SMALL CAP fund. Third Quarter Results FOCUSED INVESTING FOR THE LONG-TERM. September 30, 2015

Transcription

1 SMALL CAP fund Third Quarter Results September 30, 2015 FOCUSED INVESTING FOR THE LONG-TERM

2 SMALL CAP fund (MSCFX) Third Quarter Market Overview - September 30, 2015 As the year began, many companies were battling a decline in energy prices, commodity prices and a strong dollar. Then, during the third quarter China started to show more incremental weakness in its economy as well, intensifying the weakness in agriculture and commodity prices. The market reacted and the dizzying one-day swing of more than 1,000 points in the Dow Jones Industrial Average on August 24th delivered the event that had been worrying investors, a market correction -- technically a 10% move off of recent highs. The correction was widespread, resulting in negative third quarter returns across every sector except consumer staples and utilities. Only consumer discretionary and healthcare remains in positive territory year-to-date. While the long anticipated correction allowed the market to stop holding its collective breath, the rapidity and volatility reminded us, if we needed reminding, that short-term market swings can be wildly unpredictable. We re glad we are playing the long game. It has been a difficult quarter and year for many investors. The third quarter ended with the S&P 500 Total Return (TR) down -6.44% for the quarter, and -5.29% for the first nine months of the year. Both the Dow Jones Industrial Average TR and the S&P Small Cap 600 TR mirrored the broader market, with the Dow down -6.98% for the quarter and -6.95% for the year and the Small Cap index down -9.27% for the quarter, and -5.49% year-to-date. Our other key benchmark, the Barclay s Government/Credit Bond Index Return was up slightly in both periods, +1.20% for the quarter and +0.90% year-to-date. As industrial investment has slowed with lower energy and agriculture commodity prices, the industrial and materials sectors have significantly underperformed the broader market indices this year. Exportoriented companies as well as U.S. focused companies in those sectors have also faced currency translation pressure as the dollar has appreciated significantly versus nearly all foreign currencies. This currency dynamic puts domestic companies in the difficult position of either cutting prices to match international competition or losing market share. We believe these currency and commodity headwinds will dissipate over time and companies in those sectors should outperform, but are uncertain on the timing.

3 (MSCFX) Third Quarter Results September 30, 2015 Future Outlook Four years have elapsed since the last correction in 2011 and the market s run coming out of the recession is now more than six years old. Many investors naturally have been asking if the third quarter signaled the end of the bull market. We don t think so. Despite near term headwinds, we continue to believe that stock performance longterm is built on business results. We see the U. S. economy continuing to outpace other major economies around the globe which should be good for stocks of U.S. companies. In addition, while earnings for the S&P 500 are down this year, the expectation is for moderate earnings growth to resume next year. Recent economic data supports our view. Consumer confidence is near peak levels and in better shape than the headlines suggest. Gross Domestic Product (GDP) growth was revised upward in the second quarter, reflecting stronger than expected consumer spending. The dollar/euro relationship has been stable since March, and if that stability continues, we see that particular headwind faced by exporters ending early next year. A recent research report out of Wells Capital Management pointed out that commodity modity price collapses have occurred midway through three of the last four economic recoveries since The report s author, Chief Investment Strategist Jim Paulsen, notes that the recent fall in the S&P GSCI Spot Commodity Price Index is similar to past recoveries. ries. He argues that weak commodity prices fuel continued economic expansion by shifting pricing power to manufacturers, ending the dramatic shift away from capital goods stocks. Paulsen s note also illustrates a key tenet of the Mairs & Power investment t approach patient, long-term investing through market cycles. The S&P 500 Total Return (TR) Index is an unmanaged index of 500 common stocks that is generally considered the group of stocks

4 (MSCFX) Third Quarter Results September 30, 2015 Small Cap Fund Performance Review The Mairs & Power Small Cap Fund was down 10.17% in the quarter and 9.00% for the year ending September 30, 2015, compared with negative returns for the S&P 600 Small Cap Total Return (TR) Index of 9.27% and 5.49% over the same periods. The Lipper Small Cap Core Funds Index was down 10.10% and 6.84% for the quarter and year-to-date, respectively. Larger cap stocks outperformed their smaller cap peers, but were still down 6.44% for the quarter and -5.29& for the first nine months, as measured by the S&P 500 Total Return Index. Performance data quoted represents past performance and does not guarantee future For the year, having overweight positions in both the Industrials and Materials sectors has hurt relative short term performance as these two sectors have significantly underperformed the S&P 600 Index. A tailwind to performance for the Fund due to sector allocation resulted from our underweight position in the worst performing sector this year -- Energy. Some of the Fund s historically strong performers like Vasco Data Security International (VDSI), Cray (CRAY), and Cardiovascular Systems (CSII) have come down significantly for the quarter and so far this year. We believe all three companies will recover from here and have been adding to positions in all three with the opportunity provided by their weak stock prices. We continue to believe that Vasco will gain its fair share of the data security market with its proprietary solution that dramatically reduces the likelihood that hackers will successfully compromise on-line or mobile login credentials. Cray continues to gain significant share in the high performance computing space against the market leader, IBM, as that company continues to reposition itself away from the Mairs & Power Small Cap Fund Performers TOP PERFORMERS THIRD QUARTER (6/30/15-9/30/15) Buffalo Wild Wings, Inc % ALLETE, Inc % Casey s General Stores, Inc % United Fire Group 16.26% Cardinal Financial Corp 14.87% YEAR TO DATE (12/31/14-9/30/15) Gentherm, Inc % Vascular Solutions, Inc % United Fire Group 23.38% PrivateBancorp, Inc % Wintrust Financial Corporation 19.75% WEAK PERFORMERS THIRD QUARTER (6/30/15-9/30/15) VASCO Data Security Intl., Inc % Cardiovascular Systems Inc % NVE Corporation % Cray Inc % Generac Holdings % YEAR TO DATE (12/31/14-9/30/15) Cardiovascular Systems Inc % Cray Inc % VASCO Data Security International, Inc % Generac Holdings % NVE Corporation %

5 (MSCFX) Thirdd Quarter Results September 30, 2015 space. At the same time, Cray is starting to gain traction with commercial sales, in addition to its core government and academic customer base. Cardiovascular Systems has suffered setbacks in significantly growing and cross-training its existing salesforce, which hurt near term performance. Nevertheless, we believe its solution to peripheral arterial disease which can save a patient s extremities from potential amputation makes a lot of sense and has a lot of room to grow. Likewise recent FDA approval of the company s solution to dealing with calcified arteries near the heart before angioplasty or stenting also appears to serve an unmet need. Revenue growth has been lumpy as the company attempts to build out these two new markets, but over the long term we expect they will be successful. Gentherm (THRM) and Vascular Solutions (VASC) continue to be two of the Fund s best performing stocks so far this year. As the major provider of heated, cooled and vented seats and other solutions for automobile manufacturers, Gentherm continues to benefit from increased penetration of the traditional automobile market while a recent win in the hybrid/electric market creates a significant new opportunity for the company. Vascular Solutions just continues to deliver strong results. The company is constantly developing strong new products for its sales force to push into the medical instrument market, and its core products have consistently shown strong growth. With the pullback in small cap stocks, valuations are now just a bit above their long term averages. A stronger dollar and lower commodity prices have led to slower growth, with revenue growth now in the mid-single digit range. Our expectations from here are a bit more upbeat as valuations have come in, and earnings and revenue growth should start to improve as we begin to anniversary difficult currency and commodity headwinds later this year and early next year. Andrew R. Adams Lead Manager Allen D. Steinkopf Co-Manager The Fund s investment objective, risks, charges and expenses must be considered carefully before investing. The summary prospectus or full prospectus contains this and other important information about the Fund, and they may be obtained by calling Shareholder Services at (800) or visiting Read the summary prospectus or full prospectus carefully before investing. The stocks mentioned herein represent the following percentages of the total net assets of the Mairs & Power Small Cap Fund as of September 30, 2015: ALLETE, Inc 2.51%, Buffalo Wild Wings, Inc. 1.92%, Cardinal Financial Corp. 3.09%, Cardiovascular Systems, Inc. 1.70%, Casey s General Stores, Inc. 2.69%, Cray Inc. 3.15%, Gentherm Inc. 2.50%, Generac Holdings 2.33%, International Business Machines (IBM) 0.00%, NVE Corp 1.65%, PrivateBancorp, Inc. 3.16%, United Fire Group 3.65%, VASCO Data Security International, Inc. 2.29%, Vascular Solutions, Inc. 1.31%, Wintrust Financial Corporation 3.54%. All holdings in the portfolio are subject to change without notice and may or may not represent current or future portfolio composition. 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.

6 (MSCFX) Third Quarter Results September 30, 2015 Average Annual Total Returns (%) As of 9/30/15 Quarter (1) 1 Year 3 Year Since Inception (2) Mairs & Power Small Cap Fund (3) S&P 600 Index TR (4) Lipper Small-Cap Core Funds Index (5) Expense ratio: 1.07% Inception: 8/11/2011 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. For most recent month-end performance figures, visit or call Shareholder Services at (800) (1) Periods less than one year are not annualized. (2) Since inception performance is as of August 11, 2011, which was the offering date of the Small Cap Fund. (3) Performance information shown includes the reinvestment of dividend and capital gain distributions, but does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. (4) The S&P 600 Small Cap Total Return (TR) is an index of small-company stocks managed by Standard and Poor s that covers a broad range of small cap stocks in the United States. The index is weighted according to market capitalization and covers about 3-4% of the total market for equities in the United States. 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 into the index. It is not possible to invest directly in an index. (5) Lipper Small-Cap Core Funds Index measures the performance of the 30 largest mutual funds in the small capitalization range, as determined by Lipper, Inc. It is not possible to invest directly in an index. All investments have risks. Mairs & Power Small Cap Fund is designed for long-term investors. The Fund s share price can fall because of weakness in the broad 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 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. This commentary includes forward-looking statements such as economic predictions and portfolio manager opinions. The statements are subject to change at any time based on market and other conditions. No predictions, forecasts, outlooks, expectations or beliefs are guaranteed. ALPS Distributors, Inc. is the Distributor for Mairs & Power Funds. MAIRS & POWER MNP /31/2016 W-1520 FIRST NATIONAL BANK BUILDING 332 MINNESOTA STREET ST. PAUL, MN TEL FAX mairsandpower.com