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 (class I) returned 0.29% in the third quarter versus a return of 7.12% for the Russell 3000 Index.
During the third quarter, we saw a continuation of trends seen toward the end of the second quarter: value factors remained weak, quality continued to underperform, and growth factors, which took a turn down in June, remained down. We did see some strength in underlying growth factors, which drove them towards positive territory, but they ultimately lacked enough force to drive an inflection. Strength in price momentum and earnings surprises were offset by weakness in positive earnings revisions.
Collectively, these factors detracted from relative investment results.
The Fund’s overweight to smaller-cap stocks, which trailed larger-cap stocks, was a detractor from relative investment results. In addition, domestically traded international stocks that are in the Fund, but not in the Russell 3000 Index, also detracted from relative results.
Stock selection was the main detractor from relative results during the quarter. The top three sector detractors from a stock selection perspective were Information Technology, Consumer Discretionary, and Materials. Stock selection in Healthcare and Utilities contributed modestly.
Sector allocation also detracted from relative results. Contributions from underweights in Real Estate, Consumer Staples, Utilities, and Industrials were offset by the negative relative impact from the remaining sectors, led by the Fund’s underweight in Healthcare and overweights in Materials and Financials.
U.S. equity markets ended the third quarter in positive territory, with the S&P 500 Index returning 7.71%. Second-quarter 2018 year-over-year earnings growth (reported during the third quarter) for the Index was 25%, marking the highest quarterly earnings growth period since 2010. Ten of the 11 GICS sectors saw double-digit earnings growth. Additionally, approximately 80% of the companies within the S&P 500 reported positive earnings surprises. Overall, the market seemed to demonstrate positive sentiment throughout the quarter, although it was partially muted by some macro concerns.
Similar to the first half of the year, further monetary policy normalization by the Federal Reserve supported a stronger dollar and rising interest rates. Additionally, increasing input costs for energy and industrial metals continued to impact the global supply chain, which has weighed on stock prices in some sectors.
Earlier in the year, fear of a global trade war dominated the market consciousness. Some of this concern seemed to abate during the third quarter, as the adoption of the U.S.-Mexico-Canada Trade Agreement during the quarter signaled to investors that the U.S. administration intends to reach trade deals with other countries, rather than pursue a more isolationist strategy. While some worry has been relieved, concerns about trade between the U.S. and the rest of the world, namely China, and the effects that retaliatory tariff actions could have are still top of mind for many investors. Additionally, there has been increased concern surrounding the sell-off in emerging market currencies amid rising U.S. interest rates and a strengthening dollar.
The overall earnings acceleration trend that started in the third quarter of 2016 continued during the most recent quarter, with second quarter 2018 corporate earnings growth coming in at 25.0%. For third quarter 2018, analysts’ consensus forecasts indicate another expected double-digit year-over-year increase in earnings growth, with a current estimate of 19.2%. Interestingly, stock prices have not kept up with the increases in earnings estimates, likely because of multiple macro pressures, including the threat from trade tariffs, rising oil prices, and a flattening yield curve. Yet equity valuations, as measured by forward price-to-earnings ratios, are above the five-year average and 10-year average, supporting our belief that multiple expansion is likely limited and that earnings growth may be a key driver of the market in the near term.
We think it's important to highlight that estimated 2018 revenue growth for the S&P 500 Index of 8.1% has accelerated from consensus estimates just three months ago, potentially reflecting generally strong business conditions despite the various macro cross currents. While 2018 earnings growth benefited from a reduced corporate tax rate, 2019 S&P 500 earnings growth is expected to remain a robust 10.4%, with revenue growth of 5.3% according to current analysts’ projections. We also note that a return to a “normal” economy with the Federal Reserve raising interest rates and reducing quantitative easing may cause investors to favor higher-quality companies, which we expect could benefit our investment process. However, we will closely watch the impact that rising interest rates may have on earnings revisions and growth. We will continue to focus on our process in an effort to position our portfolio in companies with improving fundamentals that 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.