| ANNUALIZED SINCE INCEPTION | QUARTERLY | YTD |
|---|---|---|
| 11.3% | - | 4.0% |
| 2025 | 2024 |
|---|---|
| 4.0% | 7.3% |
The Mairs & Power Small Cap Fund returned 3.98% in 2025, underperforming benchmarks as AI and market concentration dominated headlines. While AI infrastructure spending reached unprecedented levels with McKinsey projecting $7 trillion in global capex needs by 2030, the managers see signals of a higher-risk phase emerging with excessive capital flows and unusual financing structures. Small cap companies showed their first earnings growth in three years at 13%, benefiting from a softening labor market and Fed rate cuts. The Fund's underperformance was driven by stock selection challenges, particularly in healthcare names like Inspire Medical and CVRx, though Exact Sciences provided a positive contribution before being acquired by Abbott. The managers added Bentley Systems, focusing on infrastructure software demand. Looking ahead, they see multiple tailwinds for small caps including continued rate cuts, potential regulatory relief, and earnings growth expected to match or exceed the S&P 500 by 2027. With small caps trading at significant discounts, they believe the Fund is well-positioned for long-term investors as markets potentially broaden beyond large cap concentration.
Small cap stocks present an attractive long-term opportunity as they trade at significant discounts to large caps while showing first signs of earnings recovery after three years of contraction, with supportive tailwinds from lower interest rates and potential regulatory relief.
The managers believe they are entering a transition period for AI with higher risk signals emerging. They expect lower interest rates to provide tailwinds, and see multiple reasons to feel optimistic about the small cap environment with earnings expected to keep up with the S&P 500 and potentially outgrow it in 2027. They believe the Fund is well positioned as an opportunity for long-term investors as the market potentially broadens to include small caps.
| Date | Letter | Tickers | Keywords | Pitches | Quick Takes |
|---|---|---|---|---|---|
| Jan 18 2026 | 2025 Q4 | ABT, AIR, BSY, CASY, CVRX, EXAS, INSP, KNF, MEDP, MGPI, NVT, WK | AI, earnings, healthcare, rates, small caps, technology, Valuations | - | AI and increasing market concentration took center stage in 2025, with the rate of investment in technology and AI infrastructure spending driving market narrative. McKinsey projects nearly $7 trillion in capital expenditures will be needed worldwide by 2030 to build up AI infrastructure. The managers believe they are entering a transition period for AI, with signals that the cycle is moving into a higher risk phase given the flood of capital and unusual financing structures. Small cap companies are showing their first signs of earnings growth recovery after three years of contraction, posting 13% growth in 2025. Small cap stocks are still trading at a significant discount to the S&P 500, which the managers believe presents an attractive opportunity for long-term investors. Lower interest rates, reduced corporate tax burdens, and regulatory relief could offer further support to small caps. The Federal Reserve cut rates in the fourth quarter with expectations for lower interest rates continuing into 2026. Lower rates should provide a tailwind to profitability for smaller companies and make it easier for them to find talent. Interest rate changes take time to work through the economy, typically around a year to feel the effects. |
| Oct 24 2025 | 2025 Q3 | AZEK, INSP, MEDP, PATK | AI, Housing, infrastructure, small caps, valuation | PATK | The fund highlights narrow market leadership dominated by mega-cap AI stocks while small caps trade at a notable discount despite earnings stability. Managers emphasize opportunities in industrial and building products benefiting from data-center infrastructure and housing demand. They maintain a disciplined valuation approach amid tariff uncertainty and interest-rate cuts. |
| Jul 18 2025 | 2025 Q2 | AZEK, CGNX, HUBG, NEOG, RDNT, TECH, WK | fundamentals, Mean reversion, small caps, Valuation gap, volatility | - | The fund emphasizes the long-term opportunity in undervalued small-cap companies amid valuation dispersion. Management notes that fundamentals remain intact despite near-term macro and rate headwinds. Small caps are positioned as a fertile area for future mean reversion. |
| May 1 2025 | 2025 Q1 | AZEK, CASY, CGNX, HUBG, LFUS, NEW | - | - | |
| Dec 31 2024 | 2024 Q4 | CWAN, LTH, MGPI | - | - | |
| Sep 30 2024 | 2024 Q3 | AZEK, CASY, CLFD, CVRX. MGPI, EMTG, LTH, TNC, TTC, WK | - | - | |
| Jul 23 2024 | 2024 Q2 | CASY, CLFD, CVRX, MEDP | - | - | |
| Apr 15 2024 | 2024 Q1 | AZEK, CLFD, CVRX, DOC, KNF, MEDP, NVT, WK | - | - | |
| Jan 28 2024 | 2023 Q4 | ALTR, AZEK, CLFD, INSP, KNF, PIPR, THRM | - | - | |
| Sep 30 2023 | 2023 Q3 | AZEK, CLFD, DCI, FIBK | - | - | |
| Jun 30 2023 | 2023 Q2 | ALTR, ENTG, ENV | - | - | |
| Apr 19 2023 | 2023 Q1 | - | - | - | |
| Feb 2 2023 | 2022 Q4 | - | - | - |
| QUARTER | THEMES | TAGS |
|---|---|---|
| 2025 Q4 |
AIAI has been integrated into RGA's research process through tools like NotebookLM, Gems in Gemini, and Claude Code. The firm views AI as a force multiplier for human judgment rather than a replacement, emphasizing the Kasparov Law principle. They believe the market narrative around AI displacement is swinging to unhelpful extremes, creating investment opportunities. |
Machine Learning Automation Software Productivity Innovation |
RatesFederal Reserve resumed rate-cutting cycle with first cut since December 2024, signaling resumption of easing. Expected three cuts of 25bps between now and first quarter 2026 as Fed responds to signs of weakness in US labor market. |
Fed Monetary Policy Labor Market Easing Liquidity | |
Small CapsSmall caps getting strong start in 2026 supported by easing monetary conditions and constructive fiscal backdrop. Small caps more sensitive to economic cyclicality which is overdue for expansion. Expected to grow at better pace than large caps in 2026 after long period of underperformance. |
Value Growth Cyclical Monetary Policy Fiscal Policy | |
| 2025 Q3 |
AIAI has been integrated into RGA's research process through tools like NotebookLM, Gems in Gemini, and Claude Code. The firm views AI as a force multiplier for human judgment rather than a replacement, emphasizing the Kasparov Law principle. They believe the market narrative around AI displacement is swinging to unhelpful extremes, creating investment opportunities. |
Machine Learning Automation Software Productivity Innovation |
InfrastructureDigital 9 Infrastructure holds telecom infrastructure assets including Arqiva stake. Despite poor 2025 performance, potential capital returns and asset sales could unlock value. Infrastructure assets provide defensive characteristics. |
Telecom Infrastructure Digital Infrastructure | |
Small CapsSmall caps getting strong start in 2026 supported by easing monetary conditions and constructive fiscal backdrop. Small caps more sensitive to economic cyclicality which is overdue for expansion. Expected to grow at better pace than large caps in 2026 after long period of underperformance. |
Value Growth Cyclical Monetary Policy Fiscal Policy | |
| 2025 Q2 |
SmallCaps |
| Date | Pitch Type | Author | Ticker | Company | Industry | Sub Industry | Bull / Bear | Exchange | Keywords | Action |
|---|---|---|---|---|---|---|---|---|---|---|
| Oct 24, 2025 | Fund Letters | Mike C. Marzolf | PATK | Patrick Industries Inc. | Consumer Discretionary | Building Products | Bull | NASDAQ | Housing, manufacturing, Outsourcing, recovery, RV, tariffs, valuation | Login |
| TICKER | COMMENTARY |
|---|---|
| ABT | Exact Sciences, which was acquired for a significant premium by Abbot Laboratories in November |
| AIR | AAR Corp. is a global aerospace and defense aftermarket services provider that supports commercial airlines and government customers through parts distribution and supply-chain solutions, as well as maintenance, repair, and overhaul services—an area we believe is structurally supported by high aircraft utilization and an aging fleet. During the quarter, shares detracted from performance amid investor uncertainty following the company's early-December announcement of a Chief Financial Officer transition; however, we believe underlying demand trends across AAR's end markets remain healthy. |
| BSY | BSY provides infrastructure engineering software used in the design and operation of transportation, utilities, and industrial assets. The stock traded lower as revenue growth decelerated modestly and margins were affected by increased investment in product development and go-to-market initiatives. |
| CASY | We trimmed Casey's on strength, and the stock's roughly flat performance compared favorably with benchmark's sector returns, which declined nearly -11%. |
| CVRX | CVRx, which develops, manufactures, and sells neuromodulation devices that improve heart failure symptoms, experienced a change in management and a painful technology transition that's negatively impacted the company. |
| EXAS | The largest single contributor was Exact Sciences, which was acquired for a significant premium by Abbot Laboratories in November, resulting in an +86% return in the quarter for one of our higher-conviction positions. |
| INSP | Inspire Medical had a difficult first three quarters of the year due to challenges rolling out a new version of their product, and delays setting up reimbursement codes and billing software. The stock rebounded somewhat in the fourth quarter, but it wasn't enough to overcome the weakness earlier in the year. Inspire's product offering and differentiation in the market is still a strength, and supportive of continued leadership in a large addressable market, which is why we have stuck with the stock. |
| MEDP | Medpace was the Fund's largest contributor in H1 FY26, having been among its largest detractors over the prior 12 months. Medpace is a US-listed clinical research organisation focused on small biotechnology companies. After four consecutive quarters of elevated project cancellations, Medpace delivered a strong inflection in fundamentals, reporting very robust net bookings growth in Q2 and Q3 FY25, alongside stronger-than-expected guidance for FY26. |
| MGPI | Difficult conditions across the beer/wine/spirits industry have impacted MGP Ingredients as the company continues to work through elevated bourbon inventory levels. We believe those cyclical pressures will likely ease in the coming quarters, and the company's premium brands and market share still support our optimism for long-term growth. |
| NVT | nVent had a positive 2025 due to surging data center demand related to liquid cooling of servers and a key acquisition helping to improve revenue. |
| WK | the largest detractor was Workiva (-8.4%), which fell on no material news. The global reporting and compliance platform is one of the most recent additions to our portfolio |
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