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Hartford Schroders US Small Cap Opportunities Fund

November 2018 Monthly Update

Performance (%)
% (as of 12/31/2018)
Average Annual Total Returns % (as of 12/31/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small Cap Opportunities  I -10.82 -10.82 6.89 5.49 11.70 11.72
Benchmark -11.01 -11.01 7.36 4.41 11.97 ---
Morningstar Small Blend Category -12.73 -12.73 5.76 3.06 11.35 ---
Performance (%)
% (as of 12/31/2018)
Average Annual Total Returns % (as of 12/31/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small Cap Opportunities  I -10.82 -10.82 6.89 5.49 11.70 11.72
Benchmark -11.01 -11.01 7.36 4.41 11.97 ---
Morningstar Small Blend Category -12.73 -12.73 5.76 3.06 11.35 ---
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

November was, to borrow from Shakespeare, “a tale told by an idiot full of sound and fury, signifying nothing.”  To wit: The intramonth ups and downs were dramatic, yet the US equity markets managed to eke out reasonable returns. Micro-cap, which had been the leading group at the mid-year mark, is the key exception. As we head into December it is probably fair to characterize year-to-date returns as disappointing, in light of the optimism that flourished at the start of the year. 

Briefly, the US landscape in November was dominated by five things: elections, trade concerns, oil prices, the conclusion of corporate earnings season and the US Federal Reserve (Fed).

 

  • In the mid-term elections, the Democrats regained control of the House of Representatives and the Republicans added modestly to their majority in the Senate.

  • The market experienced notable weakness mid-month driven by conflicting messages on the future of US-China trade.

  • Oil prices, as measured by West Texas Intermediate (WTI), fell 33% between October 3 and November 29, which put heavy pressure on energy stocks.

  • Company earnings reports continued into mid-month in the US small-cap space. In aggregate, 63% of the companies in the Russell 2000 Index reported positive earnings surprise (in our portfolio, 73% of the names had positive surprises). Unfortunately, that did not translate into an immediately positive price impact for the portfolio.

  • At the end of the month, Fed Chairman Jerome Powell made this statement sparking a rally: “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy.” Investors interpreted this as meaning the Fed would moderate their rate increases in 2019.
  •  

    Performance Review

    The Fund (Class I Shares) returned 1.76% in November, outperforming its benchmark, the Russell 2000 Index, which returned 1.59%. Stock selection was mixed, with producer durables, technology, and energy (the worst sector in the Index) being the areas of greatest strength.

    In terms of the Fund’s alpha sources, two categories outperformed in November: Mispriced Growth and Steady Eddies. Mispriced Growth names were led by Spirit Airlines, Inc. and Alaska Air Group. The best performer in Steady Eddies was Performance Food Group Co.

    Key contributors included Performance Food Group Co., Spirit Airlines, Inc. and EnPro Industries, Inc. Performance Food Group benefited from their earnings report in which they announced a noteworthy increase in revenue and earnings (EBITDA).2 Spirit rose on a strong earnings report. The company also raised revenue guidance. EnPro Industries rose after reporting strong quarterly earnings driven by growth across their core segments as well as improving margins.

    Key detractors included Invacare Corp., Cavco Industries, Inc. and Cineplex, Inc. Invacare had a modest revenue and EBITDA miss, but more significantly, the market had a greater concern from the unexpectedly weak respiratory sales and the uncertainty around the potential impact of tariffs on both respiratory and lifestyles in North America. Cavco reported strong earnings, which were unfortunately overshadowed by an SEC subpoena and the resignation of the company’s chairman and CEO. The subpoena relates to allegations of improper trading of the stock of another company. Cineplex is a Canadian cinema operator with other related lines of business; they reported EBITDA and revenues below expectations for the third quarter.

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    Quarterly Fund Outlook & Commentary
    Head of US Equities Management at 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

    1 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.

    2 EBITDA is the measure of a company's earnings before interest, taxes, depreciation, and amortization and is typically used as a proxy for a company’s current operating profitability.

     

    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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