Improving and Persistent Fundamental Quality

When evaluating a company, we look for signs of improving quality. This isn’t only found in companies in the highest-quality quartile, but also those in the next tier that show characteristics that could help them rise in quality. Improving quality can manifest itself several ways: improving cash generation, decreasing capital intensity, earning a greater return on existing assets, or improving incremental returns on each new asset in which a company invests.

For example, Ingersoll Rand, a global leader in flow-creation technologies, matches our criteria. Nearly 30% of the energy generated within a factory is derived from pumps and compressors, and Ingersoll’s products deliver meaningful efficiency gains not only from improved product design, but also from delivering on guaranteed “uptime” specifications. We believe the company’s energy efficiency is an underappreciated driver of demand, and their ability to successfully offer value-add services to customers may be both revenue and margin accretive over time.

Another pillar of our investment philosophy is the belief that the market underestimates how long fundamental improvement can persist. As a company starts to be more cash generative, it can focus these additional resources on improving its competitive advantages and widening its gap vs. competitors.

TJX Companies exemplifies this concept. TJX has thrived in recent years and expanded its footprint while many other brick-and-mortar retailers have had to close locations due to severe competitive pressure from Amazon and e-commerce. TJX has created a compelling treasure-hunt experience that gives customers access to premium brands at discounts, encouraging more frequent visits and building customer loyalty. This dynamic, along with strong inventory management and excellent execution, shields the company from online disruption and helps facilitate growth despite the challenging backdrop for many other retailers.

Risk Management and the Role of Portfolio Construction

We also view portfolio construction as an important component of the investment process. Active managers frequently underestimate the range of potential outcomes when assessing conviction in investment ideas. We seek to avoid this trap by risk-weighting position sizes to diversify risk more broadly. 

The portfolio targets a lower risk profile relative to the S&P 500 Index. This may provide a potential additional layer of lower downside-capture beyond those inherent in the team’s investment framework. The Fund’s shareholders have benefited from this risk-conscious approach by realizing lower downside capture than many peers over the past 10 years (FIGURE 2).

Why the Hartford Core Equity Fund? 

Because we believe the market tends to underappreciate the persistence of fundamental improvements, we typically hold companies for 3-5 years, allowing returns to compound over time. In addition, the diligent portfolio construction that’s integral to our investment process helps us to risk-weight position sizes to diversify the Fund’s exposures. Finally, we believe the Hartford Core Equity Fund is well-positioned to withstand bouts of market volatility because we target a beta below that of the S&P 500 Index while striving to keep pace with peers during up markets through security selection.