In this Fund update, Mike Marzolf, lead manager of the Mairs & Power Small Cap Fund, and Chris Strom, co-manager, discuss the Fund’s returns, drivers of performance in 2024, new companies in the portfolio, and what to look for in 2025. This was recorded on January 23, 2025.
Executive Summary
In 2024, the Mairs & Power Small Cap Fund was up 7.25%, underperforming the S&P Small Cap 600 Total Return (TR) benchmark, which is up 8.70%, and its peer group, the Morningstar U.S. Fund Small Blend, which is up 10.80%.
While there was modest underperformance, we are encouraged when focusing on the long term. The Fund’s performance is roughly in line with the S&P 600 since the Fund’s inception in 2011 and slightly ahead of the Russell 2000 over the same period.
Positive Stock Selection
Looking closer at stock performance, and reflecting on our philosophy and process, stock selection was a positive contributor to relative performance during 2024. The process used since the inception of the Fund continues to find historically beneficial opportunities in small and mid-cap names that have provided favorable results.
Several stocks positively impacted the Fund's performance this year. Piper Sandler (PIPR), a Minnesota-based boutique investment bank, benefited from a rebound in Mergers & Acquisitions (M&A) activity, as well as advisory, debt, and equity underwriting activities. Knife River (KNF), a provider of aggregates and construction services headquartered in Boise, saw robust construction activity and a growing pipeline. Finally, Casey's General Stores (CASY), an Iowa-based convenience store and gas station operator, continued to gain market share and benefit from the strength of its prepared foods business.
Negative Stock Performers
On the downside, MGP Ingredients (MGPI), a premium distilling spirits maker, was affected by an inventory cycle in bourbon and changes in consumer tastes. CVRx (CVRX), a neuromodulation device manufacturer, faced a tough year with management changes but showed improvement in recent quarters. Lastly, Gentherm (THRM), a supplier of comfort systems for the automotive industry, experienced a slowdown in vehicle volumes, leading to inventory issues.
Sector Performance
The Fund's performance was also influenced by various sector dynamics. The Industrials and Consumer Discretionary sectors faced challenges due to inventory cycles, while the Health Care sector was impacted by funding pressures, slowdowns in China, and concerns over GLP-1 weight loss drugs. Conversely, the Financials and Technology sectors were significant contributors to performance, driven by increased sales, expanding margins, and favorable valuations. Additionally, the Fund’s lack of exposure to the Energy sector was a positive contributor to relative performance.
Outlook for 2025
Looking ahead to 2025, the Fund is optimistic about the prospects for small cap companies. The business environment is improving, with easing inflationary pressures, normalizing inventory, and stabilizing demand. Additionally, the current market cycle, which has favored large cap stocks for 14 years, has the potential to shift, as small cap company earnings estimates are projected to exceed those of large cap peers over the next two years. We believe the Fund is well-positioned with investments in sectors such as Industrials, Health Care, and Financials, including companies like The AZEK Company (AZEK), John Bean Technologies Corporation (JBTM), Hub Group (HUBG), AAR (AIR), WinTrust (WTFC), and Piper Sandler. Additionally, recent additions to the portfolio, such as Life Time Holdings (LTH) and Clearwater Analytics (CWAN), are expected to contribute positively to future performance.
Top 10 Fund Holdings (subject to change)
Expense ratio: 0.94%
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.
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.
Russell 2000 TR Index is a small-cap stock market index of the smallest 2,000 stocks in the Russell 3000 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.