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Hartford Schroders US MidCap Opportunities Fund

October 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 10/31/2019)
Average Annual Total Returns % (as of 10/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US MidCap Opportunities  I 21.45 12.41 9.99 9.17 12.27 8.90
Benchmark 23.21 13.72 12.28 8.67 13.70 ---
Morningstar Mid-Cap Blend Category 18.99 9.06 9.77 6.26 11.12 ---
Performance (%)
% (as of 9/30/2019)
Average Annual Total Returns % (as of 9/30/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US MidCap Opportunities  I 19.74 1.95 8.75 9.63 11.74 8.84
Benchmark 21.93 3.19 10.69 9.10 13.07 ---
Morningstar Mid-Cap Blend Category 17.60 -1.45 8.37 6.51 10.53 ---
SI = Since Inception. Fund Inception: 03/31/2006
Operating Expenses:   Net 0.95% |  Gross  0.95%
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

We had a non-linear pattern of US equity returns this month. Small-cap stocks led large caps, followed by small/mid which was ahead of mid-cap stocks.  

Year-to-date, this has been an excellent year for US equities with all four of the referenced market-cap ranges posting robust double digit returns. To set a frame of reference, from 1928-2018 the average annual return for US equities was 10%. Globally, there were double digit year-to-date returns everywhere except for certain subsectors of emerging markets equities, which posted single digit returns. 

This month, the best performing sector in our benchmark, the Russell Midcap Index, was producer durables while energy was the weakest. Healthcare was close behind the producer durables. Non-earners outperformed earners. High beta2 stocks have been in vogue for the month and year-to-date. 

From a news flow perspective, trade wars and Washington politics have dominated. However, the economic backdrop has generally been positive with good employment, moderately rising wages, and low levels of debt. This comes close to describing a virtuous circle. As we regularly remind our readers, the US consumer drives two-thirds of US GDP. If the consumer has the ability and propensity to spend, the US economy will be in good shape. The strong job market and rising wages certainly provide the ability to spend. As recession concerns have receded since the summer, we are seeing more propensity to spend.

Finally, a note on the ongoing impeachment inquiry against President Trump. If the House of Representatives could vote a bill (or bills) of impeachment, this would be followed by a trial in the Senate. Only if the Senate voted to convict on one of the charges in the Senate trial would the President be removed from office. We believe this to be unlikely.

 

Performance Review

The Fund (Class I Shares) returned 1.43% in October, outperforming its benchmark, which returned 1.05%. On a year-to-date basis, the strategy remains behind the benchmark, returning 21.45% versus the benchmark’s 23.21%. Our strongest relative returns were in consumer discretionary and real estate investment trusts (REITs). The notable laggards were energy, utilities, and consumer staples. Cash exposure averaged 4.1% for the month.

For the year-to-date period, the strongest portions of the portfolio (on a relative return basis) have been technology, REITs, and producer durables. Stock selection has been positive in eight of the 10 sectors. Technology and energy are the exceptions with the issue once again being more what we didn’t hold than what we did hold.    

Turning to our alpha sources, “Mispriced Growth” lagged while “Steady Eddies” and “Turnarounds” outperformed.

Our top-contributing stocks were all “Steady Eddies” names: Brunswick Corporation, Mohawk Industries, Inc., and Fortune Brands Home & Security, Inc. Brunswick manufactures recreational products such as boats. Their earnings release reported a “beat” with optimism generated by the introduction of new boat models. Mohawk is a flooring manufacturer for residential and commercial spaces. Their earnings report was received positively. Fortune Brands reported year-over-year sales growth that was described as “solid” by one of the sell side reports. The plumbing business led among the company’s various segments.

Key detractors included ServiceMaster Global Holdings, Inc., Hexcel Corporation, and Performance Food Group Company. ServiceMaster, a pest-control company, issued a disappointing earnings report. Adjusted EBITDA3 was significantly below consensus due to higher expenses in their termite division. Hexcel, which supplies composite materials to airplane manufacturers, announced good earnings but lower-than-expected sales and revenue guidance for the full year. The company is a supplier to Boeing and fallout from the 737 MAX grounding has become a headwind. Performance Food Group distributes food items to restaurants and other “away from home” vendors. There are some concerns about near-term impact of integrating recent acquisitions.

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

3 EBITDA stands for “earnings before interest, taxes, depreciation, and amortization” and is a measurement of a company’s profitability.

 

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.

 

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