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Hartford Schroders International Stock Fund

April 2019 Monthly Update

Performance (%)
% (as of 5/31/2019)
Average Annual Total Returns % (as of 5/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I 7.20 -5.63 6.64 2.24 6.79 7.20
BENCHMARK 7.15 -6.26 6.72 1.31 5.80 ---
Morningstar Foreign Large Blend Category 7.39 -7.11 5.16 1.04 5.67 ---
Performance (%)
% (as of 3/31/2019)
Average Annual Total Returns % (as of 3/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders International Stock  I 11.04 -1.96 8.49 3.59 9.93 7.35
BENCHMARK 10.31 -4.22 8.09 2.57 8.85 ---
Morningstar Foreign Large Blend Category 10.23 -5.05 6.62 2.07 8.42 ---
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 rose in April. Economic data releases eased some of the mounting concerns over slowing growth, while major central bank messaging remained dovish. The US economy expanded by 3.2% (quarter-over-quarter, annualized) in Q1, materially improving upon Q4's 2.2% growth. In the Eurozone, while manufacturing activity remains a concern, economic growth in the first three months of the year proved more resilient than feared. Perhaps most importantly for risk appetites, the Chinese economy expanded at a faster-than-expected rate of 6.4% year-on-year in Q1.

The ongoing Q1 reporting season shows approximately 70% of developed market releases beating earnings estimates, reflecting low expectations. The IT sector advanced in April, buoyed by positive earnings, while the financial sector recovered from a more difficult March. Healthcare stocks faced headwinds from ongoing fears over changes to US drug-pricing legislation. The less cyclically-exposed real estate and utilities sectors lagged.

 

Performance Review

The Fund (Class I Shares) returned 3.37% in April, outperforming its benchmark, the MSCI ACWI ex USA Index, which returned 2.64%. Our positions in industrials and IT contributed the most to relative returns while consumer discretionary and health care detracted.

Schneider Electric SE contributed after its Q1 results demonstrated thesis-confirming organic sales growth driven by robust pricing power, cross-selling in its electrical arm, and lower cyclical exposure than the market appreciates. 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. However, having outperformed the wider industrials sector materially over the past six months, we have reduced the position size to reflect the balance of risk relative to expected upside.

Nintendo Co., LTD advanced strongly in April after its Switch console was approved for sale in China, granting the company access to the world’s largest gaming market. The development confirms progress on a major element of our investment thesis, predicated on a successful sales cycle for the Switch console, supported by growth into China via its tie-up with Tencent Holdings Ltd. Longer-term, we believe Nintendo’s shift to digital sales and the launch of its online gaming platform remain underappreciated drivers of forward earnings, and will deliver more sustainable and higher profitability than the market expects.

BHP Group plc was a weaker name in April after the miner reduced its guidance on iron ore production due to Cyclone Veronica’s impact on its West Australian operations. The operations are expected to be back running at full capacity in a few weeks. We continue to see BHP as a world-class miner involved in all core commodities, with scale that enables it be the lowest cost provider across many. The management team has a relentless focus on return on invested capital and the company’s capital discipline and strong cash flows remain supportive of shareholder returns via ongoing share buybacks. 

Takeda Pharmaceutical Co., Ltd. declined in April, as the company released its revised guidance, indicating that the Shire plc acquisition costs would be higher than originally estimated. On the positive side, Takeda also revised up its forecast for earnings at the parent level. The company is targeting $10 billion of disposals which, combined with cost synergies and other self-help activities, should significantly reduce its debt burden over the coming 12-24 months. It remains a very attractively valued, highly cash-generative business with an underappreciated pipeline.   

 

Market Outlook

Market sentiment appears to reflect a greater degree of caution amid softer economic data and central bank accommodation. Investors remain concerned by where we sit in a much-extended economic cycle, with companies at near-peak margin levels amid relatively full valuations. Furthermore, there remains the question of how personal and corporate debt—at historic highs a decade ago and around three times higher now—will behave in a recession if (or where) it materializes.

While the US has among the highest levels of corporate debt globally, it is arguably in a better position to respond to a downturn. The US Federal Reserve (Fed) has been enacting rate hikes since December 2015, as economic growth has improved and unemployment has broadly declined. It has been a relatively weak, but otherwise normal cycle, and the Fed has more tools in hand to respond than other such institutions.

The European Central Bank (ECB) and Bank of Japan (BoJ) policy rates have remained at zero (or lower) since early 2016. Yet over the same timeframe, growth and inflation in Europe and Japan have remained stubbornly below target. The BoJ expects real GDP growth of around 1.0% in 2019 and the ECB is projecting growth of 1.1%, with a host of leading indicators still slowing. We believe these markets may potentially face significant challenges in responding to a recession, given the limited scope for monetary stimulus currently available.

Overall, we believe that consensus expectations broadly reflect this environment of diverging growth trajectories. In our view, headline estimates for the US still need to fall further, but estimates elsewhere look more realistic.

Without a doubt, the market remains vulnerable to negative surprises from factors including (but not limited to) US-China trade talks, Brexit negotiations and European elections. The potential for earnings disappointment from exposed stocks in the year ahead is still material. However, we would argue that the potential for positive inflection may also have been dismissed.

For emerging markets in particular, expectations are low. Growth in Brazil is expected to rise considerably from 2018, with easing policy uncertainty and liberal economic management boosting market confidence. Market reforms in India should lift potential growth and improve the fiscal structure in the medium term. However, the market may be vulnerable to some volatility amid the general elections in Q2.

Ultimately, our investment approach remains broadly unaltered. Much of the past 12-18 months have been disappointing for investors. Almost all markets—both stocks and bonds— have fallen in value. During the period, our focus on return-on-capital, resilient balance sheets, and strong cash flows has been the correct approach, and we believe this remains the case.

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.

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.

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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