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Hartford Schroders US MidCap Opportunities Fund

May 2019 Monthly Update

Effective 5/1/19, the Fund (formerly known as the Hartford Schroders US Small/Mid Cap Opportunities Fund) changed its name, principal investment strategy and benchmark. Returns prior to 5/1/19 reflect the performance of the Fund's prior strategy. Please see the Fund’s prospectus for additional information.

Performance (%)
% (as of 5/31/2019)
Average Annual Total Returns % (as of 5/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US MidCap Opportunities  I 10.72 -0.99 7.56 8.30 12.54 8.43
Benchmark 13.55 1.59 9.87 7.89 14.43 ---
Morningstar Mid-Cap Blend Category 9.92 -3.92 7.40 5.08 11.72 ---
Performance (%)
% (as of 3/31/2019)
Average Annual Total Returns % (as of 3/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US MidCap Opportunities  I 13.21 2.98 9.80 8.70 14.60 8.73
Benchmark 16.54 6.47 11.82 8.81 16.88 ---
Morningstar Mid-Cap Blend Category 13.93 2.05 9.50 5.95 14.16 ---
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

May was not a good month for equity markets. US markets fared particularly poorly, but even the broad international MSCI World ex USA Index2 had a difficult month. Much of the pullback can be attributed to rising trade tensions. First it was the US-China trade talks and by the end of the month we had a growing US-Mexico dispute on our hands.

US equities were significantly weaker in May after US-China trade talks broke down. The US government increased the tariff rate on $200 billion of Chinese goods to 25% from 10% and China responded by hiking the tariffs on $60 billion of imports from the US. The US Federal Reserve maintained the dovish stance it has held since the start of the year.

Economic data released during the month was mixed with total nonfarm payroll employment increasing by 263,000 in April, sending the overall unemployment rate to 3.6%, from 3.8% a month earlier. Wage growth remained steady at 3.2% compared with a year earlier. The US manufacturing purchasing managers’ index3 (PMI) fell two points to 50.6, while the new orders component declined to below 50, indicating that the sector is contracting. However, US consumer confidence remains robust, with a reading of 134.1 in May, compared with 129.2 a month earlier.

The US administration blacklisted Chinese tech giant Huawei on security fears and said it will impose a new tariff of 5% on all Mexican imports in a bid to force Mexico’s government to stem the flow of migrants entering the US across its southern border. The technology, energy, and industrial sectors were among the weakest performers in May as investors became nervous about the prospects for global growth. Utilities, healthcare, and consumer staples, while lower, proved to be more resilient. The real estate sector outperformed.

Factors this month displayed a pattern of caution:

  • Largest market cap led, smallest market cap lagged
  • Highest beta4 lagged and lowest beta led
  • Highest sales growth companies outperformed, as did companies with the highest dividend yield
  • Unsurprisingly, highest foreign sales lagged

 

Performance Review

The Fund (Class I Shares) returned -5.82% in May, outperforming its benchmark, the Russell MidCap Index, which returned -6.14% in a declining market. Stock selection was positive. Sector allocation was modestly negative for the month. Our primary excess return came in producer durables (stock selection), materials & processing, and health care (stock selection in both cases). Our primary detractors were technology (stock selection) and real estate investment trusts (REITs), both sector allocation. Cash was a positive contributor this month.

Producer durables were led by our investments in the environmental, maintenance, and security services industry. Within health care, stock selection was strongest in medical & dental instruments and supplies as well as pharmaceuticals. Stock selection detracted from returns in technology, consumer discretionary, and REITs. 

Our “Mispriced Growth” and “Steady Eddies” outperformed in May. “Steady Eddies” were the strongest performers led by Aramark and ServiceMaster Global Holdings, Inc., two of the top contributors this month. “Turnarounds,” the smallest portion of the portfolio, lagged.

Key contributors included Aramark, ServiceMaster Global Holdings, Inc., and Dentsply Sirona, Inc. Aramark issued a disappointing earnings report at the beginning of the month but regained all of the lost ground and more by month-end as news reports about a potential bid for the company drove the stock price up. ServiceMaster delivered a good earnings report. Dentsply Sirona also issued a good earnings report with analysts making positive comments about their turnaround efforts.

Key detractors included Arrow Electronics, Inc., Brunswick Corporation, and ON Semiconductor Corporation. Arrow’s earnings report was poorly received. They reported weaker demand in Europe and the Americas where they sell more of their high-margin products. Brunswick encountered a sluggish recreational boat market, perhaps due to poor weather in the northern and eastern US. ON fell over trade concerns. This is partly due to the ban on Huawei in the US (US manufacturers will not be supplying parts to them during the trade embargo). Additionally, there was speculation that China could ban US semiconductor components in retaliation.

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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 MSCI World ex USA Index is a free float-adjusted market capitalization index that captures large and mid-cap representation across developed markets countries -- excluding the United States.

3 The Purchasing Managers’ Index is an indicator of economic health for manufacturing and service sectors.

4 Beta is a measure of risk that indicates the price sensitivity of a security or a portfolio relative to a specified market index.

Indices are unmanaged and not available for direct investment.

 

Important Risks: Investing involves risk, including the possible loss of principal. Security prices fluctuate in value depending on general market and economic conditions and the prospects of individual companies. ● 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.

Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI's express written consent.

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