Q3 2021 Small Cap Fund Update Recording

Q3 2021 Small Cap Fund Update Recording

October 28, 2021

Listen to Andy Adams, CIO and lead portfolio manager, Allen Steinkopf, co-portfolio manager and Chris Strom, co-portfolio manager of the Mairs & Power Small Cap Fund, as they talk with Scott Howard, VP, Investor Relations Manager, on October 28, 2021 to provide an update on current economic and market conditions and their impact on the Mairs & Power Small Cap Fund.

 

Executive Summary

The Mairs & Power Small Cap Fund celebrated its 10th anniversary in August. The Fund has grown substantially since its inception, and it has benefited shareholders by leveraging down fixed costs and, more recently, management fees. Assuming current market conditions hold, it could set a record high in assets by year’s end.

Year to date, the Fund’s best-performing sectors have been Financials and Healthcare. Industrials and Technology, despite strong performance from individual holdings, have been weaker.

 

Sector Performance

About 16% of the portfolio is in Financials. Last year, banks lagged the market. This year, our bank holdings have performed very well. Credit quality has been much better than expected, and the yield curve is starting to rise.

Our Healthcare portfolio (about 15% of the Fund) was up about 18%, versus about 7% for the index. Inspire, Catalent, and Bio-Techne, names that performed well last year, have continued their outperformance in 2021.

Several names in Industrials, the portfolio’s largest weight at 22%, also have done well. But year to date, we haven't been able to outperform in this sector, due particularly to underperformance from AAR Corp. and Proto Labs.

Technology now makes up about 21% of the portfolio, up from about 17% last year. We've received good performance from Workiva as well as from SkyWater Technology and JAMF, two Twin Cities-area companies that recently went public. But they’ve been offset somewhat by CMC Materials and Hyliion. 

The Fund currently has no Energy holdings, since it sees no long-term opportunities in this sector.

 

Individual Stocks                      

CMC Materials has been a notable underperformer over the course of the past year. This is an Illinois-based semiconductor chemical manufacturer whose core businesses have been performing very well. But one of its ancillary businesses, which provides chemicals used in oil pipelines, has faced some headwinds. Overall, we like the company and have been adding to our position. 

Another year-to-date detractor was Sleep Number, which performed well in the first quarter but sold off quite a bit in the second. 

On the positive side, Inspire Medical, which is developing a device for treating sleep apnea, has been up about 80% over the past year. It's one of the Fund’s top Healthcare contributors, at about 4% in the portfolio. Management has identified a $10 billion market opportunity, both in the U.S. and worldwide. The company has done a solid job of building out the capability for implanting these devices, and it has built relationships with all the major insurance companies.

On the negative side, Technology holding CMC Materials is down about 14% from a year ago. It has a highly specialized product called a slurry that's used in semiconductor manufacturing, and it has a very high market share within that product. A couple of years ago, it acquired a business called KMG that expanded its capabilities in the semiconductor space. It also bought a couple of ancillary businesses that didn't fit quite as well. CMC appears to be taking steps to improve KMG’s performance, and we think that there's plenty of long-term value within its core business. 

 

Outlook                      

The infrastructure bill is expected to be a $1 trillion deal, but that spending will be spread over 10 years. It builds over time, which works perfectly for our investment style. Should the bill pass, we see opportunities for many companies throughout our portfolio.

There has been much discussion about supply chain constraints and challenges. We believe this situation plays to the Fund’s strength. We work to identify companies with strong competitive advantages and the ability to push through pricing when inflation is rising. 

Small cap valuations remain very cheap. While small caps have been disproportionately impacted by Covid, we think that their prospects for earnings growth over the next couple of years are favorable.

Going forward, the Fund will continue to implement the philosophy that has driven its first 10 years: long-term investments in companies with strong competitive positions, with a preference for those headquartered in the Upper Midwest.

  

Top 10 Fund Holdings (subject to change)

Mairs & Power Small Cap Fund 

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.  

EV (enterprise value) to sales is a valuation measure that compares the EV of a company to its annual sales.

EV (enterprise value) to EBITDA (earnings before interest, tax, depreciation, amortization) is a ratio used to determine the value of a company

P/E (price-to-earnings) ratio is the ratio for valuing a company that measures its current share price relative to its per-share earnings.

Standard deviation measures the dispersion of a dataset elative to its mean. 

 

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.