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 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 Large Cap Growth Fund (Share Class I) returned 14.92% in the first quarter, underperforming its benchmark, the Russell 1000 Growth Index (the “benchmark”), which posted a return of 16.10%.
In a reversal from the fourth quarter of 2018, growth equities moved ahead of value equities in the first quarter, with the Russell 1000 Growth Index returning 16.10% vs. the Russell 1000 Value Index return of 11.93%. During the first quarter, we saw strength across all three primary factors of our proprietary multi-factor model—Momentum, Value, and Stability of Earnings—as the market appeared to refocus on company fundamentals. The model was most effective during January and February; however, we did see some pullback in March, as investors turned their attention to macro factors. For the quarter, our Momentum and Stability of Earnings factors were most effective, while our Value factor declined in effectiveness during the month.
Sector allocation was the primary driver of the Fund’s relative underperformance for the first quarter. An underweight to the Information Technology sector and an overweight to the Health Care sector were the largest detractors. An underweight to Consumer Staples provided a modest positive contribution for the quarter.
Overall, stock selection neither contributed to nor detracted from relative performance in the quarter. Contributions from holdings in the Information Technology and Health Care sectors were offset primarily by holdings in the Communication Services sector.
Recent economic indicators within the U.S. and globally appear slightly less supportive of strong equity markets. During the first two months of the quarter, markets experienced a significant rebound from December’s lows. It appeared investors favored companies with strong fundamentals during earnings season. Additionally, during this period, trade tensions began to abate, particularly between the U.S. and China. The market responded positively to the chance of the world’s two largest economies reaching a trade agreement.
However, in March, markets appeared to retreat from the renewed focus on bottom-up, company-specific performance and shift toward top-down economic factors. Perhaps of greatest concern for investors during the first quarter was the Federal Reserve’s decision to pause its monetary policy normalization plans. This was a sharp deviation from previously hawkish behavior. The Fed’s about-face hurt the Financials and Industrials sectors in particular. Additionally, the move led to an inversion in the yield curve, causing significant discomfort among investors, as this is typically considered an early indicator of recession.
Fourth quarter 2018 S&P 500 earnings growth (reported during the first quarter) was 17.1%, demonstrating a material slowdown from the previous quarter’s 24.5% growth. Only five of the 11 GICS sectors reported double-digit earnings growth, versus nine in the fourth quarter of 2018. Additionally, approximately 69% of the companies within the S&P 500 reported positive earnings surprises, down significantly from the third quarter earnings season. Overall, the market continued to demonstrate positive bottom-up fundamentals throughout the quarter, but not to the same extent as recent periods.
Our investment process is focused on bottom-up, fundamental analysis guided by our multi-factor model, with particular attention paid to earnings and a company’s ability to surprise on the upside. We are optimistic about our process and our model for 2019, which saw clear signs of strength in January and February. We believe that much of the pullback we experienced in March had to do with macro factors driving the markets, which we do not expect to persist. Our portfolio was also negatively affected by idiosyncratic events, which impacted some of our holdings in the biotech and aerospace industries.
There is a strong correlation of earnings and stock prices over time; in the past 10 years, the correlation between earnings and prices of the S&P 500 Index was 94%. However, during 2018, there was almost zero correlation of earnings to stock prices. This unfavorable environment appeared to reverse in January and February, as growing companies that exceeded earnings estimates were favored by the market. In March, a handful of idiosyncratic events had outsized effects within certain industries and securities within our portfolios, as did macro factors. Despite this, we remain resolute and are sticking to our process. We will continue to focus our efforts to position our portfolio in companies that we believe 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.