Listen to Andy Adams, Chief Investment Officer and Lead Manager of the Mairs & Power Growth Fund, as he talked to Scott Howard, VP, Investor Relations, on April 21, 2021 to provide an update on the market, economy and impact to the Mairs & Power Growth Fund in Q1 2021, as well as gave an outlook.
The Fund’s outperformance of its benchmark can be credited primarily to its sector weights and its focus on companies with durable competitive positions. It appears that some of the macro headwinds that hindered the Fund’s relative performance over the last several years, such as being skewed toward Industrials and smaller cap stocks, are starting to turn to tailwinds.
The Fund’s first quarter performance benefited from its significant overweight of Industrial, a sector that typically performs well as the economy recovers and commodity prices rise. In the first quarter, Industrials outperformed the S&P 500 by about 5% in the first quarter. The Fund’s relative overweight in smaller mid-cap stocks also positions the portfolio well for the recovery. Mid-cap stocks were up about 7% over the S&P 500 in the quarter.
The Fund’s significant overweight of Healthcare slightly hindered first quarter relative performance, as investors rotate to holdings more likely to benefit from the recovery. Healthcare earnings probably won’t snap back as much as those in other sectors. But increased government research spending and the potential for expanded healthcare coverage should help provide fairly healthy returns. Meanwhile, we have reduced our underweight of Technology, which should make this sector a less of a headwind to Fund performance.
During the quarter, the Fund added significantly to its small position in Sherwin-Williams (SHW). This had been an expensive stock during the pandemic as people spent more money on home improvement. With the market beginning to anticipate consumers spending more time and money away from home, Sherwin-Williams’ valuation on some measures has declined to a 10-year low. This has given us the opportunity to buy more of a company that has excellent long-term growth.
We are fairly upbeat about the stock market in the near term. Economists are forecasting over 7% GDP growth in the U.S. as the economy opens back up. Their bullishness is due primarily to massive government stimulus programs and the success of the COVID vaccine program.
Earnings, which were down 14% last year, are now expected to grow 28%. Since the start of 2021, consensus earnings growth expectations have increased 9%, and they’re likely to continue to move higher in the second quarter.
Top 10 Fund Holdings (subject to change)
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.
Price-to-earnings ratio is the measure of a company’s share price relative to the company’s earnings per share.
Corporate free cash flow is the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.
Price/Earning-to-growth ratio is a stock’s price-to-earnings ratio divided by the growth rate of its earnings for a specified time period.
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.