Q4 2020 Small Cap Fund Update Recording

Q4 2020 Small Cap Fund Update Recording

January 21, 2021

 Listen to Allen Steinkopf, Lead Portolio manager of the Mairs & Power Small Cap Fund, and Chris Strom, co-manager, as they talk with Scott Howard, VP, Investor Relations Manager, on January 21, 2021 to provide an update on current economic and market conditions and their impact on the Mairs & Power Small Cap Fund.

Executive Summary

In the fourth quarter of 2020, the Mairs & Power Small Cap Fund gained 27.06%, the benchmark S&P Small Cap 600 Total Return (TR) Index was up 31.31%, and the Fund’s peer group of small cap funds as measured by the Morningstar U.S. Fund Small Blend category was up 28.01%. For the entire year, the Fund gained 8.78%, the S&P Small Cap 600 TR index was up 11.29%, and the Morningstar peer group posted a 10.66% increase. 

The Fund’s early-year returns suffered after COVID-19 hit. As of June 30, the Fund was down 15% year-to-date, while the S&P 600 was down about 18%. In the second half of the year, the market climbed back dramatically. Since November, when the vaccines began to roll out, small caps in particular have rallied strongly.

Sector Overview and Performance

Stock selection drove Fund performance. Detractors to that performance were in those industries that will take longer to recover, such as restaurants, theaters, and airlines. One of the Fund’s laggards was Marcus Corp., a theater and restaurant operator, down about 57% in 2020. We continue to hold the stock, confident that it will recover along with the broader economy.

Banks, hurt by unfavorable interest rates, also detracted from performance. As the economy opens up, rates should rise and banks should do well. In Industrials, we held on to AAR, an MRO provider for airlines. AAR ended up down on the year, holding back Fund performance slightly. It should recover along with the airline industry.

By contrast, the Fund’s Healthcare holdings were up 60% last year. Two examples of strong Fund performers in this sector:                                                                                                                         

  • Inspire Medical Systems, up 153% in 2020. This Minneapolis-based company has developed a neuro-stimulator device that provides an alternative to the traditional CPAP device used by people with sleep apnea. Inspire is going after a market of more than 100 million patients worldwide, and it is well positioned to grow
  • Catalent, which gained 85% last year. This pharma-industry contract manufacturer has participated in the development of more than 50% of the new drugs that have come out in the past decade. It also has worked with several vaccine developers.

Outlook                      

From the perspective of metrics such as earnings per share, sales, and profitability, current valuation in the small cap space is very attractive. The S&P 600 market for small caps is trading more than a standard deviation below where it normally trades relative to larger-cap stocks. 

If the vaccines are rolled out in a timely manner, we believe the economy will start to open up somewhere around mid-2021. We’re fairly confident that as the economy opens up, GDP will grow and unemployment will decline.

There are pockets of the market that are quite expensive. But there also are industries and companies that have not recovered completely, such as banks and restaurants. This is where we think market performance can come from in 2021.

  

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.