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 (Share Class I) returned -20.26% in the fourth quarter versus a return of -20.20% for the benchmark, the Russell 2000 Index.
During the quarter, stock selection negatively impacted performance while sector allocation contributed to performance. Stock selection within the Information Technology sector was the largest detractor from performance with stock selection in Financials, Industrials, Real Estate, and Materials also detracting. Positive contributors from a stock selection perspective included Consumer Discretionary, Health Care and Communications Services.
From an allocation perspective, underweights to Energy and Health Care and overweights to Financials contributed positively to performance while a lack of exposure to Utilities and Consumer Staples, overweights to Industrials, and underweights to Information Technology detracted from performance.
The 20.2% decline was the seventh worst quarter in the 40 year history of the small cap index. The Russell 2000 Index was up 14% through the end of August highlighting how quick that drop was in the later part of the year. The Russell 2000 Index began its decline in September but remained in positive territory through the end of September. This changed in October as the benchmark eliminated all of the year-to-date gains with close to an 11% decline for the month. November marked a positive month for the Russell 2000 Index but that was followed by a 12% decline for December which left the index with its first annual decline since 2015.
From a style perspective, after trailing in the third quarter, the Russell Value Index, showed relative strength compared to the Russell 2000 Growth Index during the fourth quarter pullback. The Russell 2000 Value Index declined 18.7% compared to the Russell 2000 Growth Index decline of 21.7%. Investors favored the less cycylical sectors during the decline as Utilities and Consumer Staples were the best performing sectors. Investors had zero patience with the Energy sector as it declined nearly twice that of the Russell 2000 Index during the quarter while investors battered biotechnology and pharmaceutical companies which contributed to a nearly 26% decline in the Health Care sector. For calendar year 2018, despite giving back some of its lead in the fourth quarter, the Russell 2000 Growth Index declined 9.3% and outperformed the Russell 2000 Value Index which declined 12.9%.
As managers who focus on fundamental, bottom-up stock selection, market themes do not impact our portfolio management decisions. Given that we seek companies that can increase their cash flow return on investment, and we have a clear focus on financial drivers, such as sales growth, we would expect to outperform in broad-based, growth-led markets. We believe there is a continued focus in the market on company fundamentals and expect this trend to continue over the near term. A market that rewards companies based on fundamentals is a more favorable environment for our strategy.
1Effective May 17, 2018, PNC Small Cap Fund reopened to new investors.