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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
|---|---|---|---|---|---|---|---|
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"Constructive on high-quality small-cap equities entering an earnings recovery cycle, selectively adding resilient healthcare in $LH while maintaining disciplined exposure to differentiated industrial and AI infrastructure compounders."
The Mairs & Power Small Cap Fund recorded a net-of-fees return of -11.42% for the third quarter of 2026, trailing the Russell 2000 Total Return Index benchmark return of -7.23% and the S&P SmallCap 600 TR return of -6.93%. Year-to-date through September 30, 2026, the Fund gained 10.98% net of fees compared to 13.71% for the Russell 2000 TR and 14.08% for the S&P SmallCap 600 TR. Relative underperformance over the first nine months stemmed primarily from stock selection, which offset favorable sector allocation as small-cap equities retraced first-half advances amid rate pressures. The macroeconomic environment was characterized by resilient broader economic growth accompanied by persistent inflationary headwinds, driven by geopolitical conflict with Iran and oil trading near $100 per barrel. Long-term interest rates ascended, with the ten-year Treasury yield ending at 5.25% following a Federal Reserve rate hike. While massive capital investment into artificial intelligence infrastructure continues toward an anticipated $1 trillion by 2027, the strategy maintains a conservative stance against cyclical hardware commoditization while anticipating a cyclical recovery in small-cap corporate earnings after two years of contraction. Key positive performance drivers year-to-date included technology and industrial compounders Entegris, Cognex, Plexus, Littelfuse, and nVent Electric, which benefited from robust AI-related infrastructure and automation demand. Performance detractors included Patrick Industries, JBT Marel, Knife River, Hub Group, and Workiva, pressured by higher interest rates and end-market uncertainty. Portfolio activity featured the initiation of a 2.02% position in diagnostic testing leader Labcorp Holdings, while executing zero portfolio exits during the quarter.
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