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Hartford Schroders International Stock Fund

February 2020 Monthly Update

Performance (%)
% (as of 2/29/2020)
Average Annual Total Returns % (as of 2/29/2020)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I -8.32 4.67 7.44 3.85 5.91 7.25
BENCHMARK -10.38 -0.69 4.15 2.18 4.34 ---
Morningstar Foreign Large Blend Category -9.98 -0.13 3.83 1.81 4.49 ---
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

Concerns over the spread of coronavirus and its potential impact on global growth dominated sentiment and drove volatility in financial markets in February. Equity markets fell sharply, and government bond yields were broadly lower. The S&P 500 Index1 had set a new record high early in the month on robust jobs data, before witnessing one of the fastest corrections in history. European markets experienced a sharp fall, as concerns grew that the virus could send the fragile eurozone economy into recession. Asian indices were similarly impacted, although, counterintuitively, China recorded a modest gain as coronavirus infection rates in the mainland appeared to stabilize. Some Chinese activity indicators also started to improve. Overall, energy and materials stocks were among those hardest hit by measures to contain coronavirus, although all sectors globally declined.

 

Performance Review

The Fund (Class I Shares) returned -5.53% in February, outperforming its benchmark, the MSCI ACWI ex USA Index, which returned -7.90%. Outperformance was driven by stock selection within financials and underweight positioning in the energy sector. Europe and emerging markets outperformed while the UK detracted.

Tencent Holdings Ltd. contributed, with Chinese New Year and confinement measures—implemented to control coronavirus in China—expected to increase game time (especially mobile). Its most popular mobile titles—Honour of Kings and Game for Peace—are both leading mobile gaming titles globally, while older titles have also seen a resurgence brought about by Chinese movement restrictions. We continue to see the highly diversified Chinese internet giant as having significant growth potential. It also holds strategic stakes in a number of high growth companies and in aggregate we believe the business is undervalued on a sum of the parts basis.

Iberdrola S.A. gained in February. The renewables-focused utility company reported strong year-on-year profit growth and confirmed an extensive €11 billion wind and solar energy capacity buildout plan. Iberdrola is extremely well positioned to capitalize on the long-term transition toward renewable energy. We believe the impact of carbon reduction efforts is yet to be fully appreciated by the majority of management teams in the oil & gas industry. In contrast, utilities with strong or growing renewables exposure may continue to experience a material re-rating, especially given the lack of widespread ownership.

Xero Ltd. detracted in February after investors took profits following a period of strong growth. The company, which provides business accounting software to small businesses, has achieved robust growth in revenue and subscriber numbers. Xero's core markets are Australia, the UK, and New Zealand, where it has more than 1.5 million subscribers and is the leader in the cloud accounting software market. We believe Xero is well-positioned for growth with a market-leading product and a strong relationship with accountants outside of the US. The company is increasingly monetizing other services built on top of its small business platforms, such as payments, lending and payroll.

Whitbread plc declined amid the broader market sell off particularly in travel-related industries. Whitbread—operator of pubs, hotels, and restaurants—was significantly affected by the sell-off as investors feared an outbreak of the coronavirus could result in movement restrictions. While we remain cautious on our travel exposed names we do believe that its Premier Inn franchise is more levered to domestic travel and likely less vulnerable to many of the global travel disruptions. We believe this could create a misunderstood opportunity but will continue to monitor the position carefully amid the heightened concerns.   

 

Market Outlook

Valuation multiples have adjusted rapidly over the month to changing perceptions of earnings risk, with stocks in industries such as technology hardware, travel, and autos seeing falls of 15% to 20%. In a number of more benign scenarios this de-rating could be unwarranted, but with a number of unknowns regarding the likely effect of coronavirus on economic activity and corporate profitability, it is simply too early to know.

On balance, we remain somewhat hopeful that the impact on economic activity will be short-lived and the virus will serve to push out profits by a couple of quarters, rather than de-railing it entirely.

At best, earnings for the first quarter will be "messy and at worst extremely ugly, providing a source of ongoing volatility as expectations adjust. From a longer-term perspective, any impact of the virus is unlikely to result in a material or permanent impairment of the intrinsic value or long-term growth trajectory of the companies we look at.

At current levels, we are more inclined to see this as an opportunity to add to positions selectively in some of the more heavily sold-off sectors and stocks, particularly those linked to travel and trade.

Prior to the emergence of the virus we highlighted the susceptibility of markets to earnings disappointments given that, in aggregate, expectations for 2020 looked optimistic. To that end, self-help elements in company earnings stories are, in our view, more important. This remains the case.

In addition to companies with elements of self-help, we believe that businesses exposed to long-term pervasive themes such as disruption, sustainability, and climate change remain particularly well positioned. Our approach remains centered on stock opportunities that will benefit from long-term structural themes, without overlooking the importance of operational strength.

Our position in wind turbine manufacturer Vestas Wind Systems is a clear example of this as the renewable energy industry is entering an exciting growth phase. Renewables are now cost competitive without subsidies in most markets and improving cost dynamics for energy storage in the coming years will become a major catalyst for the industry. More importantly, with strong growth in installed capacity, renewables are less vulnerable to boom bust cycles as the producers now have larger stable services businesses earning attractive margins.  

In other areas that are facing disruption such as the energy sector, it is critical to identify companies and management teams that can make cash on current assets and redeploy that cash flow toward investments that will generate sustainable cash flow for the next twenty years. As competitive forces and technologies can drive returns over time, it remains critical for businesses and investors to ensure they are on the right side of disruption. As ever, while assessing market direction in the short-term is fraught with risk, we believe focusing on companies with stable balance sheets and underappreciated, sustainable earnings drivers can deliver consistent outperformance.

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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 Fund’s focus on investments in particular sectors may increase its volatility and risk of loss if adverse developments occur.

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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