As we complete the first half of 2022, we invite you to listen to an update from our Chief Investment Officer, Andy Adams. He provides insight on the state of the market, the status of the Mairs & Power Growth Fund, and an investment outlook for the rest of the year.
The first half of 2022 was a difficult period for the market, which has been reacting to higher interest rates and the near-term likelihood of economic weakness and lower earnings.
The Federal Reserve understands there will be short-term pain because of raising interest rates and that its actions risk causing a recession. But it is committed to putting the economy back on a more sustainable, long-term growth footing. However, we are watching for signs of weakening. In an economic downturn, earnings estimates will almost certainly be reduced. The decline in stock prices is the market’s way of anticipating the possibility of lower corporate earnings.
A positive long-term outlook depends primarily on slowing inflation. Should inflation recede and interest rates decline, the economy and markets will begin another cycle of growth.
Overall, sector allocation had little effect on the Fund’s relative performance in the first half. Positive contributions from overweighting Healthcare and Industrials, along with an underweight in Consumer Discretionary, were offset by lack of exposure to Energy. Energy makes up only 4.0% of the S&P 500 benchmark, but in the first half it was the best-performing sector by far, up 31.8%. We expect that in the longer term, Energy demand and supply will converge. As a result, price increases should slow, and the portfolio should benefit.
Stock selection weighed on performance in the first half of the year. Ecolab (ECL) detracted the most from relative performance in the first half as its stock declined 34.5%. The company suffered with higher input costs as most are tied to oil derivatives. Ecolab should report better results as management takes appropriate pricing actions to offset these increased costs.
Alphabet (GOOG) was also a significant drag on relative performance, even though it performed well compared to other Technology stocks in the first half of the year. While its revenue grew more than 20% in the first quarter, this was a deceleration from the 30%-plus growth it posted in each quarter of 2021. Alphabet continues to have a near-monopoly of online search, and its stock should perform better when investor sentiment swings back toward growth stocks.
Healthcare holdings UnitedHealth Group (UHG) and Eli Lilly (LLY) were two of the Fund’s largest contributors to relative performance in the first half. UnitedHealth Group has executed well on its strategy to shift away from its traditional health insurance model and into healthcare delivery. Eli Lilly, meanwhile, has benefited from positive study results for its groundbreaking product for reducing Alzheimer’s disease progression and a new weight loss product within its diabetes franchise.
In the second quarter, the Fund started two new positions. Both are Industrial companies that are leaders in markets with strong growth tailwinds.
Georgia-based Chart Industries (GTLS), which has a significant manufacturing facility in New Prague, Minnesota, manufactures storage tanks and heat exchangers for the industrial gas and energy markets. The Fund’s other new holding is Wisconsin-based Generac (GNRC), which dominates the market for residential standby generation.
Looking ahead, we believe the Fund should perform well even if the current inflationary environment persists. A significant part of our analysis involves looking closely at companies’ competitive positions and their ability to pass on price increases to their customers. We also expect the Fund’s significant exposure to Industrials to benefit as global supply chain disruptions improve. As second quarter earnings season gets underway, we will closely monitor supply chain improvements, pricing action effectiveness, and backlog resiliency. Our expectation is that our holdings should be in a relatively good position on these key issues in the current environment.
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.