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Hartford Schroders US Small Cap Opportunities Fund

August 2019 Monthly Update

Performance (%)
% (as of 9/30/2019)
Average Annual Total Returns % (as of 9/30/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small Cap Opportunities  I 20.78 0.20 9.96 9.52 11.29 12.18
Benchmark 14.18 -8.89 8.23 8.19 11.19 ---
Morningstar Small Blend Category 14.34 -7.84 7.10 6.56 10.24 ---
Performance (%)
% (as of 9/30/2019)
Average Annual Total Returns % (as of 9/30/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small Cap Opportunities  I 20.78 0.20 9.96 9.52 11.29 12.18
Benchmark 14.18 -8.89 8.23 8.19 11.19 ---
Morningstar Small Blend Category 14.34 -7.84 7.10 6.56 10.24 ---
SI = Since Inception. Fund Inception: 08/06/1993
Operating Expenses:   Net 1.17% |  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

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 are expected to take 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, but most economists are not predicting a recession in the near to medium term. However, economists are revising their forecasts for 2H GDP to 1% from 2%. Reasons for the downward revisions include uncertainty about US trade policy and slowing US manufacturing.

Specific factors in our market during August included:

  • High price-to-earnings2 stocks outperformed all lower beta3 groups as investors seemed to be willing to buy growth at any price
  • The lowest beta group outperformed, and the highest beta quintile lagged—“risk off” in other words
  • Consistent with this risk aversion, utilities, consumer staples, and real estate investment trusts (REITs) were the top performers in the Russell 2000 Index, although only utilities recorded a positive return for the month
  • Energy was by far the weakest sector (-15.8%) in August, as the price of oil dropped by 5.9%. Materials and processing, financials, consumer discretionary, and healthcare finished in a cluster of lagging returns between -5.14% and -6.88%

Notably in July, we also saw the confluence of larger cap and lower beta leading the benchmark in a month that was obviously a much different 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 -3.47% in August, outperforming its benchmark, the Russell 2000 Index, which returned -4.94%. The market return, represented by the benchmark, has risen 11.85% year-to date even after its August decline. The strongest portions of the portfolio on a relative basis were producer durables, energy, and financials. 

We also outperformed in two of the three strongest sectors (REITs and utilities) but our underweights caused us to be essentially flat in terms of contribution to return. The notable laggard in the portfolio for August was consumer discretionary. The biggest drag in the portfolio was in casinos & gambling. Restaurants were also weak.

Turning to our alpha sources, the “Steady Eddies” outperformed, which is their pattern in declining environments. In other words, they performed according to form. Conversely, the “Mispriced Growth” and “Turnarounds” both lagged.

As for individual stocks, key contributors included Valvoline Inc., Palomar Holdings, Inc., and IDACORP, Inc. 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,” however, a potential negative that was noted is the entrance of Amazon into the motor oil market. Palomar Holdings is a property insurance company. Sell side analysts responded positively to an earnings beat. IDACORP is a holding company whose principal subsidiary is Idaho Power Company. Despite reporting lower earnings for the quarter, management raised guidance for 2019. This was in part due to an increase in hydroelectric power generation plus economic strength in Idaho that is their primary service region. 

Key detractors included PlayAGS Inc., Fluidigm Corporation, and ProPetro Holding Corporation. PlayAGS designs and manufactures electronic gaming machines and reported a significant miss in their quarterly earnings report. Management identified softness in their Oklahoma casinos as the source of the underperformance. Fluidigm is a life sciences company. Management reported a disappointing quarter driven by weak results in two key business lines: Mass Cytometry and Microfluidics. ProPetro is an oilfield services company that announced a delay in the release of their 10-Q report pending a review by their audit committee. The news, as one would expect, was poorly received by the market.

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

 

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 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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