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Hartford Schroders US Small/Mid Cap Opportunities Fund

October 2018 Monthly Update

Performance (%)
% (as of 11/30/2018)
Average Annual Total Returns % (as of 11/30/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small/Mid Cap Opportunities  I -0.41 -0.31 9.45 9.67 14.09 8.87
Benchmark 1.07 1.41 10.02 8.16 15.08 ---
Morningstar Mid-Cap Blend Category -1.35 -0.62 7.84 6.58 13.40 ---
Performance (%)
% (as of 9/30/2018)
Average Annual Total Returns % (as of 9/30/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small/Mid Cap Opportunities  I 4.52 9.97 13.46 11.92 11.60 9.41
Benchmark 10.41 16.19 16.13 11.37 12.02 ---
Morningstar Mid-Cap Blend Category 5.81 11.59 12.61 9.32 10.38 ---
SI = Since Inception. Fund Inception: 03/31/2006
Operating Expenses:   Net 1.05% |  Gross  1.05%

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. Small and Mid Cap Opportunities Fund. If Class I fees and expenses were reflected, performance would have differed. SI performance is calculated from 3/31/06.

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 Wall Street Journal headline on November 1 read “October’s Wild Ride Jolts Investors.” Indeed that was the case. Beyond the gyrations in the US stock market, the bond market also experienced price declines. Inflation (which we have been talking about for almost a year) became a growing concern. Rising labor costs are beginning to show up in US government data and worries about corporate growth, along with trade concerns, drove stock and bond losses.  

Mid-term elections in the US also received a major amount of attention as political rhetoric became increasingly heated as we approached Election Day (November 6). One clear conclusion is that America remains divided on a series of issues ranging from immigration to healthcare to global trade. 

Before we get too gloomy, there is continuing evidence that the US economy remains strong. GDP is good, and employment is at or near full employment (job openings outnumber the unemployed population). Business and consumer sentiment are both strong, with the most recent Conference Board consumer confidence poll reaching the highest levels in 18 years. These are just some of the positives. 

Inflation concerns increase the pressure on the US Federal Reserve (Fed): on the one hand the President is arguing for low interest rates while the early signs of inflation (wages in particular) tilt the Fed toward continuing on their gradual rate rise path. We anticipate one more 25 basis points2 hike in 2018 plus three in 2019 and one in 2020. 

As for market factors, we saw volatility sharply lag in October after driving the market for much of the year. This benefitted our portfolio as we are overweight lower volatility names and underweight the higher volatility stocks. Size was not a factor whereas style was with value outperforming growth by 4%. However, value still lags growth by 5.5% on a year-to-date basis.

 

Performance Review

The Fund (Class I Shares) returned -8.01% in October, outperforming its benchmark, the Russell 2500 Index, which returned -10.15%. As in September stock selection drove returns and was broadly positive as the strategy outperformed in eight out of ten sectors. Technology and healthcare were the areas of greatest strength. Stock selection was negative in two sectors: energy and consumer staples.  

In terms of the strategy’s alpha sources, all three categories outperformed in October. 

Key contributors included Advanced Micro Devices, Inc., Nordstrom, Inc., and Spirit Airlines. Not owning semiconductor provider Advanced Micro Technology Devices, Inc. contributed over the period as it declined after reporting earnings. Revenues and profits were lower than expected and guidance came in below consensus driven by elevated graphics processing units (GPU) inventories. Retailer Nordstrom, Inc. rallied following positive sell-side coverage and improved demand trends for the retail industry. Finally, affordable travel company Spirit Airlines, outperformed after reporting solid earnings. The industry as a whole has been applying more price discipline and company-specific revenue initiatives continue to drive profitability. 

Key detractors included Newfield Exploration Corporation., ON Semiconductor Corporation, and Aramark. Newfield Exploration Corporation, the explorer and producer of crude oil and natural gas, declined given concerns that the production mix within its key basins would be higher in less profitable natural gas relative to oil. Brunswick is a manufacturer of recreational vehicles such as all terrain vehicles, motorcycles, and boats. It sold off despite reporting good earnings in its core marine engines and boats businesses. However, earnings and guidance continued to deteriorate within its fitness segment. As a result, it reduced the prospect of the company being able to spin out that part of the business (or sell it entirely) at an attractive valuation. Aramark, a provider of food, facilities, and uniform services to colleges, businesses, and sports stadiums, among others, underperformed due to companies with higher debt levels, such as Aramark, selling off more broadly during the month. 

 

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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 A basis point is a unit that 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.

 

Important RisksInvesting 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- and mid-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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