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 6.94% in the second quarter versus a return of 2.10% for the benchmark, the Russell 2000 Index.
During the quarter, stock selection was the main contributor to relative outperformance, while sector allocation contributed as well. From a sector allocation perspective, the portfolio’s overweight to Industrials and underweights to Energy, Health Care, Consumer Staples (to which the portfolio has no exposure) all contributed to relative investment results. However, having no exposure to Utilities and an overweight to Consumer Discretionary detracted from relative results.
This quarter marked the second consecutive quarter of positive stock selection. Notably this quarter, the contribution from stock selection came from a broader base. Consumer Discretionary, Industrials, Health Care, Financials, and Materials all contributed to relative results, while the lone detractor was Information Technology. In Consumer Discretionary, our holdings in specialty retail, auto components, and household durables stood out in particular. Aerospace & defense, building products, and machinery made contributions within Industrials. Our health care staffing holding bounced back during the quarter, while we also witnessed strong relative performance from our other holdings within life science tools, health care equipment, and health care technology. Within Financials, we also saw a broad base of outperformers, including banks, insurance, capital markets, and consumer finance. Our only area of underperformance was in Information Technology. The majority of the underperformance was related to one holding, a leading provider of technology solutions and consulting.
After witnessing intense levels of equity market volatility over the past two quarters, the second quarter was a bit tamer. After posting a decent 3.34% return in April, the Russell 2000 posted a loss of 7.90% in May, only to bounce back with a 6.9% return in June, which marked the second-best June in 25 years. In the midst of the volatility, as noted above, our stock selection shined and made a positive contribution throughout the quarter.
The month of April ended on a positive note, as the initial estimate for first quarter GDP came in well above expectations. Those investors who seem to be obsessed with making a forecast of “an impending recession in the offing” focused on inventory accumulation as the main reason why GDP came in above estimates, while those with a more favorable view of the economy commented that if not for weak consumption, GDP could have been higher.
Tariffs took center stage in early May, as President Trump tweeted that his administration will increase tariffs from 10% to 25% on $200 billion of Chinese goods. Taking advantage of the strength of the equity markets since the late December 2018 lows, investors stepped to the sidelines in May, with small-cap stocks feeling the most impact, as the Russell 2000 declined more than 6%. As the month wore on, investors began fretting about the possibility of tariffs on an additional $300 billion in Chinese exports and the selling continued.
In early June, a weak May employment report seemed to paint a clearer picture of a weakening domestic economy. One would think that evidence of a slowing macro environment would lead to lower equity prices, but quite the opposite took place. Investors bid up equities in June in hopes that a weakening economy would lead the Federal Reserve to use more of its magic potion (i.e., further rate cuts) to rescue the equity markets. Utilizing bad news as good news to value equities is something we find difficult to get our hands around!
The quarter marked the second consecutive quarter that growth outperformed value, but not to the extent that we witnessed in the first quarter. For the quarter, the Russell 2000 Growth Index increased 2.8% compared to the 1.4% gain in the Russell 2000 Value Index. Growth stocks are now well ahead of their value peers for the one-, three-, and five-year periods ended June 30, 2019. After slightly outperforming large caps in the first quarter, the Russell 2000 Index underperformed the Russell 1000 Index by 2.1%. Over the past 12 months, large cap holds a nearly 13% advantage over small caps, as the Russell 1000 Index has advanced 10% compared to the 3.3% decline for the Russell 2000 Index.
1Effective May 17, 2018, PNC Small Cap Fund reopened to new investors.