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Hartford Schroders US Small Cap Opportunities Fund

October 2019 Monthly Update

Performance (%)
% (as of 11/30/2019)
Average Annual Total Returns % (as of 11/30/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small Cap Opportunities  I 27.42 13.80 10.06 9.37 12.07 12.32
Benchmark 22.01 7.51 8.57 8.22 12.38 ---
Morningstar Small Blend Category 20.38 6.55 6.72 6.56 11.11 ---
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

We had a non-linear pattern of US equity returns this month. Small-cap stocks led large caps, followed by small/mid which was ahead of mid-cap stocks.  

Year-to-date, this has been an excellent year for US equities with all four of the referenced market-cap ranges posting robust double digit returns. To set a frame of reference, from 1928-2018 the average annual return for US equities was 10%. Globally, there were double digit year-to-date returns everywhere except for certain subsectors of emerging markets equities, which posted single digit returns. 

This month, the best-performing sector in our benchmark, the Russell 2000 Index, was healthcare; technology was close behind. Energy was the weakest-performing sector. Non-earners outperformed earners. High beta2 stocks have been in vogue for the month and year-to-date. 

From a news flow perspective, trade wars and Washington politics have dominated. However, the economic backdrop has generally been positive with good employment, moderately rising wages, and low levels of debt. This comes close to describing a virtuous circle. As we regularly remind our readers, the US consumer drives two-thirds of US GDP. If the consumer has the ability and propensity to spend, the US economy will be in good shape. The strong job market and rising wages certainly provide the ability to spend. As recession concerns have receded since the summer, we are seeing more propensity to spend.

Finally, a note on the ongoing impeachment inquiry against President Trump. If the House of Representatives could vote a bill (or bills) of impeachment, this would be followed by a trial in the Senate. Only if the Senate voted to convict on one of the charges in the Senate trial would the President be removed from office. We believe this to be unlikely.

 

Performance Review

The Fund (Class I Shares) returned 1.66% in October, underperforming the benchmark, which returned 2.63%. On a year-to-date basis, the Fund remains ahead of the benchmark by 560 basis points,3 returning 22.78% versus the benchmark’s 17.18%.

In general, it was a poor month for our stock selection with the weakest performances occurring in producer durables and, to a lesser extent, consumer discretionary. Our strongest relative returns were in materials & processing. We outperformed in energy due to our underweight. Cash exposure averaged 4.6% for the month.

As for our alpha sources, only “Turnarounds” outperformed in October while “Mispriced Growth” and “Steady Eddies” lagged.

Our top contributing stocks were all “Steady Eddies”: Generac Holdings, Inc., Brunswick Corporation, and Steven Madden Ltd. Generac designs and manufactures power generation equipment for residential, light commercial, industrial, and related markets. The company released a positive earnings report as we came into October. Brunswick manufactures recreational products such as boats. Their earnings release reported a “beat” with optimism generated by the introduction of new boat models. Steven Madden is a manufacturer of shoes and reported an earnings beat and raised guidance.

Key detractors included ServiceMaster Global Holdings, Inc., Axis Capital Holdings Ltd., and Hexcel Corporation. ServiceMaster, a pest-control company, issued a disappointing earnings report. Adjusted EBITDA4 was significantly below consensus due to higher expenses in their termite division. Axis is a specialty provider of insurance and reinsurance. They reported an earnings disappointment due to poorer-than-expected underwriting margins and catastrophe losses (Hurricane Dorian, Japanese typhoons, and other events). Hexcel, which supplies composite materials to airplane manufacturers, announced good earnings but lower-than-expected sales and revenue guidance for the full year. The company is a supplier to Boeing and fallout from the 737 MAX grounding has become a headwind.

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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 A basis point is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security.

4 EBITDA stands for “earnings before interest, taxes, depreciation, and amortization” and is a measurement of a company’s profitability.

 

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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