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Advisor select

As Director of Investment Strategy and Risk, Kent Stahl conducts research on investment trends and focuses on major risks across Wellington’s entire suite of equity, fixe +

Hartford International Equity Fund
HDVAX (Class A)
HDVCX (Class C)
HDVIX (Class I)
HDVTX (Class R5)
HDVYX (Class Y)
Fund Family
Hartford Funds
Fund Advisor
Hartford Funds Management Company, LLC
Sub Advisor
Wellington Management Company LLP
CONTACT

5 Radnor Corporate Center, 100 Matsonford Road
Radnor, PA 19087

T: 800-456-7526

Best Ideas with Contrarian Views
Hartford International Equity Fund
Ticker.com
Nov 6, 2017

Q: What is the mission of the fund?

The Hartford International Equity Fund began on June 30, 2008, with Wellington Management Company LLP as the fund’s sub-adviser, and I took over the reins on March 1, 2010, managing the fund along with Gregg Thomas.

The Fund’s objective is to seek capital appreciation. We seek to consistently generate a high level of alpha, combining active stock-picking strategies with a factor-based risk approach to mitigate drawdown risk. 

Our benchmark is the MSCI ACWI ex USA Index and we seek to deliver a large cap, core international exposure for our clients with high active-share by holding a broad mix of high-conviction stocks spanning potentially all countries except the U.S.

Q: What is your market approach?

Compared to the U.S., the non-U.S. market tends to be less efficient, and broader cap, style, or geography yield even more inefficiencies. The consistency of our performance has been predicated on the strength of our stock picking in less efficient segments of the market.

We intentionally build the portfolio to have broad exposure across geographies, market cap and styles. By maintaining balance across market factors, our stock picking should be the primary driver of the portfolio’s returns. Although this is obviously a large-cap portfolio, our range of stocks comprises a good balance of large, mid and small caps relative to the market. I think this approach to risk management is a key reason why we have been able to generate alpha in a wide array of different environments since taking over in 2010.

The strategy epitomizes stock picking in the most inefficient parts of the market. I would add that the one environment we find most challenging is a particularly narrow market environment simply because of the breadth of our capabilities. It is not cause for concern for us, however, because those periods don’t often last long and tend to mean-revert fairly quickly.

Q: What are the advantages of such a broad portfolio?

Compared to the U.S., the non-U.S. market tends to be less efficient, and broader cap, style, or geography yield even more inefficiencies. The consistency of our performance has been predicated on the strength of our stock picking in less efficient segments of the market and so breadth is important.

We believe that our competitive advantage is the depth of Wellington’s fundamental research. As of October 2017, we have over 650 investment professionals, many of whom are globally or internationally oriented. The goal is to exploit our research advantage in less efficient segments of the market.

Q: What core beliefs drive your investment philosophy?

We have three drivers. One is that we believe, over time, the most sustainable way to add value is through skilled stock picking, built on the strength of Wellington’s proprietary research methods. 

The second is that we believe in a best-ideas portfolio, highly active stock-picking, where risk is managed separately. We source a number of our managers to run concentrated versions of what they typically do for clients. And instead of having the underlying managers focus on risk, we address it by combining managers and using our risk factor-based approach. 

Third, we focus on allocating capital on a contrarian basis. We like strategies that are currently out of favor. Right now, that would be more value contrarian strategies, typically taking capital from growth styles that are doing well. I think that is a smart way to rebalance or allocate capital.

Q: What is your investment process?

We have a relatively straightforward process. We start by identifying factors or styles that we think are positioned to do really well, things like deep value or contrarian style, high growth, or quality styles. 

Once we determine in what direction we want to go, we review Wellington’s broad array of investment professionals to identify those who are the highly skilled at investing with that style and have them run highly concentrated versions of their typical standalone mandates. So, while they might own 100 stocks in a diversified portfolio, for us they might only own 20 or 25. 

The reason we do this is that combining all these concentrated portfolios results in a diversified aggregate portfolio. Because we only seek alpha generation from our stock pickers, we ask them to just give us their best ideas without thinking about diversifying risks individually—everything needs to be a significant active position for them. By looking for strategies that tend to be extreme in their factor exposures, we can emphasize stock picking in more “eclectic” areas of the market.

Choosing the stock pickers is part quantitative, part qualitative. We start with about 200 different equity strategies and quantitatively identify who has a factor footprint we like and who complements the other managers, and then qualitatively look to see if they have a differentiated philosophy or mindset that we believe can add value. 

Once we identify the managers and factors, we use our risk-factor framework to assemble the portfolio and stress test it to evaluate how the strategy would react to different market events, which also drives the position weighting.

What distinguishes our strategy is how we combine managers and manage risk within the portfolio. We let our top investors, leveraging Wellington’s research, pick the highest alpha-generating ideas while we, the portfolio managers, focus on shock-absorbing the risk.

Q: How do you integrate the differing equity strategies?

First, having the degree of breadth in the portfolio that we do generates a balance—spanning deep value to aggressive growth  helps mitigate extreme swings. 

We are also valuation conscious. There is a big difference between a great company and a great stock. And because we tend to be contrarian, when an area of the market is really out of favor, we will consider shifting capital into it and selling out of those areas doing well. 

Being this disciplined is not an easy thing for investors, and as a result, our turnover has been 50% to 100%, but we find that rotating out of things currently in favor and into those that are not is what enables us to add value.

We are high-conviction investors but also risk-focused. I have 30 years of experience studying factor markets and seeing how these things mean-revert, and I am very disciplined in following this strategy. 

Q: Can you share examples of your research process?

One example would be one of our current top active positions, a Russian multinational technology company that serves essentially as a Russian Google, a search engine and social media site. We bought it amid broad global concerns over Russia, particularly after Russia’s military incursions into the Ukraine. The ruble was plummeting, but the company featured a stable, cash-flow-generated model. 

  • Inception: June 30, 2008
  • AUM: $47 million

The stock was cheap and our IT analyst, emerging market equity team, and investors from our contrarian team had all done fundamental analysis on the company and identified it a great business, despite Russia’s volatile situation. We get lots of input and dialog on the country, sector, and style before anything goes into the portfolio. 

In contrast and showing our breadth of stocks, our top holdings also include a few Canadian banks.  The reason we like Canadian banks is because they are much like U.S. banks in terms of loan growth and higher interest rates. In fact, Canada is even better than the U.S. in that its banking market is much more consolidated. Four banks in Canada represent 95% of the market share, so they are more profitable, cheaper, and higher quality than is typical in non-U.S. markets. When the market goes down, Canadian banks have historically done well. 

Interestingly, most international investors start out with an EAFE (Europe, Australasia, Far East) mindset and overlook Canada, despite the fact that it is represented in the MSCI ACWI ex USA Index. We try to exploit that oversight, as they are simultaneously a great diversifier and business model.

Recently, we have been finding a lot of opportunities in India because we believe in the long-term sustainability of India’s recovery in terms of deregulation and the many improvements that have been made. 

The reform of India’s financial system spells opportunity for us, and we currently own three of India’s banks including a former state-run bank that stands to benefit from recent currency reform steps. The government has eliminated large-denominated bills to eradicate the black market, forcing more money through the deposit system versus the black market by making it more difficult to hoard cash. 

While our macro and emerging markets group followed the bank, its stock came into the portfolio by way of one of our more growth-oriented investors who was looking for higher-growth areas that weren’t as concentrated in the technology or healthcare spaces.

Q: What is your portfolio construction process, and what role does diversification play?

We look across a range of styles: deep value, aggressive growth, contrarian, momentum, and quality, and stress-test the portfolio by revisiting good and bad market periods to see how the portfolio would fare. And if we don’t have a strong opinion on the market, we endeavor to be risk neutral. 

The majority of the return comes from stock picking, by minimizing the portfolio’s overall exposure to various market risks. That drives the weighting decision among the different strategies of higher and lower risk. Our stress-testing methodology is what drives capital allocation, and that in turn drives security selection. 

So ours is an integrated risk process where it is our people who pick stocks from the bottom up and we implement risk management using stress testing from the top-down.

Q: Do macroeconomic factors figure into your strategy?

Certainly. For instance, looking again at banks in India, our view on the country, Prime Minister Modi, reforms, and the progress being made all contributed to our decision to invest. The same can be said about our need to be comfortable with Russian risk after its incursion into Ukraine. 

It would be foolish not to think about such things, but essentially we focus on the individual company. Deeper-value strategies tend to do better early in the cycle, while quality or momentum strategies do better later in the cycle. Nonetheless, ultimately what drives our security selection and weighting comes down to the fundamentals and what’s happening with regard to risk.

It is the same for capital allocation—it’s what’s happening with the fundamentals, without ignoring the macro standpoint. That is why I see it as an integrated process, using all of Wellington’s research advantages.

One of the areas we are looking at is the A-share market in China, which is typically going to include companies more heavily levered to local services growth. As China is moving away from production toward a service economy, that evolution could prove a lot bigger than people anticipate.

Q: How many holdings are in the portfolio, and do you implement maximum and minimum position sizes? 

In terms of the number of positions, again, we tend to run pretty diversified, using multiple managers with different sources of alpha and we do own a number of mid and small cap companies which results in more holdings. We focus less on the number of names than on our active share because, to me, that’s a better metric for money at risk. 

The strategy’s active share has typically been in the 70 percentage range over time.

Our max position is generally about 1.5% but position sizing of individual names will vary significantly depending on the characteristics of each holding. 

Our emerging market exposure generally runs between 20% and 30%.

Q: How do you define and manage risk?

We strive to deliver high alpha with consistency over time.  We focus a great deal on stress testing in order to help us navigate market extremes which has produced a consistent pattern of outperformance. 

Our risk framework is designed to give us a better sense of how we would do during those periods when our clients fear mean reversion. If we are able to mitigate extreme swings, it allows our clients to benefit from compounding alpha over many years.


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