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.
Asset allocation cannot guarantee a profit or prevent a loss. An investment in the Fund is subject to interest rate risk, which is the possibility that a Fund's yield will decline due to falling interest rates and the potential for bond prices to fall as interest rates rise. High yield bond investing includes special risks. Investments in lower rated and unrated debt securities are subject to a greater loss of principal and interest than investments in higher rated securities. The values of mortgage-backed securities depend on the credit quality and adequacy of the underlying assets or collateral and may be highly volatile. 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. 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. Investments in small- and mid-capitalization companies present a greater risk of loss than investments in large companies. The Fund may invest a portion of its assets in derivatives. Derivative instruments include options, futures and options on futures. A small investment in derivatives could have a potentially large impact on the Fund’s performance. The Fund may be unable to terminate or sell a derivatives position. Derivative counterparties may suffer financial difficulties and may not fulfill their contractual obligations.
The PNC Balanced Allocation Fund (class I) returned 8.37% in the first quarter versus a return of 9.31% for the 60/40 Hybrid of S&P 500 Index and Bloomberg Barclays U.S. Aggregate Bond Index.
The Fund’s exposure to small-cap stocks (as represented by the Russell 2000 Index) aided relative returns during the quarter. However, the Fund’s tactical overweight position to value-oriented stocks underperformed the S&P 500 (and the Russell 1000 Growth Index) over this period.
Additionally, the Fund’s fixed income total return was modestly positive, and our position marginally outperformed the Bloomberg Barclays Aggregate Index given the Fund’s exposure to high yield.
Equity markets staged a strong comeback in the first quarter after a precipitous decline during fourth quarter last year. In fact, 2018 was the worst performing year for stock markets since 2008 and December was the worst final month of the year since the Great Depression, as measured by the S&P 500 Index. Then sentiment abruptly turned positive as we headed into 2019, leading January to become the best start to the year in 30 years, also as measured by the S&P 500 Index. A variety of factors, including easing trade relations between the U.S. and China, solid corporate earnings, and a more dovish Fed helped spur the snap-back. U.S. equities outperformed both developed and emerging markets.
On a market capitalization basis, small-cap equities outperformed large-cap equities during the first quarter after falling more than large caps at the end of last year. First quarter 2019 total return was 14.58% for the Russell 2000 Index and 13.65% for the S&P 500 Index. All sectors within the S&P 500 posted positive returns for the quarter, with some of the worst fourth quarter performers, including Information Technology, Industrials, and Energy, demonstrating the strongest performance. Energy rebounded along with crude oil prices during the quarter. Healthcare was the overall sector laggard after being the best performing sector during the second half of 2018, but still posted a 6.59% return.
Growth stocks outperformed value stocks across both large and small market caps during first quarter, consistent with other hallmarks of a “risk-on” environment. Additionally, while fourth quarter 2018 was marked by a flock towards quality (e.g., stocks with consistent earnings, high return on equity (ROE), strong free cash flow, and/or low debt), this reversed during the first quarter as market sentiment improved. A renewed risk-on environment drove stocks with low ROE, high debt, and high beta to generally outperform.
Looking overseas, emerging market equities rallied to near six-month highs on trade optimism, a rebound in global equities, a stable U.S. dollar, higher oil prices, and a more dovish Fed. However, towards the end of the quarter, this enthusiasm was tempered due to renewed global growth fears. While anxiety over U.S./China trade negotiations may have calmed, investors are now increasingly focused on the potential unraveling of global supply chains.
Investors piled in to bonds during the first quarter, as fears of a near-term recession eased with a change in tone by the Fed. Like equity markets, fixed income markets experienced a dramatic risk-off trade during the fourth quarter, much of which was erased during the first few months of 2019. Positive excess returns in investment grade credit reversed much of the fourth quarter selloff. A majority of the recovery in investment grade and high yield occurred during January, with investment grade producing its third-best month of excess return since 2010, as measured by the Bloomberg Barclays Aggregate Bond Index.
However, towards the end of the first quarter, bond investors appear to have grown more cautious. While Fed-induced interest rate pressure is off the table for now, there seems to be heartburn surrounding the underlying factors that drove the Fed to pause its policy normalization plans in the first place.
The Treasury yield curve has been flattening for some time, finally inverting near the close of the first quarter. The 10-year yield dropped below the 3-month yield for a few trading sessions following disappointing manufacturing data in Europe. An inverted yield curve tends to signal slowing growth expectations and often precedes a recession. This is the first time the yield curve has inverted for any length of time since 2007.
Concerns about global growth and changes in central bank policy are putting pressure on global yields as well. By the end of March, the proportion of holdings within the Bloomberg Barclays Global Aggregate Credit Index with negative yields stood at nearly 20%, the highest since mid-2016.