In this Fund update, Mike Marzolf, lead manager of the Mairs & Power Small Cap Fund (MSCFX), discusses the Fund's returns, the drivers of performance in the first half of 2026, holdings in the portfolio, and what to look for in the remainder of the year. This was recorded on July 23, 2026.
Executive Summary
The Small Cap Fund rose nearly 21% in the second quarter of 2026, bringing its year-to-date return to 25% and its one-year return to 42%. On a relative basis, the Fund outperformed its primary benchmark, the Russell 2000, both year-to-date and over the trailing one-year period.
Small cap stocks broadly began outperforming roughly a year ago, and the second quarter of 2026 was no exception. The Fund managers believe this continued participation in small caps remains a constructive backdrop for the Fund's quality-oriented, long-term approach.
Stock Selection
Notable holdings during the first half of 2026:
- Cognex (CGNX), a Massachusetts-based maker of computer vision systems. The company's cameras are used to monitor products as they move through logistics operations, like what happens at Amazon distribution centers. Cognex serves the logistics, semiconductor, life sciences, packaging, and consumer electronics markets, with a customer roster that includes Amazon, Apple, Procter & Gamble, and Eli Lilly. The company is experiencing attractive growth and margin expansion as those end markets continue to invest in automation.
- AAR (AIR), an aerospace company that supplies new and used parts to airlines and provides repair, maintenance, and heavy maintenance services. AAR has been signing exclusive relationships with parts suppliers that carry significantly higher margins than its corporate average, and its software business is adding to customer productivity, with Delta among its customers. Together, these dynamics are helping expand the company's margins.
Sector Performance
Relative strength year-to-date was led by the Information Technology, Industrials, and Financials sectors. That strength was partially offset by weakness in Health Care and Materials, along with the Fund's lack of Energy exposure, which was a headwind given the sector's positive performance during the first half of the year.
Outlook for the Rest of the Year
The Fund managers are confident in portfolio positioning, grounded in the firm's "boots on the ground," active research approach. This includes visiting companies, their partners, and even their competitors to understand what drives growth, market-share gains, and margin expansion. Consistent with the firm's long-term philosophy, the Fund holds a concentrated portfolio of companies purchased at reasonable valuations, with the intent to hold them through an economic cycle as their earnings grow.
Quality remains a defining attribute of the Fund. Every company in the Small Cap Fund is profitable, compared with roughly 30% to 40% of companies in the Russell 2000 that are not. The weighted average earnings growth of the Fund's holdings is 21% while maintaining reasonable valuations that area creating attractivie opportunities in the market. With positive underlying fundamentals and accelerating growth prospects for portfolio companies, we believe the Fund is well-positioned for the rest of 2026 and into 2027.
Disclosures
Top 10 Fund Holdings (subject to change)
Expense ratio: 0.97%
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.
Cash flow is the net amount of cash and cash equivalents being transferred in and out of a company.
Russell 2000 TR Index is a small-cap stock market index of the smallest 2,000 stocks in the Russell 3000 Index.
S&P Small Cap 600 TR Index is an index of small-company stocks managed by Standard and Poor’s that covers a broad range of small cap stocks in the U.S. The index is weighted according to market capitalization and covers 3-4% of the total market for equities in the U.S. It tracks both the capital gains of a group of stocks over time and assumes that any cash distributions, such as dividends, are reinvested back in the index.
Morningstar Small Blend Category, as defined by Morningstar are stocks in the bottom 10% of the capitalization of the U.S. equity market which are defined as small cap. The blend style is assigned to portfolios where neither growth nor value characteristics predominate.
All investments have risks. The Small Cap 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 thebroad 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 United States corporations. The Small Cap Fund may invest in initial public offerings by small cap companies, which can involve greater risks than investments in companies which are already publicly traded.
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 Funds may be lower or higher than the performance quoted. For the most recent month-end performance figures, visit the Funds’ website at www.mairsandpower.com, or call Shareholder Services at (800) 304-7404.The Funds’ investment objectives, risks, charges and expenses must be considered carefully before investing. The prospectus and summary prospectuses contain this and other important information about the Funds, and may be obtained by calling Shareholder Services at 800-304-7404, or by visiting www.mairsandpower.com. Read the prospectus and summary prospectuses carefully before investing.
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.
The mention of specific securities is not intended as a recommendation or an offer of a particular security, nor is it intended to be a solicitation for the purchase or sale of any security.