Listen to Mairs & Power Small Cap Fund Co-Managers, Mike Marzolf and Chris Strom, provide an update on the current economic and market conditions and their impact on the Mairs & Power Small Cap Fund.
The first half of 2022 was a difficult period for the market, which has been reacting to higher interest rates, supply chain issues, COVID-19 variants, and the near-term likelihood of economic weakness and lower earnings.
So far, many lagging indicators of economic activity have generally looked good. Unemployment has been low, home prices have been rising, and industrial production hasn’t slowed. In addition, corporate earnings have stayed resilient. The current consensus of earnings growth is 10.6% for this year and 9.2% in 2023. But the market focuses on leading indicators, and those are flashing yellow and, in some cases, even red.
While current macro conditions are challenging, our experience supports the belief that companies with durable competitive advantages have the pricing power to navigate rising input costs, the cash flows to reinvest in new products and initiatives, and the margins and returns to drive higher earnings growth rates throughout the economic cycle.
Most sector performance was down in the second quarter. Only Consumer Staples, Energy, and Utilities had positive returns for the quarter.
While the absence of Energy holdings was by far the single largest detriment to the Fund’s year-to-date relative performance, we continue to believe that the sector will face secular headwinds as advancements in transportation, as well as battery and storage technologies, make the transition from fossil fuels to renewable sources of energy increasingly compelling, both financially and environmentally. The combination of underinvestment by the industry and recent geopolitical tensions have caused fossil fuel supplies to fall short of demand, driving up the prices of both Energy commodities and Energy stocks. We believe these conditions are temporary, and so we will continue to steer clear of the sector.
Individual Stocks: Positives, Detractors, and Additions
Individual positions that significantly helped the Fund’s performance year-to-date included MGP Ingredients (MGPI) in Consumer Staples, and AAR (AIR) in Industrials. Another boost to the Fund's relative performance in the first half came from Intricon, a Minnesota-based maker of implantable and wearable medical devices that we exited in the quarter as it was acquired by a private equity firm for a 39% premium.
Holdings that significantly detracted from performance included Technology positions, Jamf Holdings (JAMF), and Workiva (WK). Other detractors included Azek Co. (AZEK) in Industrials and Sleep Number (SNBR) in Consumer Discretionary.
The Fund added one name in the second quarter:
- Altair Engineering, a Michigan-based software company, that helps businesses (e.g., automotive, aerospace, energy, life sciences, and technology) make better decisions when designing products, managing computing resources, and understanding and managing opportunities and risk. As the world electrifies, Altair’s solutions improve safety, reduce energy consumption, and enable the design of more efficient motors and controls on devices, as well as the more efficient design of alternative energy production systems like solar and wind farms.
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.
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.