Listen to Pete Johnson, co-manager of the Mairs & Power Growth Fund, as he talks to Scott Howard, VP, Investor Relations, on October 19, 2021 to provide an update on the market, economy and impact to the Mairs & Power Growth Fund in Q3 of 2021, as well as give an outlook.
The Mairs & Power Growth Fund’s relative underperformance was due to its overweight position in Industrials, which were hit hard in the quarter.
Each year seems to bring its own set of challenges, and 2021 has been no different. While we’re keeping a watchful eye on short-term headwinds such as supply shortages, we remain committed to the long-term focus that has served us well decade after decade. Temporary headwinds inevitably provide opportunities, and we continue to add to certain holdings with compelling valuations.
Facing widespread material and labor shortages along with transportation delays, Industrial companies have been unable to meet customer demand. Input prices have also skyrocketed as companies clamor over limited resources. For instance, steel prices have jumped more than 200% over the past year.
3M’s results highlight how these forces have affected our Industrial holdings. 3M was late to raise prices to offset inflation, and when it did so, it underestimated the magnitude of that inflation.
Outside of Industrials, the Fund’s stock selection remained strong in the quarter, notably in the Technology sector. We have been steadily reducing our underweight position to Technology over the past several years, and many of our investments in the sector paid off handsomely in the third quarter.
A steady Fund outperformer this year has been Motorola Solutions, the leading provider of communications equipment to emergency responders. Company management has driven organic growth by pushing into ancillary markets, such as public safety software and video security. More recently, Motorola Solutions has benefited from improving municipal budgets.
The Fund invests across the entire market-cap spectrum, and we continue to find compelling opportunities in the small cap space. In the third quarter, the Fund added Minneapolis-based bed manufacturer Sleep Number. While the company operates in a fiercely competitive industry, we believe Sleep Number’s unique technology and its retail experience give it a leg up on its competition. Its partnership with the Mayo Clinic should help drive further innovation.
One of the biggest detractors of Fund performance, both in the quarter and year to date, has been Hormel. Like many other Consumer Staples companies, Hormel has struggled to keep up with this year's strong market snapback. Its relatively low price has given us the opportunity to add to our position.
The surge in raw material prices will likely crimp Industrials’ margins in the short term. But the sector’s underlying demand trends remain strong, and the pressure in margins should lighten. Many of our Industrial companies have started taking the necessary steps to restore profitability, and we believe their true earnings power will re-emerge next year.
While inflation could rise higher and persist longer than expected the companies in the Fund’s portfolio typically thrive in this type of environment. Thanks to their competitive strength, they can generally push through pricing that more than offsets cost inflation.
We continue to hope that the Federal Infrastructure and Jobs Act, better known as the infrastructure bill, will be signed into law later this year. If signed, the bill would invest roughly $1 trillion into our nation’s roads, bridges, broadband networks, and power plants. All this would help the Fund’s Industrial companies immensely. Want to read more on this, click here to read our Inside Look of the infrastructure bill.
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.
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.