Q2 2020 Growth Fund Update Recording

Q2 2020 Growth Fund Update Recording

July 20, 2020

Listen to Andy Adams, Chief Investment Officer and Lead Manager of the Mairs & Power Growth Fund, as he talks with Scott Howard, VP, Investor Relations Manager, on July 20, 2020 to provide an update of on current economic and market conditions and their impact on the Mairs & Power Growth Fund.

 Executive Summary

The Mairs & Power Growth Fund experienced a tale of two quarters in the first half of 2020. This is reflected in the performance of the Fund’s benchmarks. On March 23, the S&P 500 was down 31% year-to-date, and the S&P Small Cap Index was down about 42%. The second quarter saw a major recovery. As of June 30, S&P 500 was down about 4% for the year. Small cap stocks also rebounded, though they’re still down about 13% in the first half.

The Fund’s 20-year performance has been extremely strong. But it has struggled a bit in the last three to five years. One reason: We have always invested heavily in industrial companies with strong competitive positions. The S&P 500 over the last three years is up about 10.7% per year. Over that same period, S&P 500 industrial companies on average have risen only 4.9%.

Also, about a quarter of the Fund’s portfolio is invested in small and midsize companies. Over the long term, those stocks have been strong performers. But in the past three years, the S&P mid-cap index is up only about 2.4% per year on average. The S&P value index is up just 3.7%, though it has outperformed the S&P 500 long-term. 

Sector Overview

Through the first half of the year, the Industrial sector is down about 15%. Another headwind on Fund performance is its underweight in Technology, which overall has been up about 15% year-to-date. By contrast, the Fund’s overweight in Health Care helped performance in the first quarter. We took advantage by trimming some of our holdings in the sector, as well as in some thriving Consumer Staples companies, to pursue buying opportunities elsewhere.  

In the first quarter, we added to our Technology holdings Microsoft and Visa. With people working from home, Microsoft is in a strong position to provide connectivity. Visa should benefit from the movement toward electronic payments and the longer-term growth in e-commerce.

The Fund also added two new Technology holdings in the first half:

  • Workiva, an Iowa-based compliance software company. Even if the pandemic is lengthy, its business should sidestep a significant slowdown. 
  • Activision, a gaming company whose titles include “Call of Duty” and “World of Warcraft.” We believe some of the people playing while staying at home will probably continue to do so once the pandemic eases. 

The Fund has been cautiously adding to its Financial holdings, notably U.S. Bank and Wells Fargo. These banks are under great pressure due to credit concerns. But they're also extremely well capitalized, which should help them absorb any significant difficulties with their loan portfolios.

Outlook                     

The market demonstrated remarkable optimism in the second quarter. One key reason: more than $2 trillion in government stimulus. There's now talk of another stimulus package. And interest rates have been extremely low. The 10-year treasury is trading at about 6%, and mortgage rates are about as low as they've ever been.

Full recovery remains far off. The unemployment rate, which peaked at about 14.7%, has declined to 11.1%. But most estimates suggest that unemployment will remain elevated through this year and even into 2021. Earnings for the S&P 500 are expected to be down by about 25% this year, though perhaps returning to pre-pandemic levels in 2021. 

The number of new COVID-19 cases also is worrisome. But we’ve been encouraged by treatments in development that could bring down the severity and the mortality rate. There also are optimistic signs in terms of vaccine development. 

We expect a volatile period ahead. But we believe long-term prospects look good, thanks to government economic support and COVID-19 treatment prospects. 

 

Top 10 Fund Holdings (subject to change)

Mairs & Power Growth Fund 

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.