CIO Small Cap Fund Update Recording

CIO Small Cap Fund Update Recording

March 25, 2020

Listen to Andy Adams, Chief Investment Officer and Co-manager of the Mairs & Power Small Cap Fund, as he talks with Scott Howard, VP, Investor Relations Manager, on March 25, 2020 to provide an update on current economic and market conditions and their impact on the Mairs & Power Small Cap Fund.

 

Executive Summary

Our investment philosophy continues to be focused on investing in companies with strong competitive positions for the long term. With that in mind, we are taking advantage of what we think is short term volatility in stocks that we know well to opportunistically add and trim positions. 

Every correction impacts stocks and sectors differently. We believe that the broad-based, somewhat indiscriminate selloff taking place has created a number of attractive investment opportunities.

Sectors

  • The Energy sector has been hit hard. Fortunately, we have been underweight in this sector for a long time. We have always been concerned with these companies’ ability to generate return on investment above their cost of capital. We will continue to be extremely cautious about adding to our Energy sector weight.
  • The Consumer Discretionary sector has been the second hardest-hit sector in the small cap space during this correction. Here, too, we have a very small portfolio weighting. It is challenging to find a retailer or restaurant that stays popular long enough to generate excess returns for our long term investment horizon. We will also continue to be very cautious in adding to this sector.
  • The Healthcare sector, another sector in which the Funds holds an overweight position, has been a relatively strong performer. As a result, we’ve trimmed some of our positions in this sector.
  • The Industrial sector has performed about in line with the S&P Small Cap 600 Index, and our holdings have performed slightly better than the Index. We continue to have a large overweight position in this sector, with a strong bias toward companies based in the Upper Midwest that we know very well.

Changes to Fund Holdings

  • Over the past few days, we have started slowly adding to positions in companies whose businesses will be impacted by the downturn, but which we expect will bounce back with the end of social distancing. We continue to be very selective in what we are buying. Some companies with very strong growth opportunities have seen their stock prices drop nearly in half.
  • A stock we were buying earlier this year is NVE Corp., a Minnesota-based Internet of Things company that recently launched a line of easy-to-use programmable sensors. We saw an opportunity in that stock and have added to the Fund's position.

Assessments

  • We regularly review the balance sheet quality of all the stocks in our funds. We focus on the operating leverage the companies have historically exhibited in past market downturns, and the amount of financial leverage they currently have. We identify which companies are more highly levered and adjust our positions accordingly.
  • Valuation estimates for this year, particularly for the second quarter, are extremely opaque. We’ve supplemented our forecast work with a historical earnings and cash flow base methodology. This has helped us identify longer term opportunities.
  • Small cap stocks are now trading at the lowest valuations relative to large cap stocks in nearly 20 years. We are slowly getting more aggressive on some stocks whose prices we believe have been disproportionately hit hard.

As always, our main concern is with our clients and our employees. We hope all of you are staying safe and healthy. We have set up our office to make sure that we are available to you as we always have been. And we remain well positioned to help your portfolios ride out this storm.

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. 

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 about 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. It is not possible to invest directly in an index.