PNC Multi-Factor Large Cap Value Fund (class I) returned -1.35% in the second quarter versus a return of 1.18% for the benchmark Russell 1000 Value Index.
Growth factors were positive during the first two months of the quarter; however, momentum weakened significantly during the month of June. At the same time, the Fund saw price reversal begin to work. Value factors were consistently weak throughout the quarter declining further from an already low starting point. Quality factors, as defined by the proprietary stability of earnings factor, were relatively neutral overall during the beginning of the quarter. However, weakness during the month of June led to quality underperforming for the quarter. Collectively, these factors detracted from relative investment results.
Stock selection was a detractor from relative investment results during the quarter, with holdings in the Consumer Discretionary, Information Technology, and Industrials sectors detracting the most. This was partially offset by contributions from holdings in the Consumer Staples and Health Care sectors.
Sector allocation was the main detractor from relative investment results, with the Fund’s underweight to the Energy and Real Estate sectors, overweight to the Financials sector, and lack of exposure to the Utilities sector detracting the most. This was partially offset by contributions from the Fund’s overweight to Consumer Discretionary sector.
U.S. equity markets ended the second quarter in positive territory, as there were many positive data points for equity investors to focus on. First quarter 2018 earnings growth, reported during the second quarter, for the S&P 500 Index was 25.4%, the highest it’s been since 2010. Nine of the 11 GICS sectors saw double-digit earnings growth. Furthermore, companies in the S&P 500 had record positive earnings surprises, with the Information Technology sector having the highest proportion of companies with positive earnings surprises at 90%.
However, investors’ focus seemed to shift back and forth from optimism about companies’ positive fundamental stories to concern about a range of macro headwinds: further Federal Reserve monetary policy tightening contributed to a stronger dollar and higher interest rates; heightened trade tariff rhetoric raised concerns about an increasing possibility of a global trade war; rising energy costs and the attendant impact on the supply chains of companies across multiple industries rippled through markets; and various geopolitical issues, including the execution of Brexit and political uncertainty in the European Union, stirred up additional uncertainty.
Despite the current macro backdrop, the investment team believes the fundamental earnings growth outlook for companies in their investment universe looks quite strong. Second quarter 2018 earnings growth for the S&P 500 is forecasted to be 20.0%, which if reached, would result in three consecutive quarters of double-digit annual earnings growth. Additionally, it would mark the second-highest quarterly earnings growth result since the third quarter of 2010.
Looking forward, the investment team believes valuation multiple expansion will continue to be limited, making price appreciation more likely to be driven by earnings growth over the next several quarters. The team’s belief that earnings drive stock prices is a central tenet of their investment philosophy. Over the long run, the team believes the high historical correlation between stock prices and earnings will remain intact. In an environment where the focus is on high-quality companies with improving fundamentals and earnings, the investment team expects their investment process to work well.