Listen to Chief Investment Officer and Growth Fund Lead Manager, Andy Adams and Co-Manager, Pete Johnson, as they give an update on the market, economy and impact to the Mairs & Power Growth Fund so far in 2024, as well as an outlook for the rest of the year. This was recorded on July 24, 2024.
Executive Summary
The Mairs & Power Growth Fund is up 14.32% year-to-date, which compares favorably to our peers as measured by the Morningstar large blend index, which has risen 12.49% so far this year.
The Fund is slightly trailing the S&P 500 this year and over the last five, 10-, and 20-year periods, though it has outperformed the market over the last 25 years and since its inception. The underperformance is due mainly to the Fund’s historical underweighting of the Technology sector, which has outperformed the broader market by 7% over the past decade. We’ve made a concerted effort to reduce that underweight over the past few years without deviating from our disciplined investment approach. We believe we are in a better position for our stock seeking to drive relative performance going forward.
Sector and Stock Performance
The Fund’s underperformance relative to its benchmark year-to-date was split fairly evenly between sector allocation and stock selection.
The market's strong returns have been driven primarily by Nvidia, Amazon, Meta, and Microsoft, which have all significantly outperformed the broader market. And after a slow start this year, Alphabet rebounded sharply in the second quarter thanks to strong revenue growth and significant improvement in margins. Together, these five stocks have driven more than 60% of the market's returns in 2024. The Fund has significant positions in all of them except for Meta.
Nvidia extended its meteoric rise in the second quarter and is now up 150% year-to-date, accounting for almost a third of the market's returns. The company continues to see immense demand for its graphic processing unit (GPU) chips that power generative AI. Later this year, Nvidia will launch its latest GPU architecture, which promises to be magnitudes faster than its already blisteringly fast chips.
Meanwhile, Industrial and Healthcare stocks have languished, which has hurt relative performance given the Fund’s overweight position in both sectors. But we’re seeing signs of a bottom in both markets and have been adding to our positions.
Outside of these sectors, stock picking remains strong. In addition to holdings in Nvidia, Alphabet, Microsoft, and Amazon, the Fund has experienced positive performance from investments in companies that aren't necessarily tied directly to AI but which are likely to benefit from its adoption. An example is Qualcomm, whose modems and chipsets are vital to cellular communications. Qualcomm is up nicely this year, as its technology will likely play a big role in the AI market.
A handful of companies have weighed down performance, notably Workiva, Rockwell Automation, and Graco. For the most part, these stocks have been hit by slowing fundamentals due to high interest rates and other macro factors. For instance, Graco has been hit badly by the slowdown in the housing market, since many of its pumps are used for house painting.
Outlook
Many of our companies are in the very early stages of AI adoption. We expect the initial benefits of AI will be operational, but customer-facing benefits probably aren't far behind. JPMorgan, UnitedHealth Group, and C.H. Robinson are examples of Fund holdings that are vigorously pursuing AI projects to boost efficiency and productivity.
We believe inflation and interest rates will come down, which should benefit housing-related stocks and small caps. We’re finding good opportunities in small and midsize companies, since their valuations are currently more attractive than those of large companies. We will continue to focus on stock selection driven by companies that possess durable competitive advantages, attractive long-term growth opportunities, and excellent management teams.
Top 10 Fund Holdings (subject to change)
Expense ratio: 0.64%
S&P 500 TR Index is an unmanaged index of 500 common stocks that is generally considered representative of the U.S. stock market.
Morningstar large-blend portfolio are fairly representative of the overall U.S. stock marketing in size, growth rates, and price. Stocks in the to 70% of the capitalization of the U.S equity market are defined as large-cap. The blend style is assigned to portfolios where neither growth nor value characteristics predominate. These portfolios tend to invest across the spectrum of U.S. industries, and owing to their broad exposure, the portfolios’ returns are often similar to those of the S&P 500 Index.
The statements and opinions expressed are those of the speakers and are as of the date of this call. All information is historical and not indicative of future results and subject to change. Characteristics and other statistical measures refer to underlying stocks in the portfolio and do not represent or predict the performance of any fund.
Scott Howard is a registered representative of Foreside Fund Services, LLC.
All investments have risks. The Growth Fund is designed for long-term investors. Equity investments are subject to market fluctuations and the Fund’s share price can fall because of weakness in the broad market, a particular industry, or specific holdings. Investments in small and midcap companies generally are more volatile. International investing risks include among others political, social or economic instability, difficulty in predicting international trade patterns, taxation and foreign trading practices, and greater fluctuations in price than U.S. corporations.
Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance as of the most recent month end is available by calling 800-304-7404. Click Here for standardized performance.