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Hartford Schroders US Small Cap Opportunities Fund

February 2018 Monthly Update

Performance (%)
% (as of 3/31/2018)
Average Annual Total Returns % (as of 3/31/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small Cap Opportunities  I -1.54 8.72 8.27 11.83 9.57 12.55
BENCHMARK -0.08 11.79 8.39 11.47 9.84 ---
Morningstar Small Growth Category 2.27 17.98 8.42 11.68 9.51 ---
Performance (%)
% (as of 3/31/2018)
Average Annual Total Returns % (as of 3/31/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small Cap Opportunities  I -1.54 8.72 8.27 11.83 9.57 12.55
BENCHMARK -0.08 11.79 8.39 11.47 9.84 ---
Morningstar Small Growth Category 2.27 17.98 8.42 11.68 9.51 ---
SI = Since Inception. Fund Inception: 08/06/1993
Operating Expenses:   Net 1.14% |  Gross  1.14%

Performance prior to 10/24/16 for Class I-shares reflects the performance, fees, and expenses of the Investor Class of the predecessor fund Schroder U.S. Opportunities Fund. If Class I fees and expenses were reflected, performance would have differed. SI performance is calculated from 8/6/93.

Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted.

 

Market Review

The nine-day correction: The month began with the US equity markets in full swoon. A sharp correction began on January 26, bottomed on February 8, and was merely a bad memory by February 15. At its depth, the market was down 10% by market close on February 8, which, by the standard yardstick, constituted a correction. But it seemingly was over as quickly as it began. A variety of reasons were proposed for the sell-off, many pointing to various trades betting on low volatility (which was a profitable trade throughout 2017). Once volatility began to spike, speculators rushed to close out these positions and, as a result, drove the market into a downward spiral. This led to stocks largely moving together in lockstep regardless of market capitalization and style. Inter-stock correlations2 approached 1.0 in February (Source: Morningtar) which makes it difficult for active managers to find differentiated stocks.

The US economy is in good shape as seen in rising gross domestic product (GDP)3 and employment, declining unemployment, and rising wages. The latter, in our view, will presumably help stimulate consumer spending. Interest rates, as represented by the 10-year US Treasury Note, continued to rise through most of the month, finishing February at a yield of 2.86%. Yields on the US 10-year have been rising steadily since last September.

In Washington, the double-barrelled stimulus from the tax bill and the new US government budget is unique in its timing. The economy is clearly late cycle and, historically, prior government stimulus packages have occurred early in the economic cycle. This has raised concerns about the potential for higher inflation, more likely in 2019 than 2018.

In the US equity markets, certain themes persisted from 2017: Large has outperformed small and growth has continued to outpace value.  

 

Performance Review

The Fund (Class I Shares) returned -3.69% in February, outperforming its benchmark, the Russell 2000 Index, which returned -3.87%. Nine of the 10 sectors in the Index were negative, with energy the weakest at -12.8%. 

Our weakest relative performance was in healthcare where stock selection detracted, generally. Technology was our second biggest detractor, again primarily from stock selection. Unusually, technology was our best absolute returning sector, followed by financials.                                                                               

In terms of the strategy’s alpha categories, Mispriced Growth slightly outperformed. Turnarounds, however, were the weakest, while Steady Eddies also lagged.    

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Quarterly Fund Outlook & Commentary
Head of US Equities Management Schroders Fred Schaefer

The Fund seeks capital appreciation by combining three diversified, uncorrelated sources of potential alpha1:

Mispriced Growth
Companies that can offer an unrecognized or underappreciated growth dynamic over the ensuing 2-3 years

Steady Eddies
Companies with stable growth characteristics, slower but more predictable revenues and earnings patterns

Turnarounds
Companies whose growth engine appears to have broken, but there appears to be evidence that growth is returning

 

Alpha is a measure of the performance of a portfolio after adjusting for risk. Alpha is calculated by comparing the volatility of the portfolio and comparing it to some benchmark. The alpha is the excess return of the portfolio over the benchmark.

Correlation is a statistical measure of how two investments move in relation to each other. A correlation of 1.0 indicates the investments have historically moved in the same direction; a correlation of -1.0 means the investments have historically moved in opposite directions; and a correlation of 0 indicates no historical relationship in the movement of the investments.

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.

 

Important Risks: Investing involves risk, including the possible loss of principal. There is no guarantee a fund will achieve its stated objective. 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 and volatility than large-cap securities ● The main risk of real estate related securities is that the value of the underlying real estate may decrease in value. 

The views expressed herein are those of Schroder Investment Management North America Inc. (Schroders) are for informational purposes only, and are subject to change based on prevailing market, economic, and other conditions. They may not reflect the views of Hartford Funds or any other sub-adviser to our funds and should not be construed as research or investment advice or as an offer or solicitation to buy or sell any security.

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