment thesis, the strongest gains were made in its China operations. We believe this strong growth in China and Hong Kong should be sustained by AIA's significant scale advantages, supported by solid structural growth trends. Furthermore, the company has begun preparatory work on the new sales and service centers in Tianjin and Shijiazhuang, Hebei, which we expect to be major drivers of new business going forward. It is led by a management team with a great track record on capital allocation, operational excellence, and pursuit of genuine incremental opportunities.

Schneider Electric SE contributed strongly in June after the company reaffirmed expectations of positive organic growth in the medium-term. The French multinational reported a successful start to 2019 with strong organic sales growth driven by robust pricing power, cross-selling in its electrical arm and lower cyclical exposure than the market appreciates. In its energy management unit, the US and Canada performed well, with growth expected to continue for the rest of the year. The company expects revenue growth in 2019 to be between 3% and 5%. 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.

Zee Entertainment Enterprises Ltd. was a weaker holding in June. Subscription and advertising revenues were in line with expectations in its recent results. However, the market was concerned about regulatory issues and the impact on advertising revenue from the switch of some free-to-air channels to a subscription model. Zee has invested heavily in new content to boost its television and digital offerings and we continue to see the company as incredibly well positioned to benefit in the long term from India's growing middle class. We expect governance to improve significantly and the company should benefit from a sale of stake to a strategic buyer.

Infineon Technologies AG detracted after the German chipmaker paid $9 billion to acquire relatively unknown US-based Cypress Semiconductor in a bid to expand its capabilities into autos and internet technologies. The premium paid for the acquisition was considered too high by many in the market which, together with its exposure to the Chinese car market amid heightening trade tensions, led to selling pressure. The company also reported flat Q2 earnings and said it expected revenue growth of 1% in Q3 due to weaker demand. We continue to believe structural drivers support the long-term growth trajectory of the business. Infineon has done a commendable job pivoting away from its legacy reliance on home into autos/industrial, and is well-positioned in the fast-growing silicon carbide market, which is a key component in enabling electric vehicle battery producers to maximize their driving range and minimize cooling requirements.   

 

Market Outlook

We maintain a cautious view on global markets given macro risks and softening fundamentals. Global economic momentum is weakening—with earnings expectations moderating as a consequence—but expansion broadly continues, although margins are facing increasing headwinds. Additionally, prolonged policy uncertainty continues to weigh on business investment and sentiment. Valuations, although relatively full in aggregate, are not egregious. Ongoing policy support from major central banks has been confirmed rhetorically if not in action.

Interest rate expectations have come full circle since late last year. In December, consensus expectations were for two Fed rate hikes in 2019. Two to three months ago, this had dropped to zero. Now consensus is forecasting rate cuts. The European Central Bank has suggested that renewed stimulus measures remain on the table if inflation fails to pick up. The Bank of Japan has also committed to extending its low rates until at least 2020.

We remain concerned about the complacency around financial leverage amid low interest rates. Bond-proxy equities have moved higher as discount rates have fallen again. With yield-seeking investors funnelling into bond proxy stocks, we are increasingly observing dividend payers with significant leverage and relatively weak financials refusing to cut their dividend payment for fear of losing their investor base.

Business confidence and investment remains under pressure from the unclear outlook for trade terms between the US, Europe, and China. While the G20 Summit meeting in June brought a respite and commitment from the US and China to resume talks, it is far from certain that the two sides can bridge their differences, and so the specter of further tit-for-tat tariffs remains. It is also quite possible that the US will impose tariffs on EU auto exports later in the year, further complicating relations between the US and EU.

While earnings expectations have come down in 2019, consensus forecasts continue to point to expectations for a second half acceleration. If this fails to materialize, there is increased risk of selling pressure, with "growthier" names likely more vulnerable. The high levels of debt held by many companies, particularly if increased at the top of the economic cycle without a credible plan to pay off the debt, could also leave a number of stocks vulnerable.

There will inevitably be a number of companies that find themselves ill-equipped to deal with a tougher economic environment. Our focus remains on choosing stocks with strong return-on-capital, resilient balance sheets, and good cash flows. It is also increasingly important for companies to have elements of pricing power and self-help as companies dependent on macro support alone are unlikely to deliver amid the slowdown. We expect companies with these positive characteristics are not only more resilient, but will retain greater flexibility to adapt to change in a shifting competitive landscape.

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

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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