PNC International Equity Fund (class I) returned 5.43% in the fourth quarter versus a return of 5.00% for the benchmark MSCI ACWI ex USA Index.
Positive stock selection effect was offset slightly by a negative country allocation effect. Sector allocation also detracted slightly from the Fund's performance this quarter.
Outperformance associated with the country allocation effect included the investment team's overweights to Singapore, Korea, and Thailand. Large positive impacts also came from underweights to Mexico, Spain, and France. Detracting from performance were overweights to Germany and Norway, along with underweights to Japan and South Africa.
From a sector allocation perspective, underweights to the Utilities and Financials sectors added to performance. Overweights to the Materials and Consumer Discretionary sectors aided performance as well. The investment team's underweight to the Energy sector detracted from performance, as it was the second best-performing sector during the quarter behind the Materials sector. Stock selection in the Information Technology, Consumer Discretionary, and Consumer Staples sectors aided overall performance, while stock selection in the Financials, Real Estate, and Materials weighed negatively on overall performance.
In the broader market, tax reform in the U.S. dominated the global news flow. There was also continued investor debate around the number of Federal Reserve interest-rate hikes in 2018 and what that means for global equities, especially emerging markets, which continued to rally.
In Asia, China's growth moved ahead with imports and exports continuing to beat expectations, but the property sector clampdown impacted the local real-estate market – prices dropped across the country, especially on the high end. The much-anticipated power transition in China happened smoothly and Xi Jinping will remain the leader of China for the next five years. In India, growth was negatively affected by recent reforms (demonetization and a goods and services tax). Additionally, inflation continued rising and valuations remained high despite the deterioration in the current-account deficit. Korea was impacted by a global tech downgrade, which hit most Korean tech names. The Bank of Korea raised rates and the won strengthened. The country is also working on improving its relationship with China. Southeast Asian countries benefitted from a low inflationary environment and growing consumer confidence.
The European economy is demonstrating strong cyclical growth that is broad-based across sectors and geographies. The European Central Bank remains committed to its reduced level of quantitative easing, providing continued liquidity to the markets. Both the IHS Markit purchasing managers index (PMI) for the Eurozone manufacturing sector (currently above 60) and European consumer confidence are at the highest levels in 16 years. Unemployment levels continue to decline and inflation remains subdued.
Outperformance was attributed to positive absolute returns in eight sectors, with the greatest contributions from Consumer Discretionary and Materials. After a lackluster 2016 due to lower commodity prices, Materials surged in 2017 with the majority of holdings up in excess of 20%. Financials, Industrials and Energy also contributed measurably. Utilities and health care holdings were in negative territory.
Global macro-economic growth was on an upswing, as evidenced by strong corporate earnings, heated merger and acquisition activity, and increased consumer spending. As would be expected in such an environment, cyclical sectors including Materials and Consumer Discretionary, as well as Consumer Staples, dominated performance.
Supply-demand fundamentals remain resilient in the Materials sector, with demand originating in Asia and translating into renewed economic growth in Europe and more recently, the U.S. The reduction in tax rates in the U.S. ultimately will be positive for corporate cash flows and valuations. We believe that freed-up cash flow will go into further investments and capital spending, which could stimulate investment growth in the world economy.