Listen to Andy Adams, Chief Investment Officer and Lead Manager of the Mairs & Power Growth Fund, as he gave an update of what is going on in the economy and the impact to the Mairs & Power Growth Fund. This was recorded on November 19, 2020.
The Mairs & Power Growth Fund gained 7.56% in the third quarter, and was up 2.45% for the first nine months of 2020. The S&P 500 Total Return benchmark was up 8.93% and 5.57% over the same periods, while the Lipper Multi Cap Core Funds Index of peers has posted gains of 8.52% in the third quarter and 4.47% year-to-date through September.
Despite the Fund’s strong stock selection, we’ve faced a couple of major macro headwinds due to its sector weights.
The first is the Fund’s overweight in the Industrial sector and underweight in Technology. This has been a good long-term strategy -- Industrial companies have built strong competitive positions and invested in cyclical downturns to emerge stronger than their competitors. An example is Ecolab, which has been taking market share from smaller competitors that don’t have its robust digital resources.
By contrast, Technology business models historically have been disrupted by new innovators. But that clearly hasn’t been the case for some of the largest companies over the last decade. Two of the Fund’s largest holdings are Google and Microsoft, which both have strong competitive positions and excellent growth outlooks. Technology stocks now make up nearly 25% of the Fund’s portfolio.
The biggest contributor to the Fund’s performance in 2020 so far is a Technology company -- Nvidia, which is up 100% year to date and has grown to a 4% position in the portfolio. The computer graphics cards Nvidia makes have been used primarily in digital gaming. But we’re also seeing great interest and potential usage by data centers for applications like machine learning and artificial intelligence.
The Fund’s other macro headwind has been a significant exposure to smaller and mid-cap stocks. Looking at valuations, we believe that the smaller mid-cap stocks are close to 20-year lows relative to their larger peers. But knowing that the relative valuations of larger and smaller caps tend to go in cycles over the long term, we do expect small and mid-cap stocks to snap back. So we’re sticking with the vast majority of our smaller and mid-cap holdings.
We like everyone else, are extremely excited to hear the safety and efficacy of the first Covid vaccine candidates. Those vaccines provide a much needed light at the end of the tunnel for everyone, the economy and markets as well.
The next several months will likely be difficult. But late 2021 is looking like we could see a return to a more normal economic environment, and we beleive that could benefit equity markets.
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.
Scott Howard is a registered representative of ALPS Distributors, Inc.