Listen to Andy Adams, Chief Investment Officer and Lead Manager of the Mairs & Power Growth Fund, and Pete Johnson, Co-Manager, as they gave an update on the market, economy and impact to the Mairs & Power Growth Fund in 2020, as well as gave an outlook for 2021. This was recorded on January 28, 2021.
Growth Fund 2021 Summary
The Mairs & Power Growth Fund gained 16.67% in 2020, while the Fund’s benchmark, the S&P 500 Total Return benchmark, rose 18.40%.
The Growth Fund’s macro leanings were all headwinds to performance in 2020. Yet despite these headwinds, the Fund underperformed the benchmark by less than 2%. And despite the Fund’s underperformance the past few years compared to that benchmark, its long-term performance has still been strong, thanks in large part to our stock selection. Going forward, we believe that the Growth Fund’s macro leanings will work in our favor.
The Fund's Macro Leanings
Let’s look more closely at the Growth Fund’s three chief macro leanings:
Value investing - We focus on reasonably valued companies with high rates of return. Value stocks have performed weakly since 2008. While companies may not keep pace in very strong markets, they have historically held up better during downturns.
Small- and mid-cap stocks - These stocks make up about 14% of the Fund’s portfolio. In the short term, this overweight has been a drag on performance relative to larger stocks. But over the last two decades, small caps have generally outperformed large caps.
Regional investing - Roughly 54% of the Fund's assets are invested in companies headquartered in Minnesota and the Upper Midwest. These stocks underperformed the benchmark in 2020. For instance, the Piper Sandler Minnesota index returned 6.80% last year. But over the last 20 years, the Piper Sandler Index’s average annual returns are 7.10%, compared to 5.37% for the S&P 500
Technology was the S&P 500’s strongest-performing sector in 2020, gaining 43.89%. Historically, the Growth Fund has been underweight in the Technology sector. Last year, that underweight was a drag on Fund performance.
That noted, the Fund is rapidly closing the gap, thanks in large part to strong stock picking. We own Alphabet and Microsoft, which now are two of the Fund’s largest holdings. In 2020, we added Nvidia, which gained 122.30%. Nvidia supplies graphic cards used in data centers and in artificial intelligence (AI) and machine learning applications. Its exposure to PC gaming also offers the potential for future growth opportunities. Another headwind to Fund performance was not owning Apple, though we believe that company has less long-term growth potential.
In 2020, we also added Amazon. Until recently, we didn't think its profitability performance justified its price. But in the last two quarters, Amazon’s profitability has grown significantly. We started building a position last year, but not owning it earlier was a significant headwind.
The Growth Fund also has been historically overweight in in Healthcare and Industrials, sectors that in 2020 both underperformed the S&P 500. But as we’ll note, both of these sectors, in our opinion, are potentially poised to perform more strongly.
The Biden administration is seeking to bolster the Affordable Care Act, which we believe could benefit our Healthcare portfolio. The administration also is discussing an infrastructure plan focusing on bridges, roads, and clean technologies. Such investments, we believe could help boost the Fund’s Industrial portfolio.
What’s more, we’re seeing inklings of inflation, with some spikes in commodity prices. We believe the value-oriented companies we hold have competitive positions that could allow them to pass price increases on to their customers. There also has been a rebound in 10-year interest rates. With both rates and inflation having the potential to rise, value stocks, in our opinion, are likely to come back into favor.
In addition, as more and more vaccines are administered, we believe there could be a rebound in company earnings and dividends. The potential for additional fiscal stimulus is another reason for optimism.
In sum, we believe the Growth Fund’s portfolio is very well positioned for the future. While our historical biases hurt performance in 2020 relative to the S&P 500, that difference was slight. Long-term, we believe the Fund’s leanings will provide strong returns for investors.
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.
The Piper Sandler Co. Minnesota Index is a price-weighted index designed to measure the performance of the Minnesota economy. It is not possible to invest directly in an index.
Scott Howard is a registered representative of Foreside Fund Services, LLC.