Charts That Got Us Thinking
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- Brenda Newman
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1 2018 Outlook: Charts That Got Us Thinking Can the party go on with less punch in the bowl?
2 Nanette Abuhoff Jacobson is a managing director and asset allocation strategist at Wellington Management Company llp and global investment strategist for Hartford Funds. Nanette has selected the charts in this presentation to offer behind the scenes insight into what may be driving the markets. With more than 25 years of experience in the capital markets, Nanette has held a variety of roles spanning the major asset classes. As global investment strategist, she analyzes and interprets markets and investment opportunities for Hartford Funds sales organization, the financial advisor community, and major broker-dealers and distributors. She also advises Wellington Management s institutional clients, including pension funds, insurance companies, endowments and foundations, and central banks, consulting on strategic asset-allocation issues to develop multi-asset investment solutions. 2
3 Table of Contents...Page Key Points... 4 Charts: Multi-asset Views: Multi-asset views... 5 Strong returns across the board paint a benign environment... 6 US equity market breadth is healthy... 7 Global Fundamentals: Global synchronized expansion... 8 Where s the tapering?... 9 Interest Rates: Market below Fed s rate expectations Inflation expectations seem too low Bond inflows have outpaced equity inflows Regional Equities: US consumer confidence implies stronger consumption US manufacturing cycle is picking up Expect pendulum to swing back on US regulation European consumer confidence implies stronger retail sales Leading business indicators turn positive in Europe Earnings upside for European companies Japan s manufacturing cycle is improving Structural reform in Japan: Women join the work force Upward earnings revisions Tighter financial conditions in China Chinese consumer is emerging Valuations relatively attractive outside US Higher short-term rates help bank margins European banks have lagged US banks Credit: Benign default environment Higher rate sensitivity in corporate bonds Debt levels increasing in investment-grade corporate bonds Credit spreads are expensive Portfolio Construction: The importance of staying invested Think Function, Not Form: Consider diversifying exposure across economic environments Putting it all together Implementation ideas Appendix: More Charts That Got Us Thinking
4 Key Points I expect strong fundamentals and gradual monetary tightening to support risk assets in 2018 I favor equities over bonds and European and Japanese equities over US equities I believe that stability in China and commodity prices should benefit emerging markets My differentiated views Bullish on Japan where policy is most supportive and valuations are attractive Moderately bearish on investment-grade corporate bonds and dollardenominated emerging markets given concerns about long duration 1 Value-oriented sectors, such as financials, are attractive Risks: upside inflation surprise, global trade restrictions, crowded trades 1 Duration is a measure of the sensitivity of an investment s price to nominal interest-rate movement. 4
5 Multi-asset Views Asset class View Change from previous quarter Developed market equities Moderately bullish US Moderately bullish Europe Japan Bullish Bullish Emerging market equities Moderately bullish Commodities Moderately bullish 10-year rates Moderately bearish US Moderately bearish Europe Bearish Japan Moderately bearish Credit Investment-grade credit High yield Bank loans Emerging market debt Moderately bearish Moderately bearish Neutral Neutral Moderately bearish As of January 2018 Source: Wellington Management 5
6 Multi-asset Views Strong returns across the board paint a benign environment US dollar (trade weighted) CS Leveraged Loans Bloomberg Barclays US High Yield Oil 2 EM Sovereign Bonds (USD) Bloomberg Barclays US Long Treasury MSCI Europe 3 Gold 2 MSCI US Utilities MSCI Japan 3 MSCI US Financials MSCI US S&P/GSCI Industrial Metals MSCI EM 3 MSCI US Info Tech 2017 total returns (%) 1 Last year s returns paint a benign picture of the state of the world. The US dollar was the only loser, but this helped US multinationals, commodities, and emerging markets. Bitcoin Percent All returns are in local currency unless otherwise stated. 1 1 January December Based on commodity price, not represented by an index. 3 Gross returns. 4 Bitcoin actual total return = 1,700% PM Emerging Markets Bond Index Plus was used to represent Emerging markets sovereign bonds (USD). Past performance is not a guarantee of future results. Indexes are unmanaged and not available for direct investment. Please see representative Index Definitions on page 58. Sources: Bloomberg, Wellington Management 6
7 Multi-asset Views US equity market breadth is healthy Percent of New York Stock Exchange stocks closing above 200-day moving average, 5 January December 2017 In my view, the 1,700% rise in Bitcoin does not signal trouble in the overall equity market where gains have been broad-based /07 9/08 11/09 1/11 3/12 5/13 6/14 8/15 10/16 12/17 Source: Bloomberg 7
8 Global Fundamentals Global synchronized expansion Composite Purchasing Managers Indexes (PMI), 1 January 2010 November 2017 Global growth is good across regions as reflected in PMIs above US EU Japan Emerging markets 35 5/10 2/11 11/11 8/12 5/13 2/14 11/14 8/15 5/16 2/17 11/17 1 Purchasing Managers Index (PMI) is an indicator that measures economic health. A reading above 50 signals expansion from the current growth rate and a reading below 50 signals contraction from the current growth rate. Sources: Haver, Markit, Wellington Management 8
9 Global Fundamentals Where s the tapering? ECB + BOJ + Fed total assets, December 2001 November 2017 (US$ trillions) The US Federal Reserve and European Central Bank are slowing purchases, but these central banks, together with the Bank of Japan, added $1.6 trillion in purchases to their balance sheets /02 5/04 11/05 5/07 11/08 5/10 11/11 5/13 11/14 5/16 11/17 European Central Bank (ECB), Bank of Japan (BOJ), and US Federal Reserve (Fed) Source: Bloomberg 9
10 Interest Rates Market below Fed s rate expectations Market and Fed expectations for Fed Funds Rate at end of each year (%) Market Fed The market expects fewer hikes than the Fed in 2018 and 2019, but higher inflation could change the market s perceptions E 2018E 2019E 13 December Actual results may vary, perhaps significantly, from the forecasts presented. Sources: Federal Reserve, Bloomberg, Wellington Management 10
11 Interest Rates Inflation expectations seem too low Oil, price index Oil and inflation expectations, 1 August December y/5y forward inflation expectations (%) Inflation expectations haven t moved much despite the sharp rise in oil prices. 40 Oil (LHS) Inflation expectations (RHS) 35 8/16 9/16 10/16 12/16 1/17 3/17 4/17 6/17 7/17 9/17 10/17 12/ Sources: Bloomberg, Wellington Management 11
12 Interest Rates Bond inflows have outpaced equity inflows 2,000 1,500 1,000 Cumulative yearly equity and bond flows, (US$ billions) 1 Equities Bonds Inflows have been stronger to fixed income than equities, so higher rates and negative returns could have an amplified effect Data starts at 31 December : YTD through 31 October 2017 Source: EPFR Includes global open-ended mutual funds and ETFs. 12
13 Regional Equities US consumer confidence implies stronger consumption US consumer confidence: expectations December 2002 September 2017 Consumer confidence: expectations (LHS) Real consumption (RHS) US real consumption (y/y % change) A strong labor market and improving housing is making consumers confident /04 9/05 3/07 9/08 3/10 9/11 3/13 9/14 3/16 9/17-6 Sources: Conference Board, BEA, Bloomberg 13
14 Regional Equities US manufacturing cycle is picking up PMI (three-month moving average) US Purchasing Managers Index (PMI) 1 and industrial production, March 2001 November Industrial production, (y/y % change) The manufacturing recovery is broadening out beyond energy because tax reform allows full expensing of capital investments PMI (LHS) Industrial production (RHS) -10 5/01 11/02 5/04 11/05 5/07 11/08 5/10 11/11 5/13 11/14 5/16 11/ Purchasing Managers Index (PMI) is an indicator that measures economic health. A reading above 50 signals expansion from the current growth rate and a reading below 50 signals contraction from the current growth rate. 2 PMI through November 2017, industrial production through October 2017 Sources: Haver, ISM 14
15 Regional Equities Expect pendulum to swing back on US regulation 1,600 1,500 1,400 1,300 1,200 US presidential economically significant 1 federal regulations by calendar year Regulations, which were on a steady climb, are declining now. This should help banks and small businesses that have been hurt by compliance costs. 1,100 1, Economically significant is defined by Executive Order Section 3(f)(1). Regulatory action that is likely to result in a rule that may have an annual effect on the economy of US$100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local, or tribal governments or communities Source: 15
16 Regional Equities European consumer confidence implies stronger retail sales Consumer confidence, advanced three months (y/y % change) European consumer confidence and retail sales, March 2001 November Consumer confidence (LHS) Retail sales (RHS) Retail sales, three-month moving average (%) Europe is earlier in its economic cycle than the US. The domestic cycle (i.e., consumption) is picking up /01 11/02 5/04 11/05 5/07 11/08 5/10 11/11 5/13 11/14 5/16 11/ Consumer confidence through November 2017, retail sales through October 2017 Sources: Haver, Wellington Management 16
17 Regional Equities Leading business indicators turn positive in Europe PMI European Purchasing Managers Index (PMI) 1 and industrial production, January 2000 December PMI (LHS) Industrial production (RHS) Industrial production (y/y % change) Manufacturing is the engine of the European economy, and it is at an all-time high for the 20 years of this survey /00 12/01 4/03 8/04 12/05 4/07 8/08 12/09 4/11 8/12 12/13 4/15 8/16 12/17 1 Purchasing Managers Index (PMI) is an indicator that measures economic health. A reading above 50 signals expansion from the current growth rate and a reading below 50 signals contraction from the current growth rate. 2 PMI through December 2017, industrial production through October 2017 Sources: Haver, Wellington Management 17
18 Regional Equities Earnings upside for European companies month forward earnings per share indexed to 100, December 1987 November 2017 US (US$) Europe (euro) European earnings have lagged the US during the past seven years. Even a small rise in inflation would give companies more pricing power Source: Barclays 18
19 Regional Equities Japan s manufacturing cycle is improving PMI Japan Purchasing Managers Index (PMI) and industrial production, March 2003 November Industrial production, three-month moving average (%) Japan is emerging from secular stagnation. Manufacturing is improving, driven by a rise in capital spending, which is replacing old machinery. This helps compensate for a tight labor market. 30 PMI (LHS) Industrial production (RHS) /04 11/05 5/07 11/08 5/10 11/11 5/13 11/14 5/16 11/17 1 Purchasing Managers Index (PMI) is an indicator that measures economic health. A reading above 50 signals expansion from the current growth rate and a reading below 50 signals contraction from the current growth rate. 2 PMI through November 2017, industrial production through October 2017 Sources: Haver, Wellington Management 19
20 Regional Equities Structural reform in Japan: Women join the work force Female labor force participation, (%) US OECD countries 1 Japan A lesser known development in Prime Minister Abe s push for structural reform is to increase female participation in the workforce, which is now higher than the US and leading to higher labor, income, and consumption The Organisation for Economic Co-operation and Development (OECD) is an intergovernmental economic organization with 35 member countries, founded in 1960 to stimulate economic progress and world trade. Source: OECD 20
21 Regional Equities Upward earnings revisions % change in MSCI Japan consensus earnings per share (EPS) 1 through calendar year Analysts are upgrading their earnings estimates for Japanese companies after many years of downward revisions Last 10Y average Last 20Y average -20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec As of 31 October Earnings per share (EPS) is the projected growth rate in earnings per share for the next five years. Please see representative Index Definitions on page 60. Sources: IBES, Datastream, MSCI, Wellington Management 21
22 Regional Equities Tighter financial conditions in China 6 5 China five-year swap rate, January 2012 December 2017 (%)1 China is undergoing a managed slowdown. The government is curbing excess lending by raising rates /12 7/12 2/13 8/13 2/14 9/14 3/15 10/15 4/16 11/16 5/17 12/17 1 Through 8 December 2017 Source: Bloomberg 22
23 Regional Equities Chinese consumer is emerging Consumer confidence China consumer confidence and retail sales, January 2004 October 2017 Consumer confidence (LHS) Retail sales (RHS) Retail sales, three-month moving average (%) Consumer confidence is surging as the property market continues to perform well. President Xi is trying to bring discipline to the banking sector while protecting consumers /04 10/05 10/06 10/07 10/08 10/09 10/10 10/11 10/12 10/13 10/14 10/15 10/16 10/17 Sources: Haver, Wellington Management 23
24 Regional Equities Valuations relatively attractive outside US 20-year percentile rankings, November 2017 US Europe Japan EM Trailing price-to-book (%) Shiller P/E ratio (%) na US Europe US Japan US EM Trailing price-to-book (%) Shiller P/E ratio (%) na US valuations are richest, while Europe, Japan, and emerging markets are at median valuations versus their own history. In the bottom table, US richness is more pronounced because the premium versus other regions is at the high end of the range. 1 Price-to-book is the ratio of a stock s price to its book value per share. 2 Shiller P/E ratio is a valuation measure, generally applied to broad equity indices, that uses real per-share earnings over a 10-year period. Sources: MSCI, Datastream, Wellington Management 24
25 Regional Equities Higher short-term rates help bank margins Quarterly change in average net interest margins (%) month LIBOR (%) Higher short-term rates are positive for US bank margins Q2014 2Q2014 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 2Q Change in average net interest margins (LHS) 3-month LIBOR (RHS) LIBOR (London Interbank Offered Rate) is the world s most widely used benchmark for short-term interest; it is the interest rate at which banks bank borrow funds from other banks in the London interbank market. Sources: Moody s, Bloomberg 25
26 Regional Equities European banks have lagged US banks Bank indexes, 28 December December 2017 MSCI Europe Banks MSCI USA Banks European banks have more upside because Europe is earlier in its economic cycle. Also, nonperforming loans are declining, and capital rules are more clear now /13 10/13 3/14 9/14 2/15 8/15 1/16 7/16 12/16 6/17 12/17 Past performance is not a guarantee of future results. Investors cannot directly invest in an index. Sources: Bloomberg, Wellington Management 26
27 Credit Benign default environment Moody s US high yield default rate, actual December 1996 November 2017, estimated December 2017 November 2018 (%) The default environment is positive. After the energy industry shake-out, defaults have declined, and they are expected to reach 2%. 4 Moody s forecast E Actual results may vary, perhaps significantly, from the estimated data presented Source: Moody s 27
28 Credit Higher rate sensitivity in corporate bonds US investment-grade credit duration, 1 December 2006 November 2017 (years) Investors should be cautious with corporate bonds because the duration has reached 7.5 years. This makes these bonds more susceptible to rising interest rates than shorter-duration bonds /07 11/08 11/09 11/10 11/11 11/12 11/13 11/14 11/15 11/16 11/17 1 Duration is a measure of the sensitivity of an investment s price to nominal interest-rate movement. Source: Barclays 28
29 Credit Debt levels increasing in investment-grade corporate bonds September 2013 June 2017 BBB debt/ebitda 1 BB debt/ebitda Investors should also be cautious with corporate bonds due to increased debt levels, as companies have been using debt to fund mergers and acquisitions and stock buybacks /13 12/13 3/14 6/14 9/14 12/14 3/15 6/15 9/15 12/15 3/16 6/16 9/16 12/16 3/17 6/17 1 Earnings before interest, tax, depreciation and amortization (EBITDA) is a measure of a company s operating performance. Source: JPMorgan 29
30 Credit Credit spreads are expensive Option-adjusted spreads, 1 13 December 2017 Current Percentile inception (%) Median Low Inception date US corporates June 1989 US high yield January 1994 Emerging market debt December 1994 Credit spreads are at the rich end of their historic range. This suggests that total returns could be low. Investors should consider sovereign bonds for portfolio diversification. 1 Option-adjusted spread (OAS) is a measurement tool for evaluating yield differences between similar-maturity fixed-income products with different embedded options. Sources: Barclays, Wellington Management 30
31 Portfolio Construction The importance of staying invested Value of US$100 investment in S&P 500 Index, January 1926 October One of the advantages that individual investors have is a long investment horizon. Investors who try to time the market risk missing the best days and substantially reducing their investment returns Staying invested full period (1,102 months) Missing 10 best months 27.8 Missing 20 best months Missing 30 best months Missing 40 best months Missing 50 best months Annualized return (%) Past performance is not a guarantee of future results. Investors cannot invest directly in an index. For illustrative purposes only. Based on monthly total returns Sources: S&P, Wellington Management 31
32 Think Function, Not Form Consider diversifying exposure across economic environments Relative performance by economic environment Rising Growth Public equities Private equities Long/short equity hedge funds Corporate spreads High yield Nominal govt bonds Agency MBS Municipal bonds Bank loans EMD REITs Absolute return/ active risk Emerging market currencies/ ILBs Industrial metals commodities Natural resource equities Energy & agriculture commodities TIPS Gold/precious metals commodities Growth Inflation Stagflation Weak growth EMD: Emerging Markets Debt REITs: Real Estate Investment Trusts ILBs: Inflation-Linked Bonds MBS: Mortgage-Backed Securities TIPS: Treasury Inflation Protected Securities While the base case is to have most exposure in assets that respond best to a growth environment, consider assets that do well in higher-inflation and weak-growth environments to hedge against a potential equity sell off. Falling Falling Inflation Rising The example presented is for illustrative purposes and reflects the current opinions of Wellington Management Global Multi-Asset Strategies sm team as of the date appearing in this material only. This is based on historical assumptions and is not intended to be a prediction of how any asset class will perform in the future. Economic environments are defined by year-over-year changes in GDP growth and inflation. Growth: + GDP growth, inflation. Weak growth: GDP growth, inflation. Inflation: + GDP growth, + inflation. Stagflation: GDP growth, + inflation. 32
33 Putting it all together I expect strong fundamentals and gradual monetary tightening to support risk assets in 2018 I favor equities over bonds and European and Japanese equities over US equities I believe that stability in China and commodity prices should benefit emerging markets My differentiated views Bullish on Japan where policy is most supportive and valuations are attractive Moderately bearish on investment-grade corporate bonds and dollardenominated emerging markets given concerns about long duration Value-oriented sectors, such as financials, are attractive Risks: upside inflation surprise, global trade restrictions, crowded trades 33
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36 Table of Contents...Page Appendix: More Charts That Got Us Thinking Buying stocks when fear runs high has historically led to long-term gains VIX and S&P 500 Index are negatively correlated Intra-year dips in the S&P 500 Index happen frequently Are you an opportunistic or apprehensive investor? The cyclical nature of active and passive investing Are value stocks poised to outperform growth stocks after a long period of underperformance? Are international stocks poised to outperform US stocks after a long period of underperformance? Growth is gaining momentum outside the US Stock market returns after significant oil price declines Duration risk is rising: Are you prepared? Hypothetical impact of rising rates on fixed income Some asset classes have performed well in rising-rate periods US interest rates could continue to stay low US debt to GDP levels are approaching record highs Annual inflation is below its historical average but rising Tax-equivalent yields Municipal bond yields look attractive Healthcare is trading at a discount to its historical average Fund flows
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38 VIX and S&P 500 Index Are Negatively Correlated S&P 500 Index (Price Level) 3,000 2,000 1,000 n VIX (Right-hand side) n S&P 500 Index (Left-hand side) VIX Average: VIX The VIX is currently at historical lows. As it rebounds, history suggests the S&P 500 Index could lose momentum /97 1/99 1/01 1/03 1/05 1/07 1/09 1/11 1/13 1/15 1/17 12/17 0 VIX levels below 20 reflect complacency, while levels of 40 or higher reflect extremely high levels of volatility. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. Source: Morningstar, 1/18. 38
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43 Are international stocks poised to outperform US stocks after a long period of underperformance? Relative Performance (%) US Equity vs. International Equity 5-Year Rolling Returns (1/1/ /31/2017) US Outperformed International Outperformed 6.8 years /17 The average performance cycle for US equities versus international equities has historically lasted 7.2 years. US equities have outperformed international equities over the past 6.8 years, indicating the cycle may be getting ready to turn. US Equity is represented by S&P 500 Index. International Equity is represented by MSCI World ex USA Index. The chart shows the values of the S&P 500 Index s returns minus the MSCI World ex USA Index s returns. When the line is above 0, domestic stocks outperformed international stocks. When it is below 0, international stocks outperformed domestic stocks. Past performance is not a guarantee of future results. The performance shown above is index performance and is not representative of any investment s performance. Indices are unmanaged and not available for direct investment. For illustrative purposes only. Source: Morningstar, 1/18 43
44 Growth is gaining momentum outside the US Real GDP growth, annual percentage change, 2017 With buoyant financial markets and a long-awaited cyclical recovery in manufacturing and trade under way, world growth is projected to rise, especially for developing economies. Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country s borders in a specific time period. Real GDP growth is a macroeconomic measure of the value of economic output adjusted for price changes (i.e., inflation or deflation). Source: IMF, World Economic Outlook, 10/17 44
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46 Duration risk is rising: Are you prepared? Years Duration of the Bloomberg Barclays US Aggregate Bond Index More sensitive to interest rates Average: 4.8 years December 2017: 6.0 years In June, the duration of the Bloomberg Barclays US Aggregate Bond Index exceeded six years for the first time since Fixed-income investors should consider evaluating the duration risk in their portfolios. 4 Less sensitive to interest rates /2017 Effective duration is a measure of price sensitivity to interest rate changes. Source: Barclays Live, 1/18. For illustrative purposes only. 46
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56 Index Definitions: Bloomberg Barclays Global Aggregate Bond Index provides a broad-based measure of the global investment-grade fixed-rate debt markets. Bloomberg Barclays US High Yield Corporate Bond Index is an unmanaged broad-based market-value weighted index that tracks the total return performance of non-investment grade, fixed-rate publicly placed, dollar-denominated and nonconvertible debt registered with the Securities and Exchange Commission. Bloomberg Barclays Global Aggregate Bond Index provides a broad-based measure of the global investment-grade fixed-rate debt markets. Bloomberg Barclays US Long Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint, but are part of a separate Short Treasury Index. Credit Suisse (CS) Leveraged Loan Index is designed to mirror the investible universe of the United States dollar-denominated leveraged loan market. JP Morgan Emerging Markets Bond Index is a broad-based, unmanaged index which tracks total return for external currency denominated debt (Brady bonds, loans, Eurobonds and U.S. dollar-denominated local market instruments) in emerging markets. MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of 21 emerging market country indices. MSCI Japan Index is a free-float adjusted market-capitalization index designed to measure large- and mid-cap Japanese equity market performance. MSCI Japan Financials Index is a free float-weighted equity index. It was developed with a base value of 100 as of December 31, MSCI USA Consumer Staples Index is designed to capture the large and mid cap segments of the US equity universe. All securities in the index are classified in the Consumer Staples sector as per the Global Industry Classification Standard (GICS ). MSCI USA Materials Index is designed to capture the large and mid cap segments of the US equity universe. All securities in the index are classified in the Materials sector as per the Global Industry Classification Standard (GICS ). MSCI Europe Index is a free-float adjusted market-capitalization-weighted index designed to measure the equity market performance of the developed markets in Europe: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. MSCI Europe Financials Index captures large and mid cap representation across 15 Developed Markets (DM) countries in Europe*. All securities in the index are classified in the Financials sector as per the Global Industry Classification Standard (GICS ). MSCI USA Financials Index is designed to measure the performance of the large and mid cap segments of the US equity universe. All securities in the index are classified in the Financials sector in the Global Industry Classification Standard (GICS ). MSCI USA Energy Index is designed to capture the large and mid cap segments of the US equity universe. All securities in the index are classified in the Energy sector in the Global Industry Classification Standard (GICS ); USD (trade weighted) is a proxy for the US dollar. MSCI USA Information Technology Index is designed to capture the large and mid cap segments of the US equity universe. All securities in the index are classified in the Information Technology sector as per the Global Industry Classification Standard (GICS ). MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market. With 627 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the US. MSCI USA Industrials Index is designed to the capture large and mid cap segments of the US equity universe. All securities in the index are classified in the Industrials sector as per the Global Industry Classification Standard (GICS ). MSCI USA Utilities Index is designed to capture the large and mid cap segments of the US equity universe. All securities in the index are classified in the Utilities sector as per the Global Industry Classification Standard (GICS ). Nikkei 225 Index, commonly known as the Nikkei Index, is a price-weighted index for Tokyo Stock Exchange. S&P Composite 1500 Health Care Index comprises those companies included in the S&P Composite 1500 that are classified as members of the GICS health care sector. S&P/GSCI Industrial Metals Index provides investors with a reliable and publicly available benchmark for investment performance in the industrial metals market. 56
57 All investments are subject to risk, including the possible loss of principal. Foreign investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as political and economic developments in foreign countries and regions. These risks are generally greater for investments in emerging markets. Small- and mid-cap securities can have greater risk and volatility than large-cap securities. Risks of focusing investments on the health-care sector include regulatory and legal developments, patent considerations, intense competitive pressures, rapid technological changes, potential product obsolescence, and liquidity risk. Investments in the commodities market and the natural-resource sector may increase liquidity risk, volatility and risk of loss if there are adverse economic consequences in these sectors. Fixed Income risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall; these risks are currently heightened due to the historically low interest rate environment. Investments in high-yield ( junk ) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. Bank loans can be difficult to value and highly illiquid; they are subject to credit risk and risks of bankruptcy and insolvency. Mortgage and asset-backed securities risks include credit, interest-rate, prepayment, and extension risk. Municipal securities may be adversely impacted by state/local, political, economic, or market conditions. Investors may be subject to the federal Alternative Minimum Tax as well as state and local income taxes. Capital gains, if any, are taxable. The value of inflation-protected securities generally fluctuates with changes in real interest rates, and the market for these securities may be less developed or liquid, and more volatile, than other securities markets. U.S. Treasury securities are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. The Floating Rate Fund and the Floating Rate High Income Fund should not be considered an alternative to CDs or money market funds. This Fund is for investors who are looking to complement their traditional fixed-income investments. The views expressed here are those of Nanette Abuhoff Jacobson. They should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams and different fund sub-advisers may hold different views and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds. Investors should carefully consider a fund s investment objectives, risks, charges and expenses. This and other important information is contained in the fund s prospectus and summary prospectus (if available), which can be obtained by visiting hartfordfunds.com. Please read it carefully before investing. Mutual funds are distributed by Hartford Funds Distributors, LLC (HFD), Member FINRA. Hartford Funds Management Company, LLC (HFMC) is the mutual funds investment manager. Certain funds are sub-advised by Wellington Management Company LLP or Schroder Investment Management North America Inc. Schroder Investment Management North America Ltd. serves as a secondary sub-adviser to certain funds. HFD and HFMC are not affiliated with any fund sub-adviser. 57
58 At Hartford Funds, your investment satisfaction is our measure of success. That s why we use an approach we call human-centric investing that considers not only how the economy and stock market impact your investments, but also how societal influences, generational differences, and your stage of life shape you as an investor. Instead of cookie-cutter recommendations and generic goals, we think you deserve personalized advice from a financial advisor who understands your financial situation and can build a financial plan tailored to your needs. Delivering strong performance is always our top priority. But the numbers on the page are only half the story. The true test is whether or not an investment is performing to your expectations. NAJ_FLP_ hartfordfunds.com hartfordfunds.com/linkedin
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