Mairs & Power's Small Cap Fund Navigates Turbulence with Benchmark Shift and Sector Shifts

The first quarter of 2025 was a rollercoaster for small-cap investors, with the Russell 2000 Total Return Index plunging -9.48%—far outpacing the broader market's decline of -4.27% for the S&P 500. Amid this volatility, the Mairs & Power Small Cap Fund made a bold move: swapping its longtime benchmark, the S&P SmallCap 600 TR Index, for the Russell 2000 TR Index. This strategic pivot isn't just about semantics—it's a clear signal that the fund is repositioning to weather macroeconomic storms while hunting for overlooked gems in defensive sectors. Let's dissect why this matters and whether this fund is worth your attention.

Why the Benchmark Switch Matters

The S&P SmallCap 600 has been the fund's North Star since its 2011 launch, but it's now giving way to the Russell 2000. Why? Three reasons:
1. Regulatory Preparedness: The SEC's upcoming Rule 35d-1 “Names Rule” (effective 2026) could force funds to dump securities that don't fit their stated focus. The Russell 2000's broader market coverage offers more flexibility.
2. Deeper Diversification: The Russell includes 2,000 stocks, versus the S&P's 600, giving Mairs & Power room to hunt in overlooked niches.
3. Alignment with Reality: The Russell has historically better captured small-cap volatility, making it a sterner test of the fund's skill.

But here's the catch: in Q1 2025, the fund's performance—while not disclosed in full—likely lagged its old benchmark. The S&P SmallCap 600 TR's -4.27% return looked rosier than the Russell's -9.48%, but that's precisely why this shift is smart. The Russell's steeper drop underscores the brutal conditions small caps faced, and by adopting it, Mairs & Power is saying, “We're not hiding—we're adapting.”

Sector Reallocations: Betting on Defensives

The fund's Q1 commentary hints at a tactical shift toward defensive sectors, even if precise allocations aren't spelled out. Here's what we know:
- Focus on Durable Businesses: The fund's creed—investing in companies with “durable competitive advantages and favorable valuations”—aligns with sectors like healthcare, utilities, and consumer staples, which held up better in Q1's downturn.
- Weakness in Cyclicals: Sectors like tech and industrials, which rely on economic expansion, likely dragged down performance. The fund's low turnover (a hallmark of its long-term approach) suggests it's sticking to its winners rather than panic-selling.

The Risks—and Why They're Manageable

Small-cap investing is inherently riskier. The fund's prospectus warns of “higher volatility compared to larger companies”, and Q1's double-digit drop in the Russell 2000 is proof. But here's why I'm not hitting the panic button:
1. Long-Term Focus: The fund's average holding period is years, not months. The current downturn is a buying opportunity for companies with “attractive niches”—think regional banks or niche healthcare providers.
2. Minnesota Muscle: The fund's historical emphasis on Upper Midwest companies (e.g., healthcare services, industrials) has historically insulated it from national volatility.
3. Dividend Discipline: Unlike many small-cap funds, Mairs & Power distributes dividends annually in December, rewarding patient investors.

Should You Buy Now?

The answer hinges on your risk tolerance. If you're a long-term investor (5+ years) and can stomach volatility, this fund's repositioning is a buy signal. The Russell 2000's broader scope and the fund's focus on defensive sectors make it a candidate for a 5-10% allocation in a diversified portfolio.

But beware:
- Market Timing: Small caps often lag in the early stages of a recovery. Don't expect a quick rebound.
- SEC Rule 35d-1: The fund may need to sell certain holdings by 2026—a risk that's already priced in.

Final Take

Mairs & Power's Q1 moves are textbook Cramer-ian “Mad Money” strategy: aggressive, contrarian, and disciplined. By embracing the Russell 2000 and doubling down on defensives, they're positioning to thrive when the small-cap tide turns. This fund isn't for the faint of heart, but for those willing to ride out the storm, it's a rare small-cap option with a long-term edge.

Action Item: Call the fund's Shareholder Services at 855-839-2800 for the most recent performance data. If the fund's holdings align with its stated focus on durable, undervalued small caps, take a position—but set a stop-loss for a 15% drop to guard against the inevitable volatility.

Disclosure: This analysis is for informational purposes only. Always consult a financial advisor before making investment decisions.