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Hartford Schroders US Small Cap Opportunities Fund

February 2020 Monthly Update

Performance (%)
% (as of 2/29/2020)
Average Annual Total Returns % (as of 2/29/2020)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small Cap Opportunities  I -13.22 -0.46 4.23 6.12 10.10 11.75
Benchmark -11.36 -4.92 3.52 5.12 10.41 ---
Morningstar Small Blend Category -12.59 -6.92 1.33 3.44 9.03 ---
Performance (%)
% (as of 12/31/2019)
Average Annual Total Returns % (as of 12/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small Cap Opportunities  I 32.03 32.03 10.55 9.71 11.67 12.43
Benchmark 25.52 25.52 8.59 8.23 11.83 ---
Morningstar Small Blend Category 23.51 23.51 6.60 6.70 10.60 ---
SI = Since Inception. Fund Inception: 08/06/1993
Operating Expenses:   Net 1.18% |  Gross  1.19%
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. Opportunities Fund. If Class I fees and expenses were reflected, performance would have differed. SI performance is calculated from 8/6/93.

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 -10.56% in February, underperforming its benchmark, the Russell 2000 Index, which returned -8.42%, in what was another difficult month in the market. In general, it was a poor month for our stock selection, with the weakest performances occurring in healthcare and consumer discretionary and, to a lesser extent, producer durables. Our strongest relative returns were in real estate investment trusts. We outperformed in energy due to our underweight. Cash exposure averaged 4.50% throughout the month. Larger cap and lower beta3 outperformed for the month. The lowest beta quintile was the only group that had a positive return while the highest beta names once again fared the worst. The largest capitalization quintile outperformed, while the lower quintile continued to trail.

Turning to our alpha sources, all three groups lagged for the month of February. “Mispriced Growth” names underperformed the most while “Steady Eddies” were held back by positions in Performance Food Group Co. and Perficient, Inc.

Key contributors included Entegris, Inc., Teladoc Health, Inc., and ServiceMaster Global 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-share4 in-line. Teladoc Health, Inc., the provider of tele-healthcare services, reported strong earnings and provided in-line Q1 and strong full-year 2020 guidance. ServiceMaster Global Holdings, provider of commercial and residential cleaning and pest-control services, reported strong earnings led by both the Terminix and ServiceMaster Brands segments.

Key detractors included ASGN, Inc., Plantronics, Inc., and American Woodmark Corporation. ASGN, Inc., the professional and IT staffing company, saw slowing growth in its Apex IT staffing unit, which is 63% of its total business. In addition, the IT labor supply is tight right now, so staffing companies are having trouble sourcing talent on an ad hoc basis. Plantronics, Inc. designs, manufactures, and distributes headsets, voice, video and content products. The company’s stock fell on disappointing earnings results, especially with enterprise headsets, with grim guidance for the current quarter. American Woodmark Corporation manufactures and distributes kitchen cabinets and vanities for new and remodelled construction markets. The company missed on earnings due to lower sales, which created a choppier-than-expected outlook moving forward.

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

4 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. Small-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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