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Hartford Schroders US Small/Mid Cap Opportunities Fund

November 2017 Monthly Update

Performance (%)
% (as of 12/31/2017)
Average Annual Total Returns % (as of 12/31/2017)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small/Mid Cap Opportunities  I 15.56 15.56 11.65 16.00 9.41 9.63
BENCHMARK 16.81 16.81 10.07 14.33 9.22 ---
Morningstar Mid-Cap Blend Category 15.86 15.86 7.93 12.74 7.49 ---
Performance (%)
% (as of 12/31/2017)
Average Annual Total Returns % (as of 12/31/2017)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small/Mid Cap Opportunities  I 15.56 15.56 11.65 16.00 9.41 9.63
BENCHMARK 16.81 16.81 10.07 14.33 9.22 ---
Morningstar Mid-Cap Blend Category 15.86 15.86 7.93 12.74 7.49 ---
SI = Since Inception. Fund Inception: 03/31/2006
Operating Expenses:   Net 1.00% |  Gross  1.00%

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

All eyes are on tax reform. Despite generally positive economic data out of the US (a rebound in October payrolls, a better than expected Institute for Supply Management (ISM) number, and consumer confidence at long-term highs), it was tax reform that dominated headlines and sentiment. After weeks of debate and backroom negotiations, Republicans released their initial bill early in the month, and after many fits and starts, iterations and last minute edits at time of print it appears they may have the votes to pass the bill if they can reconcile both the Senate and House versions into a piece of unified legislation. In its current state, the bill slashes the corporate tax rate, places a cap on corporate interest deduction, overseas profits are moved to a territorial system, plus repatriation of deferred foreign profits and a simplification of the individual tax code. To cap off a busy month a change in Federal Reserve leadership was announced with the nomination of Jerome “Jay” Powell to succeed Janet Yellen as chairperson.

Large cap continued to outperform despite potential tax cuts disproportionally benefiting smaller-cap companies. Within the small-cap space, consumer durables and discretionary were the best performers due to better than expected earnings and potential tax reform. Small-cap ETFs saw large inflows in November driving up performance in the smallest companies in the index. The fastest growers continued to outperform.  

 

Performance Review

The Fund (Class I Shares) returned 3.44% in Novermber, outperforming its benchmark, the Russell 2500 Index, which returned 3.29%. Stock selection in materials & processing and consumer discretionary were generally additive in term of alpha as was stock selection in financial services, utilities, and consumer staples. The Fund benefitted from underweights to real estate investment trusts (REITs) and technology, as these sectors underperformed in November. Stock selection lagged most in healthcare and energy. Technology and producer durables were also underperformers in November. The Fund’s average cash weight of 7.9% also weighed on returns.

In terms of the strategy’s three alpha categories, mispriced growth outperformed the Index in November, but the Fund’s “Steady Eddies” and “Turnarounds” holdings generally lagged in November.   

 

Market Outlook

When we look at the market landscape, we begin with valuations, which are stretched. The only (small) saving grace is the very low level of interest rates, which does allow for higher price-earning (P/E) ratios.2 That is not to argue that our space is inexpensive; we are making the point that it is not quite as bad as it looks. Also, at the asset class level, it is worth noting that the earnings yield in the US small- and smid-cap space are significantly superior to that of the US 10-year Treasury yield. Relative to the large-cap space, small-cap valuations are at or below long-term averages of trailing and forward earnings respectively.  We are much more comfortable with valuations relative to large caps than we were at the beginning of the year, and we are finding more investment ideas in the smaller-cap space.    

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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.

Price/Earnings (P/E) is the ratio of a stock's price to its earnings per share.

 

Important Risks: All investments are subject to risk, including the possible loss of principal. There is no guarantee the Fund will achieve its stated objective. The Fund’s share price may fluctuate due to market risk and/or security selections that may underperform the market or relevant benchmarks. Small- and mid-cap securities can have greater risk and volatility than large-cap securities and may be less liquid than other types of investments. The main risk of real estate related securities is that the value of the underlying real estate may decrease in value. The Fund may be adversely affected when certain large shareholders purchase or redeem large amounts of shares of the Fund.

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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