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Hartford Schroders US Small/Mid Cap Opportunities Fund

February 2019 Monthly Update

Effective 5/1/19, the name, principal investment strategy and benchmark of the Hartford Schroders US Small/Mid Cap Opportunities Fund will change. Please see the supplement to the Fund's prospectus for additional information.

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/Mid Cap Opportunities  I 13.21 2.98 9.80 8.70 14.60 8.73
Benchmark 15.82 4.48 12.56 7.79 16.23 ---
Morningstar Mid-Cap Blend Category 13.93 2.05 9.50 5.95 14.16 ---
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/Mid Cap Opportunities  I 13.21 2.98 9.80 8.70 14.60 8.73
Benchmark 15.82 4.48 12.56 7.79 16.23 ---
Morningstar Mid-Cap Blend Category 13.93 2.05 9.50 5.95 14.16 ---
SI = Since Inception. Fund Inception: 03/31/2006
Operating Expenses:   Net 1.05% |  Gross  1.05%
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. Small and Mid Cap Opportunities Fund. If Class I fees and expenses were reflected, performance would have differed. SI performance is calculated from 3/31/06.

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 3.26% in February, underperforming its benchmark, the Russell 2500 Index, which returned 4.72%. 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 producer durables and consumer discretionary. Cash was the third largest detractor. We also lagged in technology, which was the market leader for the month and YTD. In both cases this was due to stock selection; however, this was mainly driven by names the strategy did not hold as opposed to those that it held. Our best sources of return were in real-estate investment trusts (REITs), the second weakest index sector, and consumer staples.

In terms of the Fund’s three alpha sources—“Steady Eddies,” “Mispriced Growth,” and “Turnarounds”—while all three categories had positive returns for the month, none of our categories outperformed. The “Steady Eddies” were our strongest group, however “Mispriced Growth” names lagged by the largest margin.

Key contributors included Catalent Inc., ServiceMaster Global Holdings, Inc., and Performance Food Group Company. Catalent is a contract manufacturing organization providing advanced delivery technologies and solutions for drugs, biologics, and consumer health products. They issued an earnings report that was well received. ServiceMaster is a pest control company. Management reported higher than expected growth in the residential business (commercial business was flat) and raised guidance. Performance Food Group markets and distributes food and food-related products. Their earnings report exceeded expectations as earnings per share3 and EBITDA4 came in above analyst estimates.

Key detractors included Aramark, Dycom Industries, Inc., and Valvoline, Inc. As we are in the midst of our earnings season, it’s not surprising that all three stocks experienced disappointments in their announcements. Aramark, despite posting a modest earnings beat, lagged due to a variety of concerns such as potential for rising wage pressure, leverage, and possible competition for their food services business. Dycom reported an earnings miss, noting that their Verizon business has become less profitable. Valvoline reported an earnings shortfall due to lower volumes in North America.

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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.

3 Earnings Per Share is the projected growth rate in earnings per share for the next five years.

4 A measure of a company's earning power from ongoing operations, equal to earnings before deduction of interest payments, income taxes, depreciation, and amortization. EBITDA excludes income and expenditure from unusual, non-recurring or discontinued activities.

 

Important RisksInvesting 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- and mid-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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