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Hartford Schroders US Small Cap Opportunities Fund

April 2020 Monthly Update

Performance (%)
% (as of 4/30/2020)
Average Annual Total Returns % (as of 4/30/2020)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small Cap Opportunities  I -24.05 -15.42 -0.47 3.47 7.70 11.12
Benchmark -21.08 -16.39 -0.82 2.88 7.69 ---
Morningstar Small Blend Category -23.31 -19.30 -3.05 1.27 6.83 ---
Performance (%)
% (as of 3/31/2020)
Average Annual Total Returns % (as of 3/31/2020)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small Cap Opportunities  I -32.56 -21.30 -4.29 0.47 6.82 10.66
Benchmark -30.61 -23.99 -4.64 -0.25 6.90 ---
Morningstar Small Blend Category -32.44 -26.35 -7.00 -2.04 5.52 ---
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 economy continued to decline rapidly during April but, paradoxically, the markets rallied sharply. By the end of April, the first-time unemployment claims stood at 26.4 million. The first report in May added 3.8 million to that total. Since the crisis began, the weekly claims have been in the millions. Previous peaks did not reach 700,000. The Department of Labor reported that by the end of March, the US unemployment rate was 4.4%. The report issued in early May showed an unemployment rate of 14.7% and we expect this number to continue to rise.

Despite the grim economic news, the equity markets in particular had a very strong month. The apparent disconnect from fundamentals can be seen as a sign of the massive liquidity that has been supplied by the Federal Reserve Bank in an incredibly short period of time: $3 trillion in two months versus the Great Financial Crisis, which saw $2 trillion in two years. As a result, we have large pools of money seeking risk assets. 

The US is slowly beginning to reopen after the shutdown in March and April. The pace will vary by state and could be moderated by any increases in infection rates. States with the highest infection rates, such as New York, are being more cautious on reopening.

Growth continues to outperform value. In our view, investors seem to be unwilling to pay for value but are quite willing to pay up for growth. In a time where growth is scarce, there is a logic to this.

 

Performance Review

After a dismal March, the Russell 2000 Index—the Fund’s benchmark—generated 13.74% in April. While we did not outperform the benchmark in this strong up month (as is our pattern), the Fund (Class I Shares) returned 12.62%.

Sector allocation was negative with drags from cash and our underweights in healthcare (due to our low exposure to biotechnology) and energy (which had a strong rally) contributed. We did have positive allocation effect from being overweight in consumer discretionary and materials & processing. Stock selection was modestly positive with strong effects in producer durables and technology. 

Turning to our alpha sources, the “Mispriced Growth” names performed well. “Steady Eddies” and “Turnarounds” lagged. 

Key contributors included Compass Diversified Holdings, Catalent, Inc., and ASGN, Inc. Compass Diversified Holdings is a private equity firm that manages a group of small- and middle-market businesses. The company has low leverage and a lot of liquidity, which will likely help them find many opportunities given the decline in valuations for smaller/middle-market companies. Catalent, Inc. provides delivery technologies and development solutions for drugs, biologics, and consumer health products. Soft-gel capsules for pills is one of their most well-known products. The company announced an agreement with Johnson & Johnson to be their US manufacturing partner for their COVID-19 vaccine candidate. ASGN, Inc. is a professional staffing and IT company. The company offered strong earnings with in-line guidance estimates despite experiencing some softening in the last couple weeks of March due to the effects of COVID-19.

Key detractors included Axis Capital Holdings, Golub Capital BDC, Inc., and Kemper Corporation. Axis Capital Holdings provides insurance and reinsurance products and services. Investors attempted to price in potential insurance-related losses to the coronavirus. Golub Capital BDC, Inc. is a business development company and operates as a credit-focused asset manager. GBDC announced a rights offering to raise capital and bolster their balance sheet. Kemper Corporation engages in the property and casualty insurance and life and health insurance businesses. The stock has been volatile as have most financials. They have not yet reported earnings, so the stock movement is more related to market sentiment than company specific fundamentals.

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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.

 

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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