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Hartford Schroders US MidCap Opportunities Fund

August 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 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 ---
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 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

Much like a carnival ride, the US equity markets went through a series of dizzying swoops, swerves and drops, ending the month in negative territory. The Wall Street Journal observed that this was by many measures the most tumultuous period yet for markets in 2019. Concerns about global trade were prominent on the fear list compounded by a lack of clarity on the Trump administration’s plans. On September 1, new tariffs took effect on a broad range of Chinese goods. Gold was a good barometer of fear with gold prices rising 7.9% in August while equity markets declined. We have also seen an inversion on the US Treasury yield curve with the 2-year note yield rising above that of the 10-year bond. This has sparked recession concerns. It is important to note that most economists are not predicting a recession in the near to medium term. However, economists are revising their second half GDP forecasts downwards from 2 to 1%. Reasons for the revisions include uncertainty about US trade policy and slowing US manufacturing.

Specific factors at work in our market during August included:

  • High price-to-earnings2 stocks outperformed, and the lower beta3 groups also outperformed as investors seemed to be willing to buy growth at any price
  • The highest beta quintile lagged—risk off carried the day
  • Consistent with this risk aversion in the market, utilities and real estate investment trusts (REITs) were the only two sectors in the Russell 25004 to eke out (modest) positive returns for the month. Consumer staples was the other outperforming sector, albeit with a small negative return 
  • Energy was by far the weakest sector (-14.8%) in August. (The price of oil dropped by 5.9%.) Materials and processing, financials, consumer discretionary, technology and healthcare finished in a cluster of lagging returns between -5.71% and -4.39%.

We also saw the confluence of larger cap and lower beta leading the benchmark in July, which was obviously a much different month in terms of outcomes. We would like to repeat our observation from prior commentaries that earnings expectations for the balance of the year are quite modest after having entered the year with elevated double-digit expectations.

 

Performance Review

The Fund (Class I Shares) returned -2.20% in August, outperforming its benchmark, the Russell MidCap Index, which returned -2.85%. The notable laggards in the portfolio for August were REITs, technology, and to a lesser extent consumer discretionary. The biggest drag from an industry perspective was casinos & gambling. Restaurants were also weak.

Year-to-date (YTD), the market, represented by the benchmark, has risen 19.57% even after the August decline of -2.85%. The strongest portions of the portfolio on a relative basis have been healthcare, materials, and producer durables. We also added value in consumer staples, financials, and REITs. In fact, the only sectors detracting value were consumer discretionary and technology. In the index, technology was the strongest performer on a YTD basis.    

Turning to our alpha sources, the “Steady Eddies” were our strongest group. This is their pattern in declining environments, as this is our defensive category. The “Mispriced Growth” stocks also outperformed although by a lesser margin. The “Turnarounds” lagged. 

As for individual stocks, key contributors included Assurant Inc., Valvoline Inc., and BWX Technologies Inc. Assurant is an insurance company providing insurance in a variety of segments such as housing, autos, mobile phones (think AppleCare), and funeral and cemetery services “pre-need.” Valvoline issued a strong earnings report. The company provides auto products and services for the “Do-It-Myself” customer—primarily oil and related lubricants. Additionally, they provide drive-through oil change and lubrication services for the “Do-It-For-Me” customer. Analysts cited a “superior organic growth story” and “expanding retail footprint.” One potential negative that was cited is the entrance of Amazon into the motor oil market. BWX Technologies is a manufacturer of nuclear components focusing on design, engineering, and manufacture of precision naval nuclear components. An earnings beat led to higher growth estimates and price target by sell-side analysts.

Key detractors included ON Semiconductor Corp., Teradata Corp., and Extended Stay America, Inc. ON Semiconductor issued a disappointing earnings report and guided down for the quarter. Sales in the auto segment were a key culprit. A restriction in sales to Huawei also had a negative impact. Teradata’s earnings report was a mixed bag—notably revenue was below expectations driven by a decline in perpetual software license revenues. Extended Stay America is a lodging REIT specializing in the mid-priced extended stay segment. Investors had been waiting for the completion of their strategic review; the board concluded that there would be no changes, which disappointed investors. Additionally, there was disappointment in their lower-than-expected growth rate.

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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 The 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 Price/Earnings is the ratio of a stock's price to its earnings per share.

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

4 Russell 2500 Index measures the performance of the small to mid-cap segment of the U.S. equity universe, commonly referred to as “smid” cap.

 

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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