The collapse of two midsize regional banks (Silicon Valley Bank and Signature Bank) was big news in the first quarter. The entire banking industry was met with jitters and despite that selloff in March, the market still produced a positive performance.

As we move into the second quarter of 2023, we invite you to listen in as Chief Investment Officer and Growth Fund Lead Manager, Andy Adams, provides an update on the state of the market, the status of the Mairs & Power Growth Fund, and an investment outlook for 2023.

Executive Summary

The market and the Mairs & Power Growth Fund had a positive snap back in the first quarter of the year, with the Growth Fund leading the S&P 500 for much of the quarter before slipping behind in March. The Growth Fund was up 7.27% while the index was up 7.50%. The Fund outperformed its peer group, as measured by the Morningstar Large Blend Category Index, which was up 5.81% for the year.

Two macroeconomic factors did have an impact on the Fund’s performance. First, the banking industry woes was a drag on performance as many Financials sector companies were impacted in a pullback on the entire group. Our main exposure is with US Bank, Wells Fargo, and JPMorgan Chase, but our broker, Charles Schwab, was also impacted. Despite the selloff, we did add to the sector, especially to JPMorgan, as we believe it will benefit from consumer anxiousness surrounding smaller banks. We have performed a thorough analysis of our banking stocks and believe that they will exit this banking event intact, and a few may even benefit from the sector turmoil. In fact, bigger banks have seen an inflow of deposits as savers seek the security of larger institutions.

Also affecting the quarter from a macro perspective was the outlook for inflation. Much of the market rally was likely due to the prevailing wisdom that the Federal Reserve (The Fed) is close to ending rate hikes. While the labor force continues to be tight and wage inflation fairly high, we are seeing some signs that things are softening a bit, which should give the Fed the ability to pause in the very near term.

Portfolio Positioning

Last year, “growthier” stocks performed much worse than “value” stocks. That historically happens because investors move toward “safer” options when the market is experiencing upheaval. In the last few years, the Growth Fund, while still sitting within the Morningstar Large Blend category, has skewed more toward growth. That is intentional as we seek out companies with secure competitive positions that are taking market share. Because of this, they are seen as “growthier” businesses. When growth names underperform value names, like in 2022, that becomes a headwind to the Fund relative to its peers and the index. However, in the first quarter, we saw the market return to growth stocks over value stocks and they aided relative performance for the Fund.

Additionally, our long-term focus on companies based in Minnesota and the Upper Midwest has some distinct advantages. Most of our major company bets have their headquarters within Minnesota and we believe that proximity allows us to know those businesses extremely well. We get to know the companies we invest in better than other investors, and while our weight in Minnesota companies has come down a little over time, it still accounts for 40% of the portfolio.

Individual Stock Performance

As previously mentioned, we saw a bounce back of growth stocks versus value stocks in the first quarter, reversing the pattern of 2022. Four stocks exemplified that trend in Alphabet (GOOG), Littelfuse (LFUS), Microsoft (MSFT), and NVIDIA (NVDA).

Our stock selection helped relative performance due to these Technology or technology-related names in the Fund. In particular, Alphabet, Microsoft, and NVIDIA are leveraging the significant media interest in artificial intelligence and leading the way to incorporate AI across work functions to drive more efficiency and create new products.

On the negative side, the Fund’s overweight in Healthcare was a detractor from performance as the sector did not keep up with the market rebound, as well as an underweight in Consumer Discretionary. The largest detractors from relative performance in the quarter were US Bank (USB), Charles Schwab (SCHW), UnitedHealth Group (UNH), and Hormel (HRL).

A Market Outlook

The outlook on inflation looks better. While the Fed raised the Federal Funds rate again in its last meeting, the impact of those rising rates has had an impact.

The most recent inflation data has seen a decrease year-over-year, even if it’s slower than the Fed would like. Also, in 2021 and 2022, we saw many companies announcing price increases and passing cost increases on to customers. In the last six months, we have heard far fewer comments about price increases, and we are seeing slowed growth for companies and earnings estimates coming down significantly for 2023. We anticipate earnings estimates to be cut even further at some point due to banking industry issues creating higher funding costs.

Finally, the first quarter rally combined with lower earnings expectations means that valuations are slightly above their long-term averages. So, while earnings projections are a little uncertain, our long-term focus means stock selection is a major driver of our performance. We believe the stock market is the best place for our investors to maintain purchasing power, and we will continue to invest in companies with durable competitive advantages that are equipped to participate in the current inflationary environment. That means both pricing and operational efficiencies to offset material and labor costs.


Top 10 Fund Holdings (subject to change)

Mairs & Power Growth Fund 

Expense ratio: 0.61%

S&P 500 TR Index is an unmanaged index of 500 common stocks that is generally considered representative of the U.S. stock market.

Morningstar large-blend portfolio are fairly representative of the overall U.S. stock marketing in size, growth rates, and price. Stocks in the to 70% of the capitalization of the U.S equity market are defined as large-cap. The blend style is assigned to portfolios where neither growth nor value characteristics predominate. These portfolios tend to invest across the spectrum of U.S. industries, and owing to their broad exposure, the portfolios’ returns are often similar to those of the S&P 500 Index.

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. Characteristics and other statistical measures refer to underlying stocks in the portfolio and do not represent or predict the performance of any fund.

Scott Howard is a registered representative of Foreside Fund Services, LLC. 

All investments have risks. The Growth Fund is designed for long-term investors. Equity investments are subject to market fluctuations and the Fund’s share price can fall because of weakness in the broad market, a particular industry, or specific holdings. Investments in small and midcap companies generally are more volatile. International investing risks include among others political, social or economic instability, difficulty in predicting international trade patterns, taxation and foreign trading practices, and greater fluctuations in price than U.S. corporations.

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.