Listen to Andy Adams, Chief Investment Officer, as he talks with Scott Howard, VP, Investor Relations Manager, on March 25, 2020 to provide an update on current economic and market conditions and their impact on the Mairs & Power Balanced Fund.
Our investment philosophy remains focused on investing in companies with strong competitive positions for the long term. With that in mind, we are taking advantage of what we think is short term volatility in stocks that we know well to opportunistically add and trim positions.
Every correction impacts stocks and sectors differently. We believe that the broad-based, somewhat indiscriminate selloff taking place has created a number of attractive investment opportunities. In the last few weeks, our turnover has been somewhat elevated as we take advantage of those opportunities.
- The Energy sector has been hard hit. Over the last five years, we have been systematically reducing our sector weight and the number of holdings due to declining competitive advantage, as well as earnings growth rates that are below market growth rates.
- The Financial sector has been the second hardest-hit sector so far this year, and one in which the Fund holds an overweight position. Extremely low interest rates will make it difficult for banks to generate much interest income. Fee-generating businesses, notably mortgage refinancing, will provide some offset.
- The Healthcare sector, another sector in which the Funds holds an overweight position, has been a relatively strong performer. As a result, we’ve trimmed some of our positions in this sector.
- The Consumer Staples sector is also holding up well. We are trimming some of our holdings in this sector in order to purchase stocks in other sectors, which are down and more attractively valued.
Changes to Fund Holdings
- We’ve been adding to names with strong competitive advantages and the financial flexibility to operate during periods of economic uncertainty. We have added to our existing positions in Visa, Sherwin-Williams and Rockwell Automation.
- In the last several days, we’ve been adding to companies that will likely be impacted by the downturn but whose business we expect will bounce back when social distancing ends.
- We regularly review the balance sheet quality of all the stocks in our funds. We focus on the operating leverage the companies have historically exhibited in past market downturns, and the amount of financial leverage they currently have. We identify which companies are more highly levered and adjust our positions accordingly.
- Valuation estimates for this year, particularly for the second quarter, are extremely opaque. We’ve supplemented our forecast work with a historical earnings and cash flow base methodology. This has helped us identify longer term opportunities.
- We’ve also conducted a durable competitive-advantage analysis of each of the companies we hold. We identify specific major customers in industries the companies are selling into. This has been helpful in assessing companies’ business exposures in this downturn.
Fixed Income Portfolio
- Our bond portfolio is overweight on corporate credit and underweight on Treasuries. Over the long term, the coupon advantage of corporates bonds has helped us deliver excess return over Treasuries. In the current environment, our positioning has been a drag on relative performance.
- We are underweight in several sectors that could be negatively affected by the current downturn, particularly Energy, Retail, Leisure/Lodging and Mining. Our two largest sector overweights are in Financials and Technology. We expect our Financial sector exposure to be a headwind for the reasons cited earlier.
- We have been selectively trimming fixed income positions and seeking to reinvest those proceeds into stocks that have significantly sold off and that fit our other investment criteria.
As always, our main concern is with our clients and our employees. We hope all of you are staying safe and healthy. We have set up our office to make sure that we are available to you as we always have been. And we remain well positioned to help your portfolios ride out this storm.
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.