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Hartford Schroders US Small Cap Opportunities Fund

February 2019 Monthly Update

Performance (%)
% (as of 3/31/2019)
Average Annual Total Returns % (as of 3/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small Cap Opportunities  I 13.14 2.48 10.74 7.69 14.16 12.14
Benchmark 14.58 2.05 12.92 7.05 15.36 ---
Morningstar Small Blend Category 13.30 -0.19 10.07 5.37 14.34 ---
Performance (%)
% (as of 3/31/2019)
Average Annual Total Returns % (as of 3/31/2019)
YTD 1YR 3YR 5YR 10YR SI
Hartford Schroders US Small Cap Opportunities  I 13.14 2.48 10.74 7.69 14.16 12.14
Benchmark 14.58 2.05 12.92 7.05 15.36 ---
Morningstar Small Blend Category 13.30 -0.19 10.07 5.37 14.34 ---
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

The market rebound continued in February. We are witnessing one of the strongest calendar year starts in 28 years. This comes on the heels of the worst December in US market history (for the S&P 500). Turnaround is an understatement.

As one might expect, this has been accompanied by the largest price/earnings expansion since 2009. The major driver of optimism is the US Federal Reserve (Fed) relaxing their tightening course. Market participant surveys in November showed a 90% expectation of a coming Fed hike. In January those expectations were 0%.

In the face of these optimistic developments, there have been 10 consecutive monthly declines in global Purchasing Managers' Indices,2 which serves as a confounding counterpoint. There has also been deterioration in housing sentiment in the US. The jobs market continues to show strength but some commentators are beginning to predict that we are at or past the peak. There are other late cycle indicators. Earnings forecasts for 2019 have also come down significantly. While analysts anticipate better earnings from small caps (relative to large caps), the 2019 expectations are now in single digits.

 

Performance Review

The Fund (Class I Shares) returned 4.33% in February, underperforming its benchmark, the Russell 2000 Index, which returned 5.20%. This is consistent with the historical tendency to lag in strongly rising markets given our more conservative approach.

The most significant areas of lag versus the benchmark were consumer discretionary and healthcare. Cash was also a notable detractor. Key detractors in consumer discretionary were housing-related stock Cavco Industries, Inc. and auto-parts company Cooper-Standard Holdings, Inc.

We delivered strong outperformance in technology, which was the market leader for the month and second strongest sector YTD. Good stock selection in Versum Materials, Inc., Cadence Design Systems, Inc., and EPAM Systems, Inc. boosted returns. Our second best return source for the month was energy, which has not always been kind to us.

In terms of the Fund’s three sources—“Steady Eddies,” “Mispriced Growth,” and “Turnarounds”—all three categories had positive returns for the month, however none outperformed. The “Steady Eddies” were our strongest group. This is a bit atypical as we normally see this group lag in strongly rising markets.

Key contributors included Versum Materials, Inc., Evolus., Inc., and Catalent, Inc. Versum agreed to a merger of equals with Entegris, and then Merck KGaA made a higher all-cash bid for Versum. Evolus is a medical aesthetics company whose stock price rose after receiving FDA approval for a new medicine. Catalent issued an earnings report that was well received.

Key detractors included Syneos Health, Inc., Cooper-Standard Holdings, Inc., and Cavco Industries, Inc. Syneos stock dropped sharply at the end of the month when they announced they were delaying their earnings release and conference call to allow for an internal review of internal financial controls. The SEC had given notice of an investigation. While we still hold the name we have reduced our position size. Cooper Standard issued a disappointing earnings report; we used this weakness to add to the position. Cavco also had a difficult earnings report as expenses have increased and the demand outlook for manufactured homes is becoming more uncertain.

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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 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.

 

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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