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Hartford Schroders International Stock Fund

November 2019 Monthly Update

Performance (%)
% (as of 12/31/2019)
Average Annual Total Returns % (as of 12/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I 25.17 25.17 12.49 6.99 6.22 7.56
BENCHMARK 21.51 21.51 9.87 5.51 4.97 ---
Morningstar Foreign Large Blend Category 21.46 21.46 9.17 5.20 5.05 ---
Performance (%)
% (as of 12/31/2019)
Average Annual Total Returns % (as of 12/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I 25.17 25.17 12.49 6.99 6.22 7.56
BENCHMARK 21.51 21.51 9.87 5.51 4.97 ---
Morningstar Foreign Large Blend Category 21.46 21.46 9.17 5.20 5.05 ---
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 equity markets were broadly higher in November, with the exception of emerging markets, which struggled against a stronger US dollar. Market sentiment continued to be driven by trade negotiations between the US and China. While uncertainty remained high, rhetoric between the two parties suggested a degree of pragmatism and some indications of progress. Global economic data was mixed, but a better-than-expected US GDP print and improved productivity measures in Europe improved sentiment.

Overall, a majority of US companies beat earnings expectations in Q3, reflecting already low expectations. Absolute earnings growth for the coming year looks set to be flat or weaker. During the month, cyclical companies and those most exposed to global trade were stronger performers while defensive bond proxy sectors were relatively weak. Industrials and information technology (IT) generally performed well, while real estate and utilities lagged.

 

Performance Review

The Fund (Class I Shares) returned 2.48% in November, outperforming its benchmark, the MSCI ACWI ex USA Index, which returned 0.88%. Consumer discretionary, industrials, and IT adding the most. Positions in financials and staples detracted. Performance was strong across all major regions over the month.

Lloyds Banking Group plc contributed in November after it reported a reduction in operating costs in its Q3 results, with an improvement in its cost-to-income ratio. Net income for the year-to-date was modestly lower than a year earlier and profit before tax was weaker due to a £1.8 billion charge to compensate customers for mis-sold payment protection insurance (PPI). We continue to be encouraged by Lloyds' progress as it is one of the few European banks showing positive earnings revisions. The bank's cost discipline and a trend of falling provisions has led to positive earnings surprises, which we expect to continue. The deadline for PPI claims was in August and we expect this to be the pre-cursor for lower provisions and capital returns through 2020. We continue to monitor the position closely as Brexit uncertainty remains an economic headwind.

Our position in Danish wind turbine supplier Vestas Wind Systems A/S contributed strongly in November. The company reported a sharp rise in Q3 earnings, beating analyst estimates, as sales rose by 30% and orders hit a record level. Vestas, the world's biggest manufacturer of wind turbines, also upgraded its outlook for revenue from its service business and said it is continuing to cut costs. Despite escalating trade tensions weighing on the global renewable energy supply chain, 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 company's order book to remain robust. 

Bridgestone Corp. declined in November after the company issued weaker guidance for Q4. The Q3 results themselves were stable, with positive organic growth driven primarily by improved sales in larger and speciality mining tires. While we had expected some slowdown due to seasonality and headwinds we had identified in other parts of the business, the extent of the downgrade was larger than expected. The cut in sales forecasts are also more significant than tire making peers, who have themselves flagged difficult conditions. In particular, we are watching the performance of Asia operations with interest, where the company has indicated that recent pricing increases have resulted in lost market share. This messaging does not fully align with our own data insights team research, which has thus far revealed little change in relative pricing. The position remains under review as we continue to monitor it closely. 

Online travel reservation company Booking Holdings, Inc. weighed in November. The shares fell sharply early in the month after two competitor travel sites reported weaker-than-expected earnings. This was despite Booking's own Q3 earnings delivering a positive earnings surprise, and an 11% increase in room booking over Q3 2018. We continue to view Booking as a high conviction, long-term holding, given its exposure to structural growth from global travel spend and rising online penetration as well as its plans to invest for growth via opportunistic mergers and acquisitions.   

 

Market Outlook

As we look to the end of 2019 and into 2020, markets remain finely balanced. Valuations on a trailing price-to-earnings1 basis are still lower than they were in much of 2018, but earnings estimates are also falling amid fading economic growth and a number of macro headwinds. The US-China trade war is a major swing factor which could provide either a positive tail-wind on resolution or pose an increasing drag to confidence and investment. The UK’s path to Brexit remains unclear, despite recent indications of a deal, as the UK heads to a general election, and political unrest across the world is otherwise prevalent.

Investors have become increasingly fixated on the potential for a rotation in style performance, given that growth stocks have materially outperformed value stocks over the past few years. While predicting the timing of style rotations is particularly difficult, we believe that businesses with strong quality characteristics should remain well positioned and likely trade at a premium. With growth increasingly scarce, we expect quality businesses to continue to command a premium as they offer greater resilience and growth visibility. Sluggish economic growth and the persistent low rate environment may also continue to weigh on sectors such as financials and energy, providing a further headwind for the performance of value. We are focused on finding companies where growth is unappreciated, across all segments of the market.

Our bottom-up stock selection continues to lead us to opportunities in a number of unloved cyclical areas such as Japanese machine tools and German industrials. Here, expectations remain depressed, and it will require only modest improvement in the operating environment to generate material year-on-year earnings growth. Self-help and restructuring should also drive incremental returns. Similarly, we have begun to take a more positive view on end market demand for semiconductors, now that excess inventory has been flushed out, as we head into year end.

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. Companies dependent on macro support alone—as alluded to earlier—are unlikely to deliver in a slowing growth environment. We expect that companies with these positive characteristics are not only more resilient, but will retain greater flexibility to adapt to the evolving competitive landscape.

1 Price/Earnings is the ratio of a stock's price to its earnings per share.

 

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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