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.
Investments in small-capitalization companies present greater risk of loss than investments in large companies. 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. 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.
PNC Small Cap Fund (Class I) returned 13.90% in the first quarter versus a return of 14.58% for the benchmark, the Russell 2000 Index.
During the quarter, a positive impact from stock selection was offset by the effects of sector allocation. From an allocation perspective, the strategy benefitted from having no exposure to Consumer Staples and Utilities. However, overweights to Industrials and Financials and underweights to Information Technology, Energy, and Health Care detracted from relative results.
Reversing course from the prior quarter, stock selection within Industrials contributed to relative results. Our holdings in the machinery, building products, professional services, and aerospace & defense industries all outperformed industry peers. Stock selection within Real Estate also contributed, as our two real estate management holdings, along with a real estate brokerage holding, all showed strength during the quarter after underperforming during the fourth quarter sell-off. Health Care was the primary underperformer in relation to stock selection, due to our exposure to health care staffing and health care equipment, to a lesser degree. Stock selection within Communication Services and Consumer Discretionary also detracted from results, but much less so.
U.S. equity prices staged a dramatic rebound in the first three months of 2019. Equity markets found a bottom on Christmas Eve and haven’t looked back since. January 2019 was the sixth-best month in the history of the Russell 2000 Index, which followed the sixth-worst month in the history of the Russell 2000 in December 2018. These markets clearly aren’t for the faint of heart! However, our team remains intensely focused on long-term wealth creation during these volatile times.
In early January, markets advanced sharply on the back of a strong December 2018 jobs report, in addition to some dovish comments by Federal Reserve Chairman Jerome Powell. Powell’s comments offered a shift in tone from his remarks after the Fed raised rates in December, by signaling greater flexibility to market developments and slower global growth. In late January, equity markets continued to rally, as the Federal Open Market Committee announced no change to its federal funds target rate, as well as an indication that they are prepared to adjust their policy on balance sheet normalization. The shift in tone of the Fed—and the Fed in general—is not a focus of our team and never has been. Our focus, through all of the posturing by the Fed and the recent volatility the Fed has brought to the markets, is to own companies that we believe are increasing cash flow return on investment (CFROI) levels, trading at attractive valuations, and managed by teams that have shown a history of wealth creation.
The rally continued in February, as equity markets showed considerable strength after posting robust January results. Investors pushed the markets higher, as growing hopes for at least a temporary resolution to the U.S.-China trade dispute boosted sentiment.
In March, fourth quarter real gross domestic product (GDP) was revised down to an annual growth rate of 2.2% from the prior estimate of 2.6%. Additionally, downward revisions to consumer spending and government purchases outweighed an upward revision to net exports. Real GDP growth is expected to slow this year, due in part to tough comparisons versus last year’s growth of 3.0%, as well as the absence of tailwinds from tax cuts and regulatory changes. However, we continue to have robust growth outlooks for our holdings, as evidenced by the strong organic revenue growth rates in our portfolio. During their latest earnings calls, many of our holdings’ management teams communicated that they continue to have a positive view regarding their business outlooks and the economic environment in general.
From a style perspective, strong gains during the quarter were led by small cap growth stocks. The Russell 2000 Growth Index increased 17.14% during the quarter compared to the 11.93% gain for the Russell 2000 Value Index. Size-wise, small-cap stocks narrowly edged out large caps, as measured by the Russell 2000 gain of 14.58% compared to the Russell 1000 advance of 14.00%. Information Technology was the best performing sector in the Russell 2000, followed by a bounce-back quarter for Energy, which was by far the worst performing sector in the fourth quarter. Consumer Staples and Utilities were two of the worst performing sectors after showing relative strength during the fourth quarter selloff. Financials also underperformed during the quarter.
1Effective May 17, 2018, PNC Small Cap Fund reopened to new investors.