PNC International Equity Fund (class I) returned 1.39% in the first quarter versus a return of -1.33% for the benchmark MSCI ACWI ex USA Index.
In terms of country attribution, the Fund outperformed both on a country allocation basis and a stock selection basis. Positive country allocation effects came from an overweight to Kenya, along with underweights to Australia and Canada. Negative country allocation effects came from an overweight to Germany, along with underweights to Taiwan and Japan. Positive selection effects came from stock selection in Japan, Canada, and France. Negative selection effects came from stock selection in the United Kingdom, Thailand, and Sweden.
In terms of sector attribution, the fund outperformed both on a sector allocation basis and a stock selection basis. Positive sector allocation effects came from an overweight to Technology, along with underweights to Consumer Staples and Energy. Negative sector allocation effects came from an overweight to Materials, along with underweights to Utilities and Financials. Positive selection effects came from stock selection in Financials, Health Care, and Technology. Negative selection effects came from stock selection in Consumer Staples, Materials, and Telecom.
In the broader market, International investors continue to witness broad-based, synchronized global growth. However, volatility is starting to increase and the rate of growth appears to be slowing, as global central banks begin withdrawing liquidity and decreasing their balance sheets. This is in large part a continuation from last quarter. U.S. tax policy changes will likely boost global growth temporarily, but increasing trade protectionism is a risk for the global economy and markets.
Both global manufacturing and non-manufacturing purchasing managers' indexes remain in expansionary territory and near multi-year highs, indicative of growth throughout the global economy. Emerging markets generally continued to outperform despite the increase in volatility, as commodity prices remained stable throughout the quarter.
Market expectations around inflation and interest rates are incorporating new data points. Prices of most major industrial metals continued to increase, while oil prices were down on rising rig counts and an oversupply in the U.S. Select agricultural prices spiked on supply fears due to droughts in major growing regions around the world. In the U.S., Jerome Powell's start as chairman of the Federal Reserve, combined with strong employment reports and higher-than-expected U.S. wage growth in January, reinforced expectations for higher domestic
inflation and more Fed interest-rate hikes than previously anticipated. The European Central Bank reduced its level of quantitative easing and the euro strengthened, while the Bank of Japan remains focused on jump-starting inflation.
China lifted its two-term presidential limit, which could effectively keep President Xi Jinping in power indefinitely. With little domestic opposition, his drive to increase China's global influence and establish economic and technology leadership will likely accelerate. Additionally, Yi Gang took over as governor of the People's Bank of China. He replaces Zhou Xiaochuan, who helped build China's modern financial system.
Global markets were volatile during the first quarter of 2018. Markets rose in January on the back of tax reform, synchronized global growth and consumer spending. By February, U.S. stock indices experienced the largest decline since August 2011. Investors were concerned that rising inflation would force interest rates higher, and erode profitability for companies already trading at elevated valuations. Fiscal tightening was signaled by the European Central Bank and Bank of Japan, leading to similar company-level worries. In March, trade wars between the U.S. and China shifted sentiment, with tariffs exacted by both countries.
Positive momentum continues in nearly all global economies, both developed and emerging. Recent company meetings echoed this drive, pointing to good business demand, inventory restocking and new purchasing trends. Raw material/commodity prices are rising, and supply-demand metrics are proving favorable, especially in electronics and tech components. As a result, select Information Technology companies remain on the investment team;s radar, as do Financial, Consumer Discretionary and Industrials sector stocks. Generally speaking, the Fund's managers already have a healthy weighting in many of these named sectors or applicable sub-sectors; therefore, they may seek to replace current portfolio holdings with more attractively-valued companies at opportune periods. Regardless of sector, the majority of undervalued, but fundamentally strong, companies remain centralized in Asia (China, Japan, Korea, Taiwan) and the U.S.
The Fund benefits from a globally diverse analyst team, all of whom conduct on-the-ground research, meet with companies/competitors, visit manufacturing plants, and carefully analyze prospective companies using local and global accounting standards. The Fund's managers continue to believe in the merits of this bottom-up investment philosophy, and strive to improve the valuation and risk profile of the portfolio.