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Second Quarter 2017 Charts That Got Us Thinking Is this a synchronized global recovery? 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 Table of Contents...............................................................................................................................................................................Page Key Points........................................................................................................................................................................................................................... 4 Charts: YTD performance: Reflationary trade in doubt.............................................................................................................................................................. 5 Global synchronized expansion....................................................................................................................................................................................... 6 Deflation looks defeated................................................................................................................................................................................................... 7 The feedback loop of oil prices and production............................................................................................................................................................ 8 Tight labor markets leading to higher wages................................................................................................................................................................. 9 US consumer confidence implies stronger consumption.......................................................................................................................................... 10 Capex intentions set to turn around............................................................................................................................................................................. 11 Expect pendulum to swing back on regulation............................................................................................................................................................ 12 Business leaders are optimistic..................................................................................................................................................................................... 13 Market’s Fed funds expectations rising........................................................................................................................................................................ 14 US dollar strength supported by monetary policy divergence.................................................................................................................................. 15 Key US political dates...................................................................................................................................................................................................... 16 Small-cap equities are more domestically focused..................................................................................................................................................... 17 Japanese equities track the yen..................................................................................................................................................................................... 18 Japan Inc’s profitability: Abenomics effect.................................................................................................................................................................... 19 European consumer confidence implies stronger retail sales................................................................................................................................... 20 Leading business indicators turn positive in Europe.................................................................................................................................................. 21 Markets pricing in less risk of Le Pen victory................................................................................................................................................................ 22 French election doesn’t look like Brexit or Trump....................................................................................................................................................... 23 Emerging economies’ current accounts have improved............................................................................................................................................ 24 Caution on China: Higher rates...................................................................................................................................................................................... 25 Valuations are expensive across most asset classes.................................................................................................................................................. 26 Peak defaults probably behind us................................................................................................................................................................................. 27 Bank loan valuations still attractive............................................................................................................................................................................... 28 Low-volatility equities are expensive............................................................................................................................................................................. 29 Financials valuations are still attractive........................................................................................................................................................................ 30 Think Function, Not Form: Diversify exposure across economic environments..................................................................................................... 31 Putting it all together....................................................................................................................................................................................................... 32 Implementation Ideas................................................................................................................................................................................................33-34 Appendix: More Charts That Got Us Thinking . ......................................................................................................................................................35-53 3 Key Points Stronger US growth implies higher interest rates Politics matter but economic fundamentals still most important I favor Japanese equities due to improving economy and mostly supportive government policies I favor adding to European equities due to an improving economy despite French election risk Consider taking some profits in US equities – benefits of a strong economy are offset by rich valuations and political risk Consider overweighting sectors that do well with higher interest rates Potential risks: Politics, higher interest rates and US dollar, China 4 YTD performance: Reflationary trade in doubt 2017 year-to-date total return (%)1 MSCI US Energy Oil* USD (trade weighted) Bloomberg Barclays Global Agg MSCI Japan MSCI US Financials US high yield MSCI US Industrials MSCI US Utilities MSCI US Cons Staples MSCI Europe MSCI US Industrial Metals MSCI EM -8 -6 -4 -2 0 2 Percent 4 6 8 10 12 During the first quarter: • Yields and the US dollar fell • Equities beat bonds • Interest-rate sensitive sectors such as utilities were competitive with cyclicals such as financials • Oil was the big loser • Emerging markets were the big winner * Based on commodity price, not represented by an index. 1 Through 31 March 2017 | Past performance is not indicative of future results. The performance shown above is index performance and is not representative of a fund’s performance. Indexes are unmanaged and not available for direct investment. Please see Index Definitions on page 54. Sources: Bloomberg, Wellington 5 Global synchronized expansion 60 The underpinnings of the reflationary trade are intact with all regions’ PMIs well over 50, indicating expanding economies worldwide. Composite purchasing managers indexes, January 2010 – February 2017 55 50 45 40 US 35 5/10 2/11 11/11 8/12 EU 5/13 Japan 2/14 11/14 Emerging markets 8/15 5/16 2/17 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 6 Deflation looks defeated 2.5 Deflation was a prominent risk as recently as a year ago. Now, even Japan has escaped deflation risk as observed in 10-year breakevens. Ten-year breakevens, 8 April 2014 – 31 March 2017 (%) US Germany Japan 2.0 1.5 1.0 0.5 0.0 1/14 4/14 7/14 10/14 1/15 5/15 8/15 11/15 Deflation is a general decrease in prices. | Source: Bloomberg 2/16 6/16 9/16 12/16 3/17 7 The feedback loop of oil prices and production 3 April 2015 – 31 March 2017 900 65 Spot oil price (LHS) Oil rig count (RHS) 60 800 55 600 45 40 500 35 Total oil rig count Spot oil price (US$) 700 50 Higher prices lead to higher oil production, however, oil is likely at the lower end of the range considering the potential extension of the production cuts and the heavydemand season. 400 30 300 25 5/15 7/15 9/15 11/15 1/16 3/16 5/16 7/16 Sources: Baker Hughes, Energy Information Administration, Bloomberg 9/16 11/16 1/17 3/17 8 Tight labor markets leading to higher wages 5 June 1994 – February 20171 Employment Cost Index (LHS) A shortage of skilled labor is leading to higher wages. 25 NFIB: skilled labor shortages (RHS) 20 15 3 10 NFIB: skilled labor shortages Employment Cost Index (y/y % change) 4 2 5 0 1 12/94 6/96 12/97 6/99 12/00 6/02 12/03 6/05 12/06 6/08 12/09 6/11 12/12 6/14 12/15 2/17 Employment Cost Index quarterly data through December 2016, NFIB: skilled labor shortages two-quarter moving average data through December 2016 then January 2017 and February 2017 monthly data. | NFIB: skilled labor shortages is the % of respondents signaling that quality of labor is their single most important problem. | Sources: BLS, NFIB, Haver 1 9 US consumer confidence implies stronger consumption 130 December 2002 – March 20171 10 Consumer confidence – expectations (LHS) Real consumption (RHS) 8 110 90 4 2 70 0 50 US real consumption (y/y % change) US consumer confidence – expectations 6 US consumer confidence tends to lead consumption, which is 2/3 of the US economy. -2 30 -4 -6 10 9/03 3/05 9/06 3/08 9/09 3/11 9/12 3/14 9/15 3/17 Consumer confidence – expectations through March 2017, real consumption through December 2016. Consumer Confidence is an index that measures how optimistic or pessimistic consumers are with respect to the economy in the near future. A high number indicates high confidence, while a low number indicates low confidence. | Sources: Conference Board, BEA, Bloomberg 1 10 Capex intentions set to turn around 15 CFO capex intentions and actual, 1Q00 – 1Q171 20 15 10 10 Intentions 5 0 0 -5 -5 -10 Actual, lagged 2 months (y/y % change) 5 The confidence story is not only for consumers, but also for the business side, too; low business confidence has been a hindrance for the US economy. -10 -15 Intentions (LHS) Actual (RHS) -15 1Q03 1Q05 1Q07 1Q09 1Q11 1Q13 1Q15 -20 1Q17 Expected growth in capital spending over next 12 months. Intention through 1Q17, actual through 4Q16 Capex intention is the amount CFOs plan to spend on capital expenditures, and capex actual is the amount they actually spent on capital expenditures. | Sources: Duke University, Haver 1 11 Expect pendulum to swing back on regulation 1,400 US presidential “economically significant”1 federal regulations by calendar year 1,300 1,200 CEOs indicate that the rollback of regulations will be beneficial for hiring and capital investment. Banks could especially benefit. 1,100 1,000 900 2008 2009 2010 2011 2012 2013 2014 2015 “Economically significant” is defined by Executive Order 12866 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: https://regulatorystudies.columbian.gwu.edu/reg-stats Most current data available used. 1 12 Business leaders are optimistic 2Q2005 – 1Q2017 80 8 CFO economic optimism1 (RHS) US real GDP (LHS) 6 4 60 2 0 50 CFO economic optimism US real GDP (y/y % change, lagged one quarter) 70 Optimism among business leaders has increased significantly, which seems to lead real GDP growth. -2 40 -4 30 -6 4Q05 1Q07 2Q08 3Q09 4Q10 1Q12 2Q13 3Q14 4Q15 1Q17 Duke/CFO Outlook: Optimism Index, US economy (scale: 0 – 100, 100 = most optimistic) Gross Domestic Product (GDP) is the monetary value of all finished goods and services produced within a country’s borders in a specific time period. | Sources: Duke, Haver, Wellington Management 13 1 Market’s Fed funds expectations rising 2.5 Fed funds rate futures contracts for each year end, December 2015 – March 2017 (%) 2019 2018 2017 2.0 1.5 1.0 After the presidential election, the market’s expectations of policy rates jumped, but they are still somewhat below the Federal Reserve’s (Fed) forecast. 0.5 0.0 1/16 3/16 4/16 5/16 7/16 8/16 10/16 11/16 1/17 2/17 3/17 Federal funds rate is the rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight. | Source: Bloomberg 14 US dollar strength supported by monetary policy divergence 1.0 The US dollar is driven by two important factors: monetary policy and the level of real rates. Tighter central bank policy and higher rates in the US are supportive of the US dollar. 10-year real yields, January 2014 – March 2017 (%) 0.5 0.0 -0.5 -1.0 US -1.5 1/14 4/14 6/14 9/14 12/14 3/15 6/15 9/15 Japan 12/15 Germany 3/16 6/16 9/16 France 12/16 3/17 Note: real yields (i.e., yields after adjusting for inflation) are from inflation-linked bonds | Source: Bloomberg 15 Key US political dates 10 – 24 Apr Congress in recess 28 Apr Continuing Resolution (CR) expires. Action needed to prevent government shutdown. 29 April President Trump’s 100th day in the office Mid-May Deadline to overrule Obama regulations using Congressional Review Act (CRA) 31 July – 4 Sep Congress in recess 30 Sep End of Fiscal Year 2017 appropriations or CR needed to keep government open While it’s difficult to predict US politics, Washington DC’s calendar gives a roadmap of important deadlines and the tight time frame in which to implement tax reform this year. 16 Small-cap equities are more domestically focused Percentage of revenue derived from each region, 31 December 2016 Large-Cap Stocks Small-Cap Stocks 6% 4% 8% 5% 7% 3% 13% 1% 6% 64% 2% US 78% Japan China Europe Emerging markets ex China Large-cap stocks are represented by the Russell 1000 Index, which measures the performance of the large-cap segment of the U.S. equity universe. Small-cap stocks are measured by the Russell 2000 Index, which measures the performance of the small-cap segment of the U.S. equity universe. | Sources: FactSet, Wellington Management Other Small-cap equities’ revenues come mostly from the US, whereas large-cap equities’ revenues derive about 35% of their revenues from outside the US. Protectionist policies in the form of tariffs or other measures that hurt big export markets such as China or emerging markets would likely hurt large caps more than small caps. 17 Japanese equities track the yen 1,200 December 2003 – March 2017 130 120 1,000 800 100 600 90 400 80 MSCI Japan (LHS) USD/JPD MSCI Japan price index 110 The Bank of Japan’s aggressive monetary policy has injected substantial liquidity into the financial system. This has led to a weakened yen, which is good for exporters—a critical part of the economy. USD/JPY (RHS) 70 200 3/04 3/05 3/06 3/07 3/08 3/09 3/10 3/11 3/12 3/13 3/14 3/15 3/16 3/17 Past performance is no guarantee of future results. The performance shown above is index performance and is not representative of any fund’s performance. Indices are unmanaged and not available for direct investment. For illustrative purposes only. The right-hand scale shows how many Japanese Yen are equal to one US dollar. MSCI Japan Index is a free-float adjusted market-capitalization index designed to measure large- and mid-cap Japanese equity market performance. | Source: Bloomberg 18 Japan Inc’s profitability: Abenomics effect 7 Beyond a weak yen, profit margins have been rising strongly in Japan with companies’ greater focus on return on assets, return on equity, and use of excess cash for buybacks and dividends. Japan profit margins (%) 6 5 4 3 2 1 2Q55 3Q65 4Q75 1Q86 2Q96 3Q06 4Q16 Abenomics refers to the economic policies of Japan’s prime minster, Shinzo Abe. Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA is indicative of how efficient a management is at using its assets to generate earnings. Return on equity (ROE) is a measure of profitability that calculates how many dollars of profit a company generates with each dollar of shareholders’ equity. | Sources: Haver, Evercore ISI, Wellington Management 19 European consumer confidence implies stronger retail sales European consumer confidence and retail sales, December 2002 – March 20171 8 10 Retail sales (RHS) 6 0 4 -10 2 0 -20 -2 Retail sales, three-month moving average (%) Consumer confidence, advanced three months (y/y % change) Consumer confidence (LHS) Similar to the US but earlier in its recovery cycle, Europe’s economy is getting stronger, underpinned by rising employment and income, which should also lead to higher consumption. -30 -4 -6 -40 3/02 11/03 7/05 3/07 11/08 7/10 3/12 11/13 7/15 3/17 Retail sales through January 2017, consumer confidence through March 2017 | Sources: Haver, Wellington Management 1 20 Leading business indicators turn positive in Europe European PMI and industrial production, January 2000 – March 20171 15 65 PMI (LHS) Industrial production (RHS) 10 60 0 50 -5 45 -10 40 -15 35 -20 Industrial production (y/y % change) PMI, three-month moving average (%) 5 55 The European PMI hit 56, a 6-year high and consistent with 6% industrial production growth and 3% GDP. However, uncertainty regarding the outcome of the French election is hanging over markets. -25 30 7/00 3/02 11/03 7/05 3/07 11/08 7/10 3/12 11/13 7/15 3/17 PMI through March 2017, industrial production through February 2017 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. A PMI reading above 50 signals expansion from the current growth rate, while a reading below 50 signals contraction from the current growth rate. Sources: Haver, Wellington Management 1 21 Markets pricing in less risk of Le Pen victory 80 Price indexes, January 2016 – March 2017 French sovereign CDS (LHS) 150 French equities (RHS) 145 140 60 135 50 130 40 125 30 120 20 French equity index French sovereign credit default swaps index 70 Credit markets were reflecting a lot of concern early in the year. Recently, however, French equities have moved higher and French credit derivative spreads have narrowed, reflecting less concern. 115 110 10 1/16 2/16 3/16 4/16 5/16 6/16 7/16 8/16 9/16 10/16 11/16 12/16 1/17 2/17 3/17 Past performance is no guarantee of future results. The performance shown above is index performance and is not representative of any fund’s performance. Indices are unmanaged and not available for direct investment. French Sovereign Credit Default Swap (CDS) – A credit derivative similar to insurance because it provides the buyer of the contract with protection against default or other negative credit event. The MSCI France index is a free-float weighted equity index that reflects the performance of equities listed in France. For illustrative purposes only. | Source: Bloomberg 22 French election doesn’t look like Brexit or Trump Poll averages 100 days prior to referendum/election (%)1 Le Pen is currently trailing Macron by 20 percentage points in the polls, which is a much wider gap than in the Brexit referendum or the US presidential election. Remain Brexit Leave Clinton US president Trump Macron French president Le Pen 0 10 20 30 40 50 60 70 Percent of respondents The polling numbers are based on data available 100 calendar days prior to the referendum /election. In each case, multiple polls were released and so we applied a simple average. French Presidential elections typically consist of two rounds and so we use polls for the expected second round of voting between Marine Le Pen and Emmanuel Macron. | Sources: UK polls – Ipsos Mori, YouGov, ComRes, ICM and Survation; US national polls – NBC, Ipsos/Reuters, and USC/Los Angeles; French polls – Ifop-Fiducial, Ipsos, and OpinionWay. 23 1 Emerging economies’ current accounts have improved 30 Emerging market fundamentals have improved after currencies’ steep declines in recent years allowed countries to rebalance their trade and stabilize their economies. Current account, sum of countries in JPM GBI-EM Global Diversified, 2004 – 2016 (US$ billions) 15 0 -15 -30 -45 -60 -75 12/04 6/06 12/07 6/09 12/10 6/12 12/13 6/15 12/16 The current account is an important indicator of an economy’s health. It is defined as the sum of the balance of trade (goods and services exports less imports), net income from abroad, and net current transfers. JP Morgan Global Bond Index – EM Global Diversified tracks the local currency bonds issued by emerging market governments up to a market cap weight of 10% per country. Sources: Haver, Wellington Management 24 Caution on China: Higher rates 6 One risk to monitor is China and its interest rates. Higher rates could damage the property cycle— a key growth engine. China five-year swap rate, December 2011 – March 2017 (%) 5 4 3 2 3/12 8/12 Source: Bloomberg 2/13 7/13 1/14 6/14 12/14 5/15 11/15 4/16 10/16 3/17 25 Valuations are expensive across most asset classes Credit option-adjusted spreads1 (basis points)2 Equity 12-month trailing P/B ratio3 US HighUS High- Yield ex US IG Global Euro IG Yield energy Corporate High-Yield Corporate EMBI+ US Europe Japan EM Current 383 374 118 393 118 338 3.09 1.84 1.32 1.58 10-year percentile (%) 11 10 13 12 27 55 100 85 58 61 20-year percentile (%) 22 20 31 23 52 50 97 57 46 60 Equity and credit valuations are expensive. For equities to perform, earnings have to beat the market’s expectations and credit conditions have to improve. As of 31 March 2017 1 Option-adjusted spread (OAS) measures fixed-income yields while taking into account any embedded options. 2 A basis point 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. 3 Price-to-Book Ratio (P/B ratio) is the ratio of a stock’s price to its book value per share. Green shading represents relatively inexpensive valuations, red shading represents relatively expensive valuations. US high yield is represented by the Bloomberg Barclays US Corporate High Yield Index ; US high yield ex energy is represented by the Bloomberg Barclays US Corporate High Yield Index ex Energy; US IG corporate is represented by the Bloomberg Barclays US Corporate Index; Global high yield is represented by the Bloomberg Barclays Global High Yield Index; Euro IG corporate is represented by the Bloomberg Barclays Euro Corporate Index; EMBI+ is an abbreviation for the JPMorgan Emerging Markets Bond Index Plus; US is represented by the MSCI USA Index; Europe is represented by the MSCI Europe Index; Japan is represented by the MSCI Japan Index; EM is represented by the MSCI Emerging Markets Index Sources: Bloomberg, Datastream, Wellington Management 26 Peak defaults probably behind us 16 Moody’s US high yield default rate, actual December 1996 – February 2017, estimated March 2017 – February 2018 (%) 12 8 Moody’s forecast 4 Credit fundamentals are healthy. Defaults peaked in the high yield market in 2016 during the shakeup of the energy and metals/mining industries. These industries are now healing, and default rates should fall. 0 98 00 02 04 06 08 10 12 14 16 Actual results may vary, perhaps significantly, from the estimated data presented | Source: Moody’s 18E 27 Bank loan valuations still attractive 6 Bank loans offer similar yield as high-yield bonds, yet they’ve historically had a stronger recovery rate and could appreciate if rates rise given their floating-rate characteristics. High-yield bond yield minus bank loan yield, January 1992 – March 2017 (%) 4 2 0 -2 93 95 97 99 01 03 05 07 09 11 13 15 17 Past performance is not a guarantee of future results. The performance shown is index performance and is not representative of any funds’ performance. Investors cannot invest directly in an index. The chart shows the yield for high-yield bonds minus the yield for bank loans. Bank loans, represented by the Credit Suisse Leveraged Loan Index, are below-investment-grade, senior secured, short-term loans made by banks to corporations. They are rated below-investment-grade because there is a greater possibility that the issuer may be unable to make interest and principal payments on those securities. High-yield bonds, or “junk bonds,“ represented by the Bloomberg Barclays US Corporate High Yield Bond Index, are rated below-investmentgrade because there is a greater possibility that the issuer may be unable to make interest and principal payments on those securities. Sources: Barclays, Credit Suisse, JPMorgan 28 Low-volatility equities are expensive 4.0 Low volatility versus high volatility relative valuations of largest 1,500 US equities, 10th versus 90th percentile, January 1966 – March 20171 P/E ratio P/B ratio 3.5 3.0 2.5 2.0 1.5 1.0 P/B ratio median 0.5 0.0 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14 17 Low-volatility (lowvol) equities are concentrated in sectors such as consumer staples and utilities, while high-volatility equities are concentrated in financials. Even though low-vol equity valuations are a bit cheaper since the election, they are still well above the longterm median on a price-to-book basis. Data through 25 March 2017 Price-to-Earnings Ratio (P/E ratio) is the ratio of a stock’s price to its earnings per share based on 12-month forward projections. Price-to-Book (P/B ratio) is the ratio of a stock’s price to its book value per share. Low-volatility stocks are defined as the 150 lowest volatility stocks of the largest 1,500 US equities. High-volatility stocks are defined as the 150 most volatile stocks of the largest 1,500 US equities. Source: Wellington Management 29 1 Financials valuations are still attractive 1.0 12-month trailing price/book, financials index – total market index, January 2001 – March 2017 MSCI Japan Financials – MSCI Japan 0.5 MSCI Europe Financials – MSCI Europe 0.0 MSCI US Financials – MSCI US -0.5 -1.0 Valuations for US and European financials are attractive relative to the market. The potential for higher interest rates, regulatory relief, and better economic activity are all supportive for financials. -1.5 -2.0 3/01 3/03 3/05 3/07 3/09 3/11 3/13 3/15 3/17 Past performance is no guarantee of future results. The performance shown above is index performance and is not representative of any fund’s performance. Indices are unmanaged and not available for direct investment. For illustrative purposes only. Please see Index Definitions on page 54.. Source: Datastream 30 Think Function, Not Form Diversify exposure across economic environments Relative performance by economic environment Growth Rising Bank loans Public equities EMD Private equities REITs Long/short equity hedge funds Inflation Stagflation EM currencies/ILBs Industrial metals commodities Weak growth Natural resource equities Corporate spreads High yield Absolute return/ active risk Growth Nominal govt bonds Agency MBS Municipal bonds Energy & Agriculture commodities TIPS Gold/precious metals commodities EMD: Emerging Markets Debt REITs: Real Estate Investment Trusts ILBs: Inflation-Linked Bonds MBS: Mortgage-Backed Securities TIPS: Treasury Inflation Protected Securities While most assets tend to perform well in a growth environment with benign inflation, think about whether you have assets that perform well in an inflationary environment, either with growth (top right hand) or without (bottom righthand). Falling Falling Inflation Rising The example presented is for illustrative purposes and reflects the current opinions of Wellington Management Global Multi-Asset Strategiessm 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. 31 Putting it all together Higher implementation risk with Trump presidency Strong US-growth momentum still likely to outweigh politics Asset allocation with stronger global growth: • I suggest diversifying equity exposure globally • Consider rotating out of bond-like equities into cyclical equities, including financials and industrials • I favor small- and mid-cap stocks over large-cap stocks • Consider tail-risk hedges in gold, US government bonds, or options 32 33 34 Table of Contents...............................................................................................................................................................................Page Appendix: More Charts That Got Us Thinking Buying stocks when fear runs high has historically led to long-term gains..................................................................................... 36 Intra-year dips in the S&P 500 Index happen frequently................................................................................................................... 37 Are you an opportunistic or apprehensive investor?.......................................................................................................................... 38 Are value stocks poised to outperform growth stocks after a long period of underperformance?............................................. 39 Domestic stocks and international stocks alternate periods of outperformance........................................................................... 40 Stock market returns after significant oil price declines..................................................................................................................... 41 Asset class returns vs. the average investor........................................................................................................................................ 42 Hypothetical impact of rising rates on fixed income........................................................................................................................... 43 Some asset classes have performed well in rising-rate periods........................................................................................................ 44 US stock reactions to fast vs. slow rate hikes....................................................................................................................................... 45 US interest rates could continue to stay low........................................................................................................................................ 46 US debt to GDP levels are approaching record highs......................................................................................................................... 47 Annual inflation is below its historical average but rising.................................................................................................................. 48 Tax-equivalent yields............................................................................................................................................................................... 49 Municipal bond yields look attractive................................................................................................................................................... 50 The drug revolution unfolds................................................................................................................................................................... 51 Healthcare is trading at a discount to its historical average.............................................................................................................. 52 Fund flows................................................................................................................................................................................................ 53 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 Index Definitions: 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. Bloomberg Barclays Global Aggregate Bond Index provides a broad-based measure of the global investment-grade fixed-rate debt markets. 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, 1998. 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®). 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. 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®). 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 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 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 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 as per the Global Industry Classification Standard. Industrial Metals are represented by Bloomberg S&P GSCI Total Return CME – a widely recognized leading measure of general commodity price movements and inflation in the world economy. 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. 54 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 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. 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. 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. Date 4/17 NAJ_FLP_0417 201102 55 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_0417 201102 hartfordfunds.com888-843-7824 @hartfordfunds hartfordfunds.com/linkedin