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Hartford Schroders International Stock Fund

August 2019 Monthly Update

Performance (%)
% (as of 9/30/2019)
Average Annual Total Returns % (as of 9/30/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I 11.97 -1.36 7.03 3.71 5.70 7.26
BENCHMARK 11.56 -1.23 6.33 2.90 4.45 ---
Morningstar Foreign Large Blend Category 12.07 -2.14 5.47 2.85 4.48 ---
Performance (%)
% (as of 9/30/2019)
Average Annual Total Returns % (as of 9/30/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I 11.97 -1.36 7.03 3.71 5.70 7.26
BENCHMARK 11.56 -1.23 6.33 2.90 4.45 ---
Morningstar Foreign Large Blend Category 12.07 -2.14 5.47 2.85 4.48 ---
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 retreated in August as perceived safe haven assets outperformed amid escalating worries over trade and global growth. Investor sentiment weakened as yields on US 2-year Treasuries rose above those on the 10-year bond, an anomaly that is often a signal of a forthcoming recession. The German and UK economies contracted in Q2 and economic activity indicators across the globe continued to highlight a visible slowdown. The US Federal Reserve did cut rates—as expected—but the central bank's measured approach left investors unconvinced it would stave off a more severe slowdown. The US-China trade dispute remained an additional source of investor concern despite showing some brief signs of de-escalation.

Most equity markets struggled through August with Asian stocks—excluding Japan—and emerging markets (EM) particularly weak. US, Japan, and European bourses also fell, but selling pressure was more muted. The more cyclical areas of the market were generally harder hit, with defensive "bond proxy" sectors such as utilities and consumer staples more resilient.

 

Performance Review

The Fund (Class I Shares) returned -2.57% in August, outperforming its benchmark, the MSCI ACWI ex USA Index, which returned -3.09%. Industrials, utilities, and IT detracted the most; positions in communication services, energy, and healthcare were additive. Holdings in continental Europe detracted the most while EM added to the relative return.

Nestle S.A. contributed positively in August after reporting faster-than-expected revenue growth in the first half of 2019, driven by especially strong product demand in Brazil and the US. Firm CEO Mark Schneider also provided positive guidance, reiterating expectations for positive momentum in its newly revitalised product suite to persist. The company continues to manage its brand portfolio proactively, focusing investment on high-growth categories and addressing low-growth businesses through product innovation and divestitures. The re-focused product range is expected to generate better pricing power which, combined with an extensive cost-cutting scheme, should expand group level margins materially by 2020.

Our position in GEA Group AG delivered strong performance as it reported robust Q2 order growth for its food processing equipment, while the increase of service sales in its revenue mix is driving more sustainable margins. We continue to see GEA as a longer-term turnaround story but are encouraged by recent headway and the clearly defined steps for further improvement outlined by the new management team. The company enjoys a strong balance sheet and its initiatives around managing costs in the sales and procurement processes will help deliver better margins and cash generation.

EssilorLuxottica S.A. was a stronger position in August after the world's largest lens maker reported strong H1 results and announced its majority acquisition of GrandVision, a major global optics retailer. Following the merger of Essilor and Luxottica, the combined firm remains well placed to deliver strong organic performance and synergies. The GrandVision deal is further evidence of its focus on strategic mergers and acquisitions as it will create further synergies and cost optimization, while expanding their retail reach. The company already enjoys a dominant competitive position and healthy free cash flow growth. However, we remain more cautious about the company's level of debt and valuation and will continue to monitor the position closely.

Philip Morris International, Inc. (PMI) detracted in August. The cigarette-maker's proposed merger with Altria prompted a sell-off as investor sentiment weakened on concerns over potential US regulatory and litigation issues. Analysts also questioned the rationale for the proposed tie-up, suggesting that the combined group was unlikely to trade at the same premium as PMI previously enjoyed. We believe that PMI remains well-positioned on a stand-alone basis, with strong international growth in its "heat-not-burn" IQOS product and longer-term margin progression. However, the pace of innovation within the industry remains quite disruptive and the competitive landscape warrants close watching. Additionally, we do not view the potential deal with Altria favorably and will monitor the situation closely.

Our position in Danish wind turbine supplier Vestas Wind Systems A/S detracted in August. The company reported a sharp decline in second-quarter profits as the global economic slowdown and escalating trade tensions starts to weigh on the global renewable energy supply chain. However, we remain confident of the company's long-term growth potential given its competitive positioning within the growing renewable energy market. With onshore wind projects now offering among the most cost competitive power generation we expect the order backlog to remain robust, with earnings further supported by services business with strong growth and healthy margins.

Recruit Holdings Co., Ltd. detracted in August. The global recruitment and human resources company reported weakness in its staffing division when it unveiled its quarterly results. The Tokyo-based company, which operates the Indeed and Glassdoor job websites, downgraded its full year 2019 revenue outlook for its overseas operations as the outlook in Europe remains uncertain. However, despite the softness in overseas staffing, the domestic staffing business remains solid and the Indeed platform continues to generate very strong sales growth. We believe the company remains well positioned and recent weakness in the share price offers an opportunity to add.   

 

Market Outlook

We maintain a cautious view on global markets amid a challenging backdrop. Global economic momentum is weakening with earnings expectations moderating as a consequence. Expansion broadly continues, although margins may be 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, as interest rate expectations have come full circle since late last year.

Even so, 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, there are currently many listed companies struggling under a combination of relatively high debt and a high dividend pay-out ratio, which ends up constraining their ability to invest and weakens their business for the long term. We remain invested in companies with significantly stronger balance sheets than the market average. This gives our holdings the option to be able to react decisively to an uncertain market environment, investing in their own businesses or making acquisitions when opportunities arise.

Business confidence and investment remains under pressure from the unclear outlook for trade terms between the US, Europe, and China. It remains far from certain that the two sides can bridge their differences, and so the spectre of further tit-for-tat tariffs and subsequent volatility remains.

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 the evolving competitive landscape.

 

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.

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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