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Hartford Schroders US Small/Mid Cap Opportunities Fund

August 2018 Monthly Update

Performance (%)
% (as of 8/31/2018)
Average Annual Total Returns % (as of 8/31/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small/Mid Cap Opportunities  I 4.93 14.07 12.12 13.04 10.31 9.51
Benchmark 12.11 23.33 14.96 12.96 11.03 ---
Morningstar Mid-Cap Blend Category 6.82 16.66 11.38 10.53 9.11 ---
Performance (%)
% (as of 6/30/2018)
Average Annual Total Returns % (as of 6/30/2018)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small/Mid Cap Opportunities  I -0.34 7.33 9.05 12.71 9.91 9.19
Benchmark 5.46 16.24 10.30 12.29 10.74 ---
Morningstar Mid-Cap Blend Category 1.89 11.18 7.71 10.09 8.60 ---
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

August brought the US both scorching temperatures and stock market. Things heated up as the US stock market surged to end the month. Investors continued to shrug off political headlines and instead focused on the strong US fundamental narrative. The underlying US economy remains strong and more favorable trade headlines that included a deal with Mexico aided investor returns this month. Corporate earnings season was better than expected, and expectations for a record amount of buybacks are high. August commentary from the Federal Reserve (Fed) was also as expected and supports the market thesis of another rate hike in September. Another sign of economic strength: The early Q3 gross domestic product (GDP) estimates from the Atlanta Fed anticipate another 4%+ expansion.

Growth was back with a vengeance in August as the highest growth, lowest quality, and smallest capitalization names were the best performers. According to Bank of America Merrill Lynch, at its current pace growth is slated to outperform value by the widest spread since the tech bubble (1999). Biotechnology rallied again, as did lower return-on-equity and non-earners (not surprising given the number of small cap biotechnology stocks that fall into those two categories).

It was a strong earnings season across the capitalization spectrum with small-, mid-, and large caps in aggregate all reporting over 23% earnings growth. US small caps saw the best earnings growth since 2010 after posting earnings growth of 26.8% and sales growth of 9.8% (source: Jefferies). It was also the first time that small caps beat large caps in the past two years driven by strong growth in healthcare and consumer staples. Estimates for 2019 are also solid for small caps (not as good as 2018, but still growing at a significant rate).

 

Performance Review

The Fund (Class I Shares) returned 2.51% in August, underperforming its benchmark, the Russell 2500 Index, which returned 4.29%. Given the Fund’s historical performance pattern and market drivers (high growth) it is not an environment in which we would expect to outperform the benchmark. Both stock selection and allocation detracted from returns this month. Technology and healthcare, the two strongest sectors in the benchmark, along with producer durables, were the primary areas of underperformance. The Fund’s cash position also hurt returns in such a strong market. Real estate investment trusts (REITs), financial services, and consumer discretionary were all areas of strength in August. 

In terms of the Fund’s alpha sources, all three categories underperformed in August.

Key contributors included Advance Auto Parts, Inc., Ciena Corporation, and Integrated Device Technology, Inc. Advance Auto Parts, Inc., a retailer of aftermarket automotive products, rallied after a strong earnings report with management also raising guidance. A number of inventory management initiatives are being well executed and more favorable weather conditions have improved demand. A provider of network and communication infrastructure, Ciena Corporation outperformed after reporting strong earnings. The company beat expectations for sales, margins, and earnings, and management also raised guidance. Integrated Device Technology, Inc., a designer and developer of semiconductors for multiple applications, rose after reports came out that Renesas Electronics were close to finalizing a deal to acquire the company.

Key detractors included Dentsply Sirona, Inc., Fortune Brands Home & Security, Inc., and GrafTech International Ltd.. Dentsply Sirona, a manufacturer of dental products and technologies, declined after management reduced guidance for the year. The change was driven by elevated inventory levels, lower top line growth, and increased margin pressure. We maintain long term conviction in the stock and have been adding to it on weakness. Fortune Brands Home & Security, Inc., a manufacturer and supplier of home and security products and services, underperformed due to wider investor concerns around the strength of the housing market. GrafTech International Ltd, a producer of graphite electrode products used in electric arc furnaces during steel manufacturing, sold off during the month. The materials sector as a whole struggled due to concerns over emerging-market weakness. The company engaged in a secondary offering, which also weighed on the stock price. 

 

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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.

 

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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