Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown here.
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The views expressed in this investment report represent the opinions of PNC Capital Advisors, LLC and are not intended to predict or depict performance of any investment. All information contained herein is for informational purposes and should not be construed as investment advice. It does not constitute an offer, solicitation or recommendation to purchase any security. The information herein was obtained by various sources; we do not guarantee its accuracy or completeness. Fund performance quoted above is for class I shares. Past performance does not guarantee future results. These views are as of the date of this publication and are subject to change based on subsequent developments.
Investments in value companies can continue to be undervalued for long periods of time and be more volatile than the stock market in general. Investments in growth companies can be more sensitive to the company's earnings and more volatile than the stock market in general. International investments are subject to special risks not ordinarily associated with domestic investments, including currency fluctuations, economic and political change and differing accounting standards that may adversely affect portfolio securities. These risks may be heightened
in emerging markets.
PNC Multi-Factor All Cap Fund (Share Class I) returned 2.97% in the second quarter versus a return of 4.10% for the benchmark, the Russell 3000 Index (the “benchmark”).
Continuing a trend from the fourth quarter of 2018, growth equities outperformed value equities in the second quarter, with the Russell 1000 Growth Index returning 4.6% vs. the Russell 1000 Value Index return of 3.8%. During the second quarter, our model’s momentum and stability of earnings factors also outperformed modestly, driven by a resurgence in the strength of both factors during the last month of the quarter. However, this was offset partially by the continued underperformance of value factors.
In particular, we noted significant strength in our price momentum and earnings surprise factors during the quarter as companies that beat earnings expectations were rewarded while companies that missed earnings expectations were punished. In fact, the negative price impact from misses this quarter was even more substantial compared to recent history. This environment benefited us as we had a greater percentage of companies that beat expectations and a lower percentage of companies that missed relative to the benchmark. Additionally, the stocks that scored the worst on our momentum factor significantly underperformed during the quarter. Therefore the avoidance of these names was also critical to our performance.
Stock selection was the main detractor to relative performance in the quarter, with holdings in the Financials, Information Technology, Energy, and Materials sectors detracting the most, partially offset by contributions from the Industrials sector. The portfolio’s overweight to smaller capitalization stocks, whose returns lagged larger capitalization stocks, also detracted from relative performance. However, stock selection within smaller capitalization stocks largely offset the allocation effect.
Overall, allocation effect was the main contributor to relative performance in the quarter with an overweight to the Financials sector and underweights to the Health Care and Real Estate sectors contributing the most, partially offset by the underweight to the Information Technology sector.
Markets continued to experience a rebound from December’s lows, although concerns around US-China trade in May stunted the rally for the month but dovish comments from the Fed buoyed stocks into the end of the quarter. It appeared investors continued to favor companies with strong fundamentals during earnings season, or perhaps more accurately, punish those with fading fundamentals. Avoiding companies that missed earnings expectations was key during this quarter.
While the market posted positive results for the second quarter, intra-quarter stock movement was influenced by multiple headlines, including questions about the prospects for a U.S.-China trade deal, global growth concerns, and increasingly fickle comments from the Federal Reserve concerning fed funds rate targets. Additionally the partial inversion of the yield curve and oil price volatility during the quarter caused great concern for the market more broadly. The Fed’s dovish comments along with the renewed possibility of a U.S.-China trade deal toward the end of the quarter provided a broad reprieve.
Although financial markets continued their recovery from fourth quarter 2018 lows, there was significant dispersion among stocks within the index. In particular, we note that there was modest strength in stocks that exhibited strong momentum and quality characteristics during the last month of the quarter. While macro events continue to, in some cases move the market, we are pleased to see a return of fundamental factors having an outsized influence. We remain confident in our belief that earnings drive stock prices over the long term and that our process identifies companies with the greatest potential earnings surprise upside. We believe that the earnings outlook for the remainder of 2019 is tepid, so being able to identify the companies who will continue to exhibit strong EPS growth and surprises will be of the utmost importance.
All in, we will continue to focus our efforts to position our portfolio in companies that the model indicates have improving fundamentals and can surprise on the upside in terms of earnings. Equally important, we will continue to try to avoid those companies that may disappoint on earnings. We are optimistic about our investment process and our multi-factor model for 2019 and remain resolute in sticking to our process.