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. 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. To the extent that the Fund invests a significant portion of its assets in a particular industry, the fund's performance could depend heavily on the performance of that industry and may be more volatile than less concentrated funds. The portfolio team may choose to invest in initial public offerings (IPOs), the performance of which is unpredictable and the effect of which may not be duplicated during periods in which the Fund does not invest in IPOs.
PNC Multi-Factor Small Cap Value Fund (class I) returned 2.40% in the second quarter versus a return of 1.38% for the benchmark Russell 2000 Value Index.
As is typical for our process, sector allocation had a lesser impact on performance than stock selection. Overall, sector allocation detracted slightly from relative performance, with Utilities being the largest detractor. The Fund’s outperformance was driven by stock selection. Specifically, selections within Health Care, Energy, Consumer Discretionary and Materials were the largest contributors to relative performance. Selections within Real Estate and Industrials were the largest detractors for the quarter.
The market experienced much higher volatility during the second quarter of 2019 when compared with the same period last year due to several factors, including uncertainty in the international trade environment. As U.S. trade negotiations with key trade partners, such as China, remain unsettled, many market participants have begun to focus on the potential impact on small-cap companies. For companies in the Russell 2000 Index, international revenue exposure has grown year over year since 2015, and small-cap companies may be less nimble in responding to shifting supply chains.
Monetary policy changes represent another source of volatility. The Federal Reserve’s sharp reversal from raising interest rates to potentially cutting them in the coming months has elevated market uncertainty.
In our observation, as the market moves into the later stages of the business cycle, market participants tend to shift toward higher-quality, lower-risk stocks and prefer large caps over small caps. Higher-quality stocks outperformed during the second quarter: Russell 2000 Index stocks with positive quarterly return on equity (ROE) outperformed their negative ROE counterparts. Large-cap stocks outperformed small-cap equities, as the S&P 500 Index bested the Russell 2000 Index by more than 2% for the quarter. Within the Russell 2000, the top quintile of stocks in terms of market cap (i.e., the largest market caps) outperformed the smallest quintile by more than 5%.
Our investment team continues to believe that the U.S. economy has entered into a corporate earnings recession, which will likely be followed by an economic recession within the near to medium term. GDP and other economic estimates from the Federal Reserve indicate slowing growth. In addition, the ISM Manufacturing Index and the University of Michigan Consumer Sentiment Index—two measures that have historically been highly correlated with small-cap stock performance—have been dropping lower. However, if the Federal Reserve uses stimulative monetary policy, we believe there is potential for the economy to continue to expand.