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Hartford Schroders US MidCap Opportunities Fund

February 2020 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 2/29/2020)
Average Annual Total Returns % (as of 2/29/2020)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US MidCap Opportunities  I -9.80 2.10 4.28 6.67 10.73 8.29
Benchmark -9.42 2.34 6.57 6.37 11.91 ---
Morningstar Mid-Cap Blend Category -10.79 -1.68 3.40 3.94 9.35 ---
Performance (%)
% (as of 12/31/2019)
Average Annual Total Returns % (as of 12/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US MidCap Opportunities  I 28.05 28.05 9.61 9.66 11.92 9.21
Benchmark 30.54 30.54 12.06 9.33 13.19 ---
Morningstar Mid-Cap Blend Category 25.87 25.87 8.94 7.01 10.73 ---
SI = Since Inception. Fund Inception: 03/31/2006
Operating Expenses:   Net 0.94% |  Gross  0.94%
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

The month ended dramatically with a collapse in the price of risk assets in response to the spread of the coronavirus. In a crisis, correlations2 tend to go to 1.0. Said differently, at the beginning of a dramatic sell, there was nowhere to hide. That is certainly borne out in the February equity returns.

As is well known, the spread of the coronavirus globally has driven the extreme negative returns, particularly over the past week when US equity markets all suffered losses in excess of 10%. In other words, the broad US equity market fell into correction territory over five days. This was the steepest and quickest loss on record.

The concerns, beyond the obvious health issues, are the disruption of supply chains and an ensuing shock to growth. As of this writing, this seems unavoidable for at least one to two quarters. Supply chains originating in China are being significantly disrupted. There are cases where parts made in China are critical to the final product manufactured and cannot be easily replicated. The halt of manufacturing in China then dominos into a manufacturing halt elsewhere.

Factors we are monitoring to assess the depth and potential length of a slowdown include business confidence, capital expenditures, and hiring plans. Declines in these indicators can be expected to lead to a slowdown in the US economy.

In the race for US President, the Democratic contest achieved some clarity after the South Carolina primary on February 29. Three candidates have withdrawn from the race—Pete Buttigieg, Amy Klobuchar, and Tom Steyer—leaving Bernie Sanders and Joe Biden. The increased clarity on the Democratic ticket has yet to provide any comfort to the markets.

Earnings estimates for 2020 are being lowered by sell-side analysts due to the anticipated impact of the coronavirus on economic activity. We are beginning to see slowdowns in travel and restaurants, and conferences are being cancelled and/or postponed due to the health concerns.

At the index level, depending on the source, forward earnings expectations have dropped from low double digits to low-to-zero for 2020. Uncertainty is ruling the day.

 

Performance Review

The Fund (Class I Shares) returned -8.91% in February, underperforming its benchmark, which returned -8.69%. Stock selection at a sector level of analysis was strongest in consumer discretionary. Real estate investment trusts performed well regardless of our traditional underweight to the group. Stock selection detracted the most in technology and healthcare during the month. Cash exposure average 4.40% for the month.

Moving to our alpha types, “Mispriced Growth” was our strongest performing group led by Entegris, which is discussed below. “Turnarounds” slightly outperformed, while “Steady Eddies” lagged by a considerable margin due to Sabre Corp. and Aramark, as mentioned below.

Key contributors included Entegris, Inc., SBA Communications Corp., and Leidos Holdings, Inc. Entegris, Inc. develops, manufactures, and supplies speciality products in the semiconductor industry. The company reported strong earnings for 4Q 2019 with sales and earnings-per-share3 roughly in-line. SBA Communications Corp, which owns and operates wireless communications infrastructure in the US, reported strong earnings and in-line 2020 guidance. Leidos Holdings, Inc., the defense, aviation, IT, and biomedical-search company, reported strong quarter results on the back of better sales and margins. Leidos also has momentum from a new Navy N-GEN contract and acquisitions of Dynetics and L3Harris Security and Automation to help drive margin expansion moving forward.

Key detractors included Sabre Corp., Aramark and Alaska Air Group, Inc. Sabre Corp., which provides technology solutions for the global travel and tourism industry, released below-expectations guidance for 2020. Travel has also been cut due to the growing concerns of the coronavirus. Aramark, provider of food, facilities, and uniform services, reported lower-than-expected results with revenue growth down internationally and in the US. Year-over-year net income was also down substantially. As a provider of services to education, healthcare, and sports venues, this company is also caught in the cross hairs of coronavirus. Alaska Air Group, the airline company based out of Washington, was down in February as well due to the coronavirus. Investors worldwide are pulling the ripcord on airline stocks.

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The Fund seeks capital appreciation by combining three diversified, uncorrelated sources of potential alpha:1

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 Correlation is a statistical measure of how two investments move in relation to each other. A correlation of 1.0 indicates the investments have historically moved in the same direction; a correlation of -1.0 means the investments have historically moved in opposite directions; and a correlation of 0 indicates no historical relationship in the movement of the investments.

3 Earnings-per-share is the projected growth rate in earnings per share for the next five years.

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 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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