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Hartford Schroders International Stock Fund

October 2019 Monthly Update

Performance (%)
% (as of 11/30/2019)
Average Annual Total Returns % (as of 11/30/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I 19.93 13.11 11.45 5.18 5.96 7.44
BENCHMARK 16.47 11.20 9.24 3.85 4.74 ---
Morningstar Foreign Large Blend Category 17.27 11.28 8.67 3.73 4.83 ---
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 equities gained in October, despite continued sluggish economic growth, as improvements in US-China trade talks and Brexit negotiations combined with central bank dovishness to bolster sentiment. As expected, the US Federal Reserve cut rates by 25 basis points1 but softened language pertaining to further easing. Details of a US-China “mini-deal” emerged, including increased China purchases of US agricultural goods, and a suspension of a proposed US tariff increase on Chinese imports. The UK and EU seemed to reach a deal for the withdrawal pact, but the accelerated timetable was voted down by Britain’s Members of Parliament, leading to a further extension of Article 50.

Performance was broad-based with nearly all regions and sectors posting gains during the month. Emerging market (EM) equities outperformed developed market equities for the first time since January. Asia, including Japan, was also particularly strong. By sector, a strong start to the Q3 earnings season drove healthcare stocks to perform well. IT also benefited from waning trade worries. Energy and consumer staples stocks were relative laggards.

 

Performance Review

The Fund (Class I Shares) returned 4.51% in October, outperforming its benchmark, the MSCI ACWI ex USA Index, which returned 3.49%. Stocks in consumer staples, industrials, and technology added most value. Healthcare stocks were the primary detractor. Most regions added value overall, with European and EM stocks leading the way. UK stocks detracted at the margin.

GEA Group AG contributed strongly in October after Q3 earnings showed an increase in orders and revenue. The German food equipment producer also raised its outlook for the full year. GEA plans to cut 800 jobs worldwide by 2020 as part of a global restructuring plan to boost efficiency, but plans to maintain its dividend payment. It also plans to sell off a number of non-core divisions, such as the compressor manufacturer GEA Bock, to focus on its main strategic markets in the food, chemical, and pharmaceuticals industries. We continue to see GEA as a longer-term turnaround story, and are encouraged by the moves by the company’s management to bolster profitability and dispose of non-core assets. 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.

German business software company SAP SE also contributed strongly following a strong set of Q3 results, with robust growth in profits from its cloud services. New cloud bookings in the quarter were up by 39% and the company confirmed its full year guidance. We believe SAP remains well positioned as its database architecture continues to grow, enabling faster and more robust analytics. The company’s in-memory computing system was an early leader in what is a rapidly expanding industry and it continues make good progress re-positioning the business around higher growth cloud-computing.

Nintendo Co., Ltd. shares were weak during the month, before rebounding strongly after reporting much better than expected sales volumes on the last day of the month. In addition, the company continues to make progress on its digital gaming platform, with developments in Mario Kart Tour game supportive of our broader investment thesis. We believe the move to increase its digital revenues will help drive better profitability and reduce its exposure to console “cycles”. Recent results confirmed the strengthening in digital sales that are now 36% of software sales, up from 20% two years ago. We continue to monitor the position closely as recent strong execution and positive earnings revisions by consensus have reduced our growth gap.

Tencent Holdings Ltd. detracted in October amidst declines in PC games and ads slowdown. Despite the weaker performance, we continue to see the company exposed to a strong structural story through its dominant position and monetization plans for gaming, advertising, and payments. The company has a 15% market share of advertising, 51% share of China’s mobile gaming market, 39% share of payments, and 15% share of cloud. Tencent also has extensive strategic stakes in a variety of other companies that we believe are not fully appreciated by the market.   

 

Market Outlook

As we look to the end of 2019 and into 2020, markets remain finely balanced. Valuations on a trailing price-to-earnings2 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 geopolitical headwinds. The US-China trade war is a major swing factor that 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 head wind for the performance of value. We are focused on finding companies where growth is unappreciated, in both economically resilient and the more cyclical parts of the market.

We continue to focus on generating value primarily through bottom-up stock selection. More recently we have been finding attractive opportunities in some of the un-loved cyclical areas outside the US. Expectations in areas such as Japanese machine tools and German industrials are now low, 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 companies with these positive characteristics are not only more resilient, but will retain greater flexibility to adapt to the evolving competitive landscape.

1 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.

2 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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