Hartford Funds Seeks to Let $4.1B Fund Make More Concentrated Investments

A Hartford Funds Management Group Inc. proposal to permit one of its funds to invest a greater share of assets in securities from fewer issuers is likely to cause plan sponsors that include the fund to re-evaluate its risks, according to an investment consultant and retirement plan advisers.

The $4.1 billion Hartford Growth Opportunities Fund was held by 123 defined contribution retirement plans with 100 or more participants, as of year-end 2021 data from BrightScope, and has distributed $442.1 million in total dollar value assets to plans. Of the distributions, 75.93% were held by jumbo-sized plans with $1 billion or more in assets. BrightScope, like PLANSPONSOR, is owned by Institutional Shareholder Services Inc.

Hartford’s proposal to reclassify the fund will change its risk profile, according to Hartford’s October 17 filing with the Securities and Exchange Commission.

“Notwithstanding the increased investment flexibility and the potential for improved investment performance over time, a non-diversified fund typically presents a greater degree of investment risk due to its ability to invest a greater percentage of its assets in a single issuer and in fewer issuers overall,” the filing stated. “Because a non-diversified fund can invest more of its assets in a smaller number of issuers, it may be more exposed to the risks associated with an individual issuer than a fund that invests more broadly across many issuers.”

If the reclassification is granted, Hartford intends to take advantage of the increased flexibility yet cautioned investors that “poor performance by a single large holding of the Fund would adversely affect the Fund’s performance to a greater extent than if the Fund were invested in a larger number of issuers,” according to the filing. “As a result, as a non-diversified fund, the Fund’s share price may fluctuate more than that of a similar fund that is more broadly diversified.”

Hartford Funds requested that shareholders vote on the proposal at a special meeting on December 13, following a unanimous approval vote by the fund’s board of directors in September. Hartford provided proxy materials to shareholders in the fund on September 25, the firm disclosed.

If shareholders approve the proposal, the reclassification is expected to take effect on March 1, 2024, in connection with the annual update of the fund’s registration statement.

Plan Sponsors Ponder

“I would be less likely to offer the fund in a retirement plan lineup,” explains Adam Rivett, a retirement consultant at insurance broker OneDigital. “The change to the composition of the holdings within the fund will open it up to potential opportunity to experience increased risk, as stated in the SEC filing.”

With the fund reclassified, Martin Schmidt, a principal in MAS Advisors, a retirement plan consultant in Miami, agrees that he will be less likely to advise offering the fund in a plan lineup and adds, “it’s one other variable to take a look at when you’re evaluating the funds.”

The Edward D. Jones Profit Sharing and 401(k) plan—with $8.7 million in total assets, as of the most recent Form 5500 data from the Department of Labor—is the largest individual plan sponsor investor in the Hartford fund, holding $336 million, according to BrightScope data.

Representatives of Edward Jones did not return a request for comment.

What Should Plan Fiduciaries Do?

Plan sponsors and retirement plan advisers that have recommended plans that include the fund in their investment lineups and that intend to retain it must consider the greater degree of risk and attendant increased volatility, says Rob Massa, managing director and Houston operations retirement practice leader at Qualified Plan Advisors.

“From a fiduciary prudence standpoint, it is important for plan sponsors to know that the volatility of the mutual funds they have in the plan may now be increased due to a change in status from diversified to non-diversified,” he says. “While a non-diversified mutual fund investment may be performing well today and passing the screens in your investment policy statement, if the risk profile of the investment no longer aligns with the plan goals, employee demographics, etc., it may be prudent to seek out alternatives.”

Massa advises that plan fiduciaries and retirement plan advisers must engage in active due diligence that includes being aware of changes to fund descriptions; trying to determine if the level of risk has increased in the fund due to a change in status; and discussing whether the change has altered the role this fund was intended to play in the plan menu and its efficacy in participant portfolio asset allocations.

Additionally, “fiduciaries need to evaluate if this warrants the [retirement plan] committee to take action to find a suitable replacement or if the fund may remain in the portfolio,” Massa says. “If the fund is going to be retained, fiduciaries should also discuss whether the fund should be placed on a watch list, especially since the fund’s quantitative metrics may not otherwise warrant such treatment.”

Why the Change?

Hartford is reclassifying the fund because the allocations to individual holdings in at last four investments—Alphabet Inc. (8.86%); Amazon.com Inc. (8.11%); NVIDIA Corp. (7.27%); and Meta Platforms Inc. (5.09%)—exceeded the investment thresholds of the Investment Advisers Act of 1940, explains Massa.

The act limits the amount that a diversified fund may invest in a single issuer to 5% of the fund’s total assets and to 10% of the issuer’s voting securities, with respect to 75% of the fund’s total assets.

“The lion’s share of growth in the 2023 stock markets has been concentrated within just a handful of publicly traded stocks,” Massa says. “Allocations to these stocks have resulted in the unintended conversion of some mutual funds, like this one, to become non-diversified.” 

Rivett explains the Hartford reclassification appears intended to support the fund retaining a larger proportion of mega-cap holdings and to rival growth index funds.

Hartford Funds “hopes to better keep up with peers and competitors who are already non-diversified with larger positions in this concentrated market [comprised of] mainly technology stocks,” Rivett explains. “Should [the reclassification] provide [Hartford] with better positioning and performance in the future, there would likely be a higher adoption rate of the fund after fiduciaries have had a chance to ‘kick the tires.’”

Last year, Fidelity Investments reclassified to non-diversified the $45.3 billion Fidelity Growth Company Fund. In 2021, T. Rowe Price reclassified the $50.8 billion Blue Chip Growth Fund.   

As a direct result of Fidelity’s diversification change, Schmidt says, “We ended up pulling the fund out” of a retirement plan he advises. “The [Fidelity] fund was underperforming, it was being closely monitored and then, all of a sudden, this change happened, and that was the nail in the coffin to really make the change.”