Note: On March 31, 2017, PNC Large Cap Core Fund became PNC Multi-Factor All Cap Fund. The Fund's strategy and risks changed as the Fund will now pursue a multi-factor approach and will no longer have a policy to invest 80% of its net assets plus any borrowings for investment purposes in equity securities issued by large-cap companies. Please see the prospectus for additional information.
PNC Multi-Factor All Cap Fund (class I) returned 5.61% in the fourth quarter versus a return of 6.34% for the Russell 3000 Index.
Growth factors — both price and earnings momentum — continued to show strength during the quarter, while value factors modestly outperformed and stability of earnings factors modestly underperformed. Collectively, these factors contributed positive alpha during the quarter. (The excess return of a fund relative to the return of the benchmark is a fund's alpha).
However, the portfolio's overweight to smaller-capitalization stocks, whose returns trailed larger-capitalization stocks, was a detraction from relative performance and that more than offset the multi-factor model's positive alpha.
Stock selection was the main detractor from relative performance during the quarter, particularly in the Information Technology, Consumer Discretionary, and Energy sectors. Sector allocation contributed to relative performance with the underweight to the Health Care and Utilities sectors and the overweight to the Consumer Discretionary sector contributing the most.
Overall, U.S. equity markets continued to rise during the fourth quarter, seeming to shrug off concerns over continuing geopolitical tensions and instead focusing on the positives of tax reform, solid economic growth, and strong corporate earnings. Revised tax policy legislation was a particular focus, as the new law is anticipated to be favorable to U.S. corporations. The Tax Cuts and Jobs Act not only lowers the federal corporate statutory tax rate, it also allows companies to repatriate overseas cash at more favorable tax rates.
This late-cycle fiscal stimulus comes at a time of economic strength in the U.S., as third-quarter 2017 GDP increased at a seasonally adjusted annual rate of 3.2%. Fourth-quarter GDP is forecast to also increase above 3%. With this generally positive macro backdrop, the fundamental earnings growth picture also looked quite strong. Third-quarter earnings grew 6.7% year over year, which was not as strong as the double-digit earnings growth in the prior two quarters, but still positive.
Company earnings are showing an acceleration that the investment team has not seen since 2011. The trend started in the third quarter of 2016 and continued throughout 2017. Earnings forecasts indicate a continuation of this trend throughout 2018. With trailing price-earnings ratios at relatively high levels the Fund's managers feel the earnings story will have to be the driver of future price movement, which the market clearly saw in 2017. They see no reason to believe our investment thesis of price appreciation driven by accelerated earnings growth (tempered by above-average valuations, with lower correlations between stocks and driven by stock-specific data) should not continue and may actually strengthen into 2018.
On March 31, 2017, PNC Large Cap Core Fund became PNC Multi-Factor All Cap Fund. The Fund's strategy and risks changed as the Fund will now pursue a multi-factor approach and will no longer have a policy to invest 80% of its net assets plus any borrowings for investment purposes in equity securities issued by large-cap companies. Please see the prospectus for additional information.