Analysis of Hartford Schroders US Small/Mid Cap Opportunities Fund
analysis, mutual fund

This weekend’s profile in Barron’s features the Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX; Class A shares). This $254 million fund has a 5.5% maximum sales charge, 1.3% expense ratio and 56% turnover. According to the article, the fund

… has returned an average of 8.7% a year over the past decade, a full two percentage points better than its category peers—beating 94% of them—and well ahead of its Russell 2500 benchmark.

The prospectus benchmark for the fund is the Russell 2500™ Index. Currently, there are no ETFs tracking this index. The iShares Russell 2000 ETF (IWM) could be used as a close substitute. Alpholio™ calculations show that over the ten years through September 2016, the fund returned more than the ETF in about 45% of all rolling 36-month periods, 53% of 24-month periods and 61% of 12-month periods. Over a rolling 36-month period, the cumulative (not annualized) return of the fund trailed that of the ETF by a median 1.90%.

Given a mixed small- and mid-cap style of the fund, the iShares Russell Mid-Cap ETF (IWR) could be used as an alternative benchmark. The fund returned more than that ETF in approximately 41% of all rolling 36-month periods (median underperformance of 6.85%), 42% of 24-month periods and 46% of 12-month periods.

As a benchmark, a single-index ETF is useful in providing comparisons of returns, but it does not take the fund’s volatility or exposures into account. To achieve the latter, let’s apply the Alpholio™ patented methodology. The simplest variant of this methodology constructs a custom, fixed membership and weight ETF portfolio to most closely track periodic returns of the fund.

To make comparisons more practical, in the following analyses the number of ETFs in the reference portfolio was limited to at most four. Here is a chart with related statistics of the cumulative RealAlpha™ for the Hartford Schroders US Small/Mid Cap Opportunities over the ten years through September 2016 (to learn more about this and other performance measures, please consult our FAQ):

Cumulative RealAlpha™ for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 10 Years

From the beginning of the analysis period through early 2013, the fund did not add any value over its reference portfolio. However, subsequently the fund’s cumulative RealAlpha™ strongly rebounded. The volatility of the reference portfolio, measured as the standard deviation of monthly returns, was slightly below that of the fund. The fund’s RealBeta™ was slightly lower than than of a broad-based domestic equity ETF.

The following chart and associated statistics show the constant composition of the reference ETF portfolio for the fund over the same evaluation period:

Reference Weights for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 10 Years

The fund had equivalent positions in the SPDR® S&P MIDCAP 400® ETF (MDY), iShares Russell 2000 Growth ETF (IWO), and First Trust US IPO Index Fund (FPX).

The fixed-income holdings of the fund were represented by the iShares 1-3 Year Treasury Bond ETF (SHY). The weight of this ETF indicates that, on average, the fund held a significant percentage of its assets in cash or equivalents. This is partially corroborated by a statement in the article:

Right now, 16.6% of its assets are in Treasury bonds or small- and mid-cap exchange-traded funds.

A similar analysis conducted over the five-year period through September this year yields the following chart and statistics:

Cumulative RealAlpha™ for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 5 Years

Until mid-2014, the fund’s cumulative RealAlpha™ was largely flat; the fund added almost all the value afterwards. The standard deviation of the reference ETF portfolio continued to be a bit lower than that of the fund. The RealBeta™ was slightly above that over the longer analysis period.

The following chart and associated statistics illustrate the fixed reference ETF portfolio for the fund over the same five-year period:

Reference Weights for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 5 Years

The fund had major equivalent positions in the aforementioned SPDR® S&P MIDCAP 400® ETF (MDY), IQ Hedge Multi-Strategy Tracker ETF (QAI), First Trust Industrials/Producer Durables AlphaDEX® Fund (FXR), and aforementioned First Trust US IPO Index Fund (FPX).

The next chart and statistics depict the cumulative RealAlpha™ for the fund over the three-year period through September 2016:

Cumulative RealAlpha™ for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 3 Years

The fund produced a substantial amount of positive RealAlpha™ but at the expense of an elevated RealBeta™.

The following chart and statistics show the static reference ETF portfolio for the fund over the same three-year analysis period:

Reference Weights for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 3 Years

The fund’s dominant equivalent position continued to be the SPDR® S&P MIDCAP 400® ETF (MDY), followed by SPDR® S&P® Insurance ETF (KIE), Vanguard Consumer Discretionary ETF (VCR), and iShares S&P Mid-Cap 400 Growth ETF (IJK).

The final chart and statistics compare the traditional performance measures of the fund to those of the SPDR® S&P MIDCAP 400® ETF (MDY) over the ten-year period:

Total Return for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) and SPDR S&P MidCap 400 ETF (MDY) over 10 Years

The fund had a marginally higher return but with a considerably lower volatility than the ETF, which led to its higher Sharpe and Sortino ratios.

In conclusion, the Hartford Schroders US Small/Mid Cap Opportunities Fund added value over a relatively short two-year period in its over ten-year history. The fund followed more a mid- rather than a small-cap style. At times, the fund held a substantial portion of its assets in short-term fixed-income securities. This could have skewed the asset allocation in the overall portfolios of its investors and also created a drag on returns. Over the past four years the fund large long-term capital gain distributions. In three of those years, the fund also produced substantial short-term capital gain distributions. This made it unsuitable for taxable accounts. Finally, the fund has a steep front load which does not enhance its appeal.

To learn more about the Hartford Schroders US Small/Mid Cap Opportunities and other mutual funds, please register on our website.


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Analysis of Hartford Core Equity Fund
analysis, mutual fund

Today’s profile in Barron’s features the Hartford Core Equity Fund (HAIAX; Class A shares). This $1.1 billion fund has a 5.5% maximum sales charge, 0.79% net expense ratio (subject to an upcoming renewal of the contractual reimbursement) and 33% turnover. According to the article

[The current manager] has managed the fund since its inception in 1998, and in the past 10 years, its 6% annualized return has beaten 92% of its peers and the Standard & Poor’s 500 index. Over the past three and five years, the large-blend fund produced an annualized total return of more than 10%, beating 99% of its peers and the S&P 500… Over the trailing three and five years, the fund fell only 80% to 90% as much as the S&P did, and exceeded the market’s gains by 2% to 4%.

Comparing Returns

First, with the front load taken into account, the fund did not beat its benchmark, the S&P 500® Index, over the 10 years through January 2016. Without the sales charge, the fund returned about 0.6% more than the index on an annualized basis over the same interval:

Historical Performance of Hartford Core Equity Fund (HAIAX)

One of the long-lived and low-cost implementations of the index is the SPDR® S&P 500® ETF (SPY). Alpholio™’s calculations indicate that since late 2004 the fund returned more than the ETF in about 50% of all rolling 36-month periods, 47% of 24-month periods and 55% of 12-month periods. The median outperformance in a rolling 36-month period (not annualized) was zero and the mean one 0.76%:

Rolling Returns for Hartford Core Equity Fund (HAIAX)

Adjusting for Risk

While a comparison of periodic returns provide a simple measure of performance, it does not adjust for the fund’s risk. To gain a deeper insight, let’s apply Alpholio™’s patented methodology. In a simplest variant of this methodology, a reference portfolio of ETFs with fixed membership and weights is constructed for each analyzed fund. Here is the resulting chart of cumulative RealAlpha™ for the Hartford Core Equity (to learn more about RealAlpha™ and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Hartford Core Equity Fund (HAIAX)

The fund produced a negative 0.8% of annualized discounted RealAlpha™. That outcome would have been much worse were it not for a strong rebound in the second half of 2014 and in 2015. At 14.2%, the fund’s standard deviation (a measure of volatility of returns) was approximately 0.25% higher than that of the reference portfolio. The fund’s RealBeta™ was 0.93.

Reference ETF Portfolio

The following chart illustrates weights of ETFs in the reference portfolio for the fund:

Reference Weights for Hartford Core Equity Fund (HAIAX)

The fund had major equivalent positions in the iShares Morningstar Large-Cap Growth ETF (JKE; constant weight of 15.1%), Health Care Select Sector SPDR® Fund (XLV; 14.8%), iShares Morningstar Large-Cap Value ETF (JKF; 13.6%), PowerShares Dynamic Market Portfolio (PWC; 11.3%), SPDR Russell 3000® ETF (THRK; 10.9%), and Vanguard Mid-Cap ETF (VO; 9.7%). The Other component in the above chart collectively represents additional six ETFs with smaller fixed weights.

Conclusion

Over the past 11 years, the Hartford Core Equity Fund did not add value on a truly risk-adjusted basis. The fund could have been easily substituted by a collection of readily accessible ETFs. Such an ETF portfolio would offer a higher return and slightly lower volatility. The fund’s steep front load further detracts from it appeal.

Currently, the fund is fairly well diversified, with top-10 of its 68 holdings constituting less than 23% of assets. Historically, the fund had reasonably low distributions, which may haven made it suitable even for taxable accounts.

To learn more about the Hartford Core Equity and other mutual funds, please register on our website.


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