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 (Share Class I) returned -14.09% in the fourth quarter versus a return of -11.46% for the benchmark MSCI ACWI ex USA Index.
In terms of country attribution, country allocation and stock selection both detracted from relative investment results. Positive country allocation effects came from an overweight to Singapore, along with underweights to Japan and Canada. Negative country allocation effects came from overweights to Norway and Austria, along with an underweight to Brazil. Positive selection effects came from stock selection in Korea, Brazil, and Colombia while negative selection effects came from stock selection in the United Kingdom, Japan, and Canada.
In terms of sector attribution, the fund outperformed on a sector allocation basis and underperformed on a stock selection basis. Positive sector allocation effects came from an overweight to communication services, along with underweights to energy and industrials. Negative sector allocation effects came from an overweight to consumer discretionary, along with underweights to utilities and consumer staples. A positive selection effect came from stock selection in technology, while negative selection effects came from stock selection in materials, industrials, and consumer discretionary.
Global growth rates are slowing. Expansion in the United States is likely peaking as it approaches the later stages of the current economic cycle. China’s Purchasing Managers’ Indexes (PMIs) are showing signs of moderating due to the adverse impact of trade frictions with the United States even as its services sector remains in expansionary territory. Growth in Europe also appears to be abating as PMIs for November expanded at their slowest pace in four years. Emerging markets outperformed the broader global market in the quarter, reversing the trend seen in the previous quarters. Still, many developing countries are grappling with a resilient dollar and domestic inflation pressures.
U.S. dollar (USD) strength against other major currencies persists. Throughout the quarter, the Intercontinental Exchange U.S. Dollar Price Index increased, extending its year-to-date gains against most major currencies. The Japanese yen rose slightly during the quarter but softened marginally on a year-to-date basis. Both the euro and British pound were weaker during the quarter, a continuation of the trend throughout 2018. Emerging market currencies were mixed against the USD during the quarter.
Investors in Asia were focused on a slowing China and its trade relations with the United States. China's growth is also being impacted by the government's focus on limiting non-bank lending to the private sector. Industrial production is growing at its slowest pace in the last three years, and November retail sales expanded at its weakest rate since 2003.
The European Central Bank (ECB) kept rates on hold during the quarter and confirmed that it would end its asset buying program at the end of 2018. Germany’s economic growth story has been under pressure due to a slowing global economy and ongoing trade tensions, and recent corporate surveys and PMI readings indicate continued weakness.
Macro-economic pressures overrode company fundamentals during the fourth quarter, leading to a depressed global market. United States- China trade tensions continued and started to impact industrial production at quarter end, with sluggish manufacturing output reported in China, the Euro Zone and the United States. The resultant weaker demand for materials, industrials and commodities caused pricing softness. In particular, oil prices were sharply down, impacted by higher United States production volumes due to continued technology-driven reductions and productivity. Other cyclical sectors, including financials and consumer discretionary posted losses. Not surprisingly, defensive holdings in utilities, communication services and consumer staples mitigated declines leading to outperformance for the quarter.
At the country level, United States holdings detracted most from performance during the quarter. Weakness in the materials sector was responsible for poor results in Belgium, Canada and Norway, while ongoing BREXIT concerns affected U.K. holdings.
Activity in the United States manufacturing sector expanded at a much slower pace than expected in December, according to the Institute for Supply Management. This decline, coupled with trade tensions impacting actual global industrial activity may lead to compromises in trade and political negotiations globally. When and if a favorable compromise is reached, investors may anticipate a new period of global economic cooperation. It would be less beneficial to economic growth and investor returns if the world entered a long period wherein policies favor protectionism and strict self-interest. Even in that environment, companies could likely adapt to operate under the local rules and practices in place. Meanwhile, volatility will likely continue and we could see more declines in global markets before conditions improve. In this environment, numerous companies are trading at single-digit multiples to earnings and many stocks are down 20% to 50%. This may be an opportune time to purchase watch list stocks at attractive prices.