An Upgrade for This Wellington-Managed Fund of Dividend Payers

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Although fees could be more competitive, Hartford Equity Income’s reliability under Wellington Management’s Michael Reckmeyer warrants an upgrade in the fund’s Morningstar Analyst Rating to Silver from Bronze.

Reckmeyer has skillfully led this fund since early 2008, but he hasn’t done so alone. Comanagers Ian Link and Karen Grimes have helped as have the other members of the firm’s now eight-person value team, not to mention Wellington’s roughly 50-person bench of global industry analysts. The breadth and quality of these investment resources eases times of transition, such as Grimes’ recent announcement that she’ll retire at year-end 2018.

Reckmeyer's approach is not flashy, but it is effective. He runs a roughly 60-70 stock portfolio of above-average dividend payers that he tries to buy when they're out of favor. He bought top-20 holding

Pharmaceutical stocks such as Eli Lilly have been a favorite of Reckmeyer's. The fund has had a double-digit stake in the industry since mid-2011 and its current 11.7% weighting is one of the large-value Morningstar Category’s highest. The fund also distinguishes itself by treading heavily in yield-rich sectors such as utilities and telecom.

The fund's income orientation has been a strength in market downturns. The fund held up better than three fourths of peers during the 2015-16 correction. The fund, though, is prone to lag in rallies and can also fall behind when interest-rates spike, such as between September 2017 and late April 2018 when the yield on the 10-year Treasury shot up about 100 basis points.

Over the long haul, Reckmeyer’s stock-picking skill has produced strong risk-adjusted results. From his 2008 start date through April 2018, the fund’s top-quintile 7.6% annualized gain beat the Russell 1000 Value Index by a percentage point with about 15% less volatility.

Process Pillar:

Positive | Alec Lucas, Ph.D. 05/16/2018

The fund earns a Positive Process Pillar rating for its focus on yield without neglecting total return. Lead manager Michael Reckmeyer is a stickler for dividends, valuations, and healthy balance sheets. He buys stocks with above-average dividends and low valuations but unappreciated growth prospects. Typically, these stocks offer a yield above the S&P 500's upon purchase. Unlike the strategy he runs for

Although Reckmeyer's process is fundamentally driven, it's not benchmark-agnostic. He keeps the portfolio's sector weightings within 10 percentage points of the Russell 1000 Value Index's. That can lead to significant sector differences between this fund and his sleeve of

The fund has a diverse portfolio of about 60-70 dividend-paying stocks. They consistently produce a higher yield than the large-value category norm and are typically well-capitalized firms. Currently, the fund derives its top-half 1.6% trailing 12-month yield from stocks that, on average, have a return on assets that ranks in the category's top half as well. The fund largely steers clear of higher-yielding stocks, which can signal a distressed dividend or limited growth prospects.

The fund's income orientation shows in its sector weightings. Its 10.6% combined stake in yield-rich telecom and utilities stocks, as of March 2018, ranked in the category's top quintile. The fund's 11.7% stake in pharmaceuticals stocks was also one of the category's highest. Top-15 holdings

Reckmeyer departs from the domestically oriented Russell 1000 Value Index by investing in attractively valued dividend payers overseas. Since early 2012, the fund's foreign stake has ranged from 12% to 20%. Most of these holdings are multinationals that pay stout dividends, including Switzerland’s

Performance Pillar: Positive | Alec Lucas, Ph.D. 05/16/2018 The fund's Positive Performance Pillar rating reflects its strong record under manager Michael Reckmeyer. Since he took over as lead in early 2008, the fund's 7.6% annualized gain through April 2018 beat the Russell 1000 Value Index by a percentage point and placed in the large-value category's top quintile. Over the same period, the fund's Sortino ratio (a risk-adjusted metric that penalizes downside risk) ranked near peers' top decile.

Reckmeyer's focus on well-capitalized dividend payers and willingness to buy them when they're out of favor has helped limit the fund's losses in faltering markets. In the 2008 credit crisis, the fund's 29% calendar-year loss beat the index by 7.9 percentage points and placed in category's top decile. The fund also had a top-decile 7% gain amid turbulence in 2011 and held up better than three fourths of peers during the 2015-16 correction.

The corollary of the fund's superior showings in down markets is that it tends to lag in rallies. The fund's 2009, 2012, and 2013 calendar-year returns each finished in or near the category's bottom third. The fund's income orientation can also make it sensitive to short-term interest-rate spikes. That happened during 2013’s taper tantrum and in 2016’s second half, when the 10-year Treasury’s yield shot up about 120 basis points between July 8 and Dec. 15. The fund lagged more than four fifths of peers during that stretch.

People Pillar: Positive | Alec Lucas, Ph.D. 05/16/2018 Capable subadvisor leadership earns the fund a Positive People Pillar rating. Wellington Management's Michael Reckmeyer has led the fund since 2008, having joined in October 2007 along with comanagers Karen Grimes and Ian Link. Reckmeyer, Grimes, and Link are part of an eight-person team at Wellington that includes dedicated analysts Adam Illfelder, Matthew Hand, Sean Kammann, Ami Shah, and Betsy George, who joined in late 2017. The team will add another analyst in view of Grimes' plan to retire at year-end 2018. The team resides in Pennsylvania, except for London-based Link and Shah. It also has access to the firm's 50-plus industry analysts.

The comanagers have distinct strategic responsibilities. Reckmeyer oversees the team's domestic equity-income strategies, which also include a slice of Vanguard Equity-Income and the equity portion of Vanguard Wellesley Income. Link has a global focus, which includes serving as a manager alongside Reckmeyer of Hartford Global Equity Income HLEAX. Grimes’ has led the domestic value strategies; her duties will be reallocated when she retires.

Reckmeyer and Link each invest at least $100,000 in the fund, and Grimes nothing. The managers' investment in their strategies is more substantial than is represented here, however. Reckmeyer, for example, invests more than $1 million each in Vanguard Equity-Income and Vanguard Wellesley Income.

Parent Pillar: Neutral | 11/17/2017 Hartford Funds, a subsidiary of The Hartford, has improved its stewardship profile but remains Neutral-rated while recent changes take hold. In 2012, The Hartford trimmed its business lineup, refocusing on its property-casualty, group benefits, and mutual fund units. At the same time, it moved its fixed-income funds, previously run in-house with mixed results, to well-respected subadvisor Wellington Management Company. Wellington has long run the firm's equity funds--about two thirds of its roughly $91 billion in fund assets. In 2016, Hartford Funds acquired Lattice Strategies, marking its expansion into exchange-traded funds, and the firm partnered with U.K.-based Schroders to expand its investment platform further. After both deals, the firm added 10 strategic-beta and actively managed ETFs and 10 actively managed mutual funds to its offerings.

While the firm mostly leaves day-to-day investment decisions to its subadvisors, it leads product management and distribution. In 2013, the firm reorganized its distribution effort and grew its internal sales team. The board and management also merged offerings, introduced new strategies, and lowered fees on several funds. While these changes have been positive, and there have been no flagrant missteps, the transitions remain new. Should the firm's recent efforts yield good experiences for fundholders at increasingly competitive costs, our confidence in Hartford Funds would grow.

Price Pillar: Neutral | Alec Lucas, Ph.D. 05/16/2018 The fund's Price Pillar rating has dropped to Neutral from Positive because its latest fees were roughly in line with most rivals'. The trend to become cheaper is positive. Between late 2016 and the fund's mid-2018 prospectus, fees for its A, C, and I shares--which together hold nearly three fourths of the assets--fell by 1 to 3 basis points apiece and the reasonably priced institutional F shares also debuted. Competitors' fees have fallen faster, though, and the fund's asset-weighted expense ratio now ranks in the peer group's third quintile.

Brokerage fees as a percentage of average net assets routinely fall below the category median thanks to the fund’s modest portfolio turnover. A December 2017 capital gain of 5.1% of net asset value hurt investors in taxable accounts, however.