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Hartford Schroders US Small Cap Opportunities Fund

June 2019 Monthly Update

Performance (%)
% (as of 7/31/2019)
Average Annual Total Returns % (as of 7/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small Cap Opportunities  I 21.96 3.16 10.99 9.89 12.01 12.30
Benchmark 17.66 -4.42 10.36 8.53 12.47 ---
Morningstar Small Blend Category 16.61 -4.99 8.45 6.68 11.40 ---
Performance (%)
% (as of 6/30/2019)
Average Annual Total Returns % (as of 6/30/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small Cap Opportunities  I 19.92 3.78 11.92 8.32 12.78 12.27
Benchmark 16.98 -3.31 12.30 7.06 13.45 ---
Morningstar Small Blend Category 15.81 -4.05 9.99 5.35 12.31 ---
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

US equities rebounded smartly after May’s negative results. It is important to note that year-to-date returns for US equities are considerably above the 91-year average annual return of 10% for the S&P 500 Index.2 International equity markets also delivered good returns for the month, quarter, and year-to-date.

Factors driving the market this month displayed some interesting changes from May:

  • Highest sales growth companies outperformed, which has been true for much of 2019
  • In a reversal, highest foreign growth companies outperformed lower foreign growth companies
  • In another reversal, highest beta3 led and lowest beta trailed for the month
  • Capitalization trends were muddled, with the middle quintile delivering the best return

In general, the markets reacted positively to signs of dovishness from the US Federal Reserve (Fed) and showed hopefulness over the possibility of easing trade tensions. We have concerns that a Fed cut may not be the panacea the market seems to be anticipating. In particular, we note that the dynamic of Fed cuts leading to higher equities does not seem to have worked for the past 20 years. Some commentators are arguing that a Fed cut could be a trap.  We also note that the short end of the yield curve is inverted, often seen as a harbinger of recession. However, the positive slope to the longer end of the curve is encouraging.

The economic news has been mixed. Wages continue to increase at a moderate pace while the Employment Cost Index4 seems to be under reasonable control despite the rise in wages. On the other hand, the ISM Manufacturing Index, commonly referred to as the Purchasing Manager’s Index,5 has been declining since August 2018. This reflects trade-related concerns and may be a harbinger of a slowdown in the US economy.

Earnings expectations for the balance of the year are modest at best, in stark contrast to the high level of optimism expressed by sell side analysts coming into the year.

 

Performance Review

The Fund (Class I Shares) returned 8.61% in June, outperforming its benchmark, the Russell 2000 Index, which returned 7.07%. Stock selection was particularly strong, contributing 172 basis points6 of excess return. Sector allocation detracted, primarily due to the cash allocation, which we will note is beginning to come down. Ultimately, our objective is to keep cash levels below 5%.

Consumer discretionary was our strongest contributor for the month, led by a takeover bid for Sotheby’s and exposure to housing and autos. Technology also contributed as did producer durables. The strongest sector for the benchmark was materials & processing. 

We experienced modestly negative stock selection in materials & processing and, to a lesser extent, in energy and utilities.    

Our “Mispriced Growth” and “Turnarounds” had positive returns, which is typical for a strongly rising market. “Mispriced Growth” leaders could be found in consumer discretionary (Sotheby’s), producer durables (Generac Holdings), and health care (Syneos Health). 

Key contributors included Sotheby’s, Generac Holdings, Inc., ASGN, Inc., and Syneos Health, Inc. Sotheby’s received a very attractive takeover offer. Generac rose on an increase in demand for portable generators, particularly in the US West Coast. Syneos stock rose on better than expected revenues. ASGN stock recovered from a drop in May related to the change in CEO. Investors are once again confident in the prospects for future revenue growth. Syneos stock rose on better than expected revenues.

Key detractors included Array BioPharma, ServiceMaster Global Holdings, Inc., and Extended Stay America, Inc. Array BioPharma received a takeout bid from Pfizer. The stock price spiked, but this was a detractor as we did not hold it. ServiceMaster’s stock price rose sharply in May after a good earnings report, however, it plateaued in June. Extended Stay, a longer-term hotel chain catering to business travellers, has underperformed. Management argues that this is due to uncertainty around their potential to unlock shareholder value.

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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 S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks.

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 The employment cost index is a quarterly economic series detailing the changes in the costs of labor for businesses in the United States economy.

5 Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector. A reading above 50 signals economic expansion; below 50 signals contraction.

6 A basis point 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.

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 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.

Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI's express written consent.

 

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