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.
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. 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. The Fund may invest a portion of its assets in derivatives. Derivative instruments include options, futures and options on futures. A small investment in derivatives could have a potentially large impact on the Fund’s performance. The Fund may be unable to terminate or sell a derivatives position. Derivative counterparties may suffer financial difficulties and may not fulfill their contractual obligations.
PNC International Equity Fund (class I) returned 3% in the second quarter versus a return of 2.98% for the benchmark MSCI ACWI ex USA Index.
In terms of country attribution, the fund outperformed both on a country allocation basis and on a stock selection basis. Positive country allocation effects came from overweights to Argentina and Germany, along with an underweight to China. Negative country allocation effects came from an overweight to Korea and underweights to Australia and Switzerland. Positive selection effects came from stock selection in Germany, Norway, and Korea. Negative selection effects came from stock selection in Israel, Argentina, and South Africa.
In terms of sector attribution, the fund outperformed both on a sector allocation basis and on a stock selection basis. Positive sector allocation effects came from an overweight to Consumer Discretionary, along with underweights to Energy and Real Estate. Negative sector allocation effects came from an overweight to Communication Services, along with underweights to Consumer Staples and Financials. Positive selection effects came from stock selection in Materials, Information Technology, and Industrials. Negative selection effects came from stock selection in Utilities, Energy, and Communication services.
International equities ended the quarter in positive territory, led by developed markets, but still underperformed U.S. equities by a modest margin. U.S. equities outperformed developed and emerging market equities in a continuation from last quarter (as measured by the Russell 3000, MSCI EAFE, and MSCI Emerging Markets indexes, respectively). After moving in near lock-step with developed market equities last quarter, emerging market equities lagged during the second quarter.
While global economic growth continues to grind forward, signs of slowing have given many investors pause. The shift by major central banks towards accommodative monetary policy reignited some appetite for more risky assets during the quarter, but concern for an impending recession still looms large. Although the Federal Reserve has held rates steady, a rate cut during 2019 is increasingly possible, and the market is forecasting two cuts. Emerging market central banks are also becoming more accommodative as they keep a close eye on Fed policy.
Ongoing trade tensions between the U.S. and major trading partners, particularly China, continue to weigh on financial markets. While the two parties agreed to resume talks during the G20 meeting in Japan, there does not appear to be any substantive progress. China is preparing for a long, drawn-out process by initiating stimulus measures in the real estate and auto industries to offset the slowdown from trade.
International investors are witnessing slowing global growth due to a weaker Chinese economy, uncertainty around continued trade tensions, and weakening industrial production. We believe that we will witness a shallow, mid-cycle downturn similar to 2015-2016. Global central banks have largely become more accommodative across the globe, thus providing support for financial markets. With a stabilizing global economy and reduced near-term trade tensions, we expect some recovery in emerging equity markets.
Global investors remain concerned about high relative levels of developed and developing market indebtedness, geopolitical and trade considerations, populism, central bank policy, and the sustainability of global growth. We are closely monitoring inflationary pressures, currency prices, and geopolitical and policy risks. We continue to search for companies within attractive regions that have earnings growth potential, high-quality balance sheets, strong management teams, and clearly defined growth strategies.
Geo-political risks have dominated headline news for more than a year, with more recent worries over U.S.- China trade frictions, threatened Mexico tariffs, and the ouster of UK Prime Minister Theresa May for failing to finalize a Brexit agreement with Parliament. Technology and materials stocks are sensitive to trade frictions. Signs of declining demand and new product postponements are already noticeable in technology. Year-to-date, the materials sector has been fairly impervious to the macro-economic threats, with decent volumes and pricing. Materials may still experience a downdraft; at that point, we intend to buy attractively-valued stocks that have been prominently featured in our screens. As value managers who have endured an outsized growth decade, we welcome markets that display stress; such periods may present the best value opportunities.