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Since the current uncertainty in Ukraine may continue for some time, investors may want to seek opportunities that are not only partially shielded from that uncertainty, but also positioned to capture potential upside should a resolution cause a global, risk-on rally. Interest rates are likely to remain low relative to history even as the Fed begins to raise rates from the bottom, so for investors seeking higher returns, we believe listed equities remain attractive. 

The strength of the US economy persists, and we believe domestically focused companies could be insulated from the war in Ukraine. Not only are US small caps more domestically focused, but they also currently offer cheaper valuations. Schroders’ investment process seeks to reduce risk by investing in different types of small-cap companies that have the potential to outperform across a variety of market environments. 


Small Caps Have Outperformed Since Russia Invaded Ukraine

Europe significantly underperformed as the invasion began, followed by emerging markets and Japan. US stocks held up, however, with US small caps (as represented by the Russell 2000 Index) outperforming the more globally exposed S&P 500 Index and NASDAQ Composite Index (Figure 1).


Small Caps Outperformed the S&P 500 and NASDAQ as the Russia-Ukraine War Began
Price movement since Russia invaded on 2/24/22

Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. Source: 2022 Bloomberg Finance L.P.

FIGURE 2 and 3

Large Caps Are More Exposed to Secular Growth, Small Caps Are More Diversified
Large- vs. Small-Cap Economic Exposure

Secular growth: technology, internet, communication services, consumer discretionary ex internet; Classic defensives: consumer staples, healthcare, and utilities; Cyclicals: energy, financials, industrials, and materials. Source: RBC as of 2/22 



Why Have Small Caps Been Beating Large Caps?

1. Composition of Indices
The composition of the S&P 500 Index has changed considerably following the increasing weight of well-known technology stocks (FIGURE 2). This has changed the characteristics of the benchmark from diversified economic exposure to a concentrated secular growth factor with higher overseas risk. Meanwhile, US small caps remain well diversified with a strong domestic bias (FIGURE 3).

2. Domestic Exposure
The vast majority of small caps’ revenue exposure is domestic, potentially offering these equities a buffer against what ensues abroad (FIGURE 4).

3. Valuations
US small caps are currently trading at a discount relative to US large caps (FIGURE 5).



Russell 2000 Index Revenue Exposure Is Overwhelmingly Domestic
Total Last 12 Months Revenue: 1,952.0B

Showing eight of 257 countries. Values are estimated based on FactSet’s proprietary algorithm. 


Small Caps Continue to Be Cheap Relative to Large Caps

Past performance does not guarantee future results. 1P/E (Price/earnings) is the ratio of a stock’s price to its earnings per share (EPS). EPS is calculated by dividing a company’s profit by the number of its outstanding shares. Source: FactSet. 


4. Earnings Outlook
Finally, earnings per share are forecast to grow more for US small caps than US large caps in the coming year (FIGURE 6).



Calendar Year EPS Growth 

  Russell 2000 Index S&P 500 Index
2019 12.0%
2020 -5.4% 6.3%
2022E 15.8% 12.2%

Forecast may not materialize. For illustrative purposes only. Sources: RBC US Equity *Strategy, S&P Capital IQ/Clarifi, Russell, CIQ estimates, FactSet, Thomson Reuters.

The small-cap universe may benefit from strong domestic economic growth, cheaper valuations, and faster expected earnings.

Looking Ahead 

No one knows how long the situation in Ukraine will last, but we can try to minimize its impact on investor portfolios while also riding longer-term, structural macro tailwinds. US small-cap stocks tend to source their revenues domestically, insulating them somewhat from global geopolitical disruptions. 

The small-cap universe offers a wide variety of companies that may benefit from the strong domestic economic growth we’re experiencing. Cheaper valuations and faster expected earnings growth could also offer a better entry point relative to US large caps. These macro tailwinds, combined with the team’s process of selecting companies with diversified performance drivers, can offer investors an attractive strategy for seeking capital growth. 


Hartford Schroders US Small Cap Opportunities Fund:



Ask your financial professional if US small-cap equities make sense for your portfolio.


Morningstar ratings for Mutual Fund I-Shares 

(as of 4/30/2022)
Overall, 4 stars, 3-Year, 3 stars, 5-Year, 4 stars, and 10-Year, 4 stars, rated against 586, 586, 534 and 351 products, respectively. Morningstar RatingTM is calculated for products with at least a 3-year history, based on a risk-adjusted return measure (excluding any applicable sale charges) and accounts for variations in a product's monthly performance. 5 stars are assigned to the top 10%; 4 stars to the next 22.5%, 3 stars to the next 35%, 2 stars to the next 22.5% and 1 star to the bottom 10%. ETFs and mutual funds are considered a single population. The Overall Rating is derived from a weighted average of the performance figures associated with its 3-, 5-, and 10-year (if applicable) Morningstar Rating metrics. For more information about these ratings, including their methodology, please go to global.morningstar.com/managerdisclosures . Ratings for other share classes may vary and are subject to change monthly. Past performance is no guarantee of future performance.
©2022 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/ or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

586 Products | Small Blend Category
Based on Risk-Adjusted Returns


NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the National Association of Securities Dealers automatic quotation market. Russell 2000 Index measures the performance of the small-cap segment of the US equity universe. S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks. 

Important Risks: Investing involves risk, including the possible loss of principal. Security prices fluctuate in value depending on general market and economic conditions and the prospects of individual companies. • Small-cap securities can have greater risks, including liquidity risk, and volatility than large-cap securities. • To the extent the Fund focuses on one or more sectors, the Fund may be subject to increased volatility and risk of loss if adverse developments occur. • Integration of environmental, social, and/or governance (ESG) characteristics into the investment process may not work as intended.

The views expressed herein are those of Schroders Investment Management (Schroders), are for informational purposes only, and are subject to change based on prevailing market, economic, and other conditions. The views expressed may not reflect the opinions of Hartford Funds or any other sub-adviser to our funds. They should not be construed as research or investment advice nor should they be considered an offer or solicitation to buy or sell any security. This information is current at 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 Schroders or Hartford Funds. 

WP671 228510

From our sub-adviser Schroders Investment Management
Author Headshot
Head of US Small and Mid Cap Equities, Portfolio Manager for Hartford Schroders US Small Cap Opportunities Fund
Author Headshot
Investment Director, US Small and Mid Cap Equities

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