Listen to Allen Steinkopf, Lead Portolio manager of the Mairs & Power Small Cap Fund, and Chris Strom, Equity Analyst, as they talk with Scott Howard, VP, Investor Relations Manager, on October 26, 2020 to provide an update on current economic and market conditions and their impact on the Mairs & Power Small Cap Fund.
In the third quarter, the Mairs & Power Small Cap Fund gained 1.53%, the benchmark S&P Small Cap 600 Total Return (TR) Index was up 3.17% and the Fund’s peer group of small cap funds as measured by the Morningstar U.S. Fund Small Blend category was up 4.14%. In the nine months year-to-date, the Fund has lost 14.39%, the S&P Small Cap 600 TR index was down 15.25% and the Morningstar peer group has declined 13.55%.
Small caps are at one of their lowest valuations relative to large caps that we've seen in the past dozen years. “Mega-caps” such as Microsoft, Apple, and Amazon have benefited from COVID-19, thanks largely to work-from-home. The Fund has taken advantage of some buying opportunities in the small cap space, which should bounce back as the pandemic recedes
Sector Overview and Performance
Overall, the Fund’s Healthcare holdings, notably Inspire Medical and Catalent, have been performing extremely well.
Another strong performer, this one in the Industrial sector, is Generac Holdings, whose backup power systems are in high demand, particularly because of this year’s hurricanes and wildfires. Overall, however, the sector is flat on its back. Industrial stocks are cheap now, but they should recover as the economy opens up further.
The Financial sector also has been struggling this year, due largely to uncertainties over banks’ loan portfolios and low interest rates. One Financial holding that hurt the Fund’s third-quarter performance was United Fire Group, an Iowa-based property casualty insurer, whose investment portfolio has been damaged by low yields.
Bricks-and-mortar businesses such as restaurants have been devastated during the pandemic. That includes movie theaters: Marcus Corp., a Fund holding, is down roughly 60% year to date.
The Fund added two promising companies in the third quarter:
- JAMF Holdings, a Minneapolis company we added after its July IPO. Its software helps organizations manage their employees’ Apple devices.
- Hyliion, which designs and develops electrified powertrains for heavy-duty Class 8 trucks. It’s a little bit of a pre-profit company, but we believe we're in early on this one.
During the quarter, the Fund took advantage of a third-quarter price rally to exit Hawkins, which supplies water purification chemicals to municipalities. It has been a solid business, but one with uncertain growth potential. Hawkins recently diversified into health supplements, a business with which we’re not comfortable.
There are solid bases for optimism. The economy has been steadily opening up, and consumer spending has been very good. Many companies’ third-quarter numbers are looking surprisingly strong based on early reports. The ISM manufacturing index is above 50%, which indicates expansion. Auto sales and housing have benefited from the very low interest rates.
We’re also optimistic that there will soon be an effective COVID-19 vaccine. Once that happens, we expect the small cap market to do better. But with cases rising in recent weeks, we will need to get through the fall and winter first. That noted, we don’t expect another lockdown.
Top 10 Fund Holdings (subject to change)
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.
EBITDA (Earnings Before Interest, Tax, Depreciation, Amortization) is a metric used to evaluate a company’s operating performance.
IPO stands for Initial Public Offering
ISM (Institute of Supply Management) Manufacturing Index measures manufacturing output nationwide.