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Bill Frels' Mairs & Power Growth Fund First Quarter 2014 Commentary

March 31, 2014

Growth Fund Performance

The Mairs & Power Growth Fund gained 1.28% for the first quarter ending March 31, 2014, slightly underperforming its benchmark, the Standard and Poor's 500 Total Return (TR) Index, which finished the period up 1.81%, and the Lipper Multi Cap Core, its peer group, at 1.66%.

Supercomputer manufacturer Cray, Inc. (CRAY) proved to be the strongest contributor to portfolio performance, gaining 35.91% for the period due in large part to the strength of its management. We believe much of the credit for the firm's success should go to Chief Executive Officer Peter Ungoro and the team he has built since leaving IBM. He has positioned the company within its traditional supercomputer business with an internally-developed adaptive computing technology that gives Cray computers the flexibility to offer CPU (Central Processing Unit) and GPU (Graphical Processing Unit) from several chip manufacturers rather than being tied to just one. As a result, Cray can use the best technology available as well as allow customers to later upgrade or reconfigure their systems if they choose. In addition, while traditionally focused on Government contracts, Mr. Ungoro has positioned the firm to grow within the emerging field of Big Data and expand its base of commercial customers. Commercial revenue accounted for just 20% of total revenue in 2012. The company's new offerings in Big Data should create significant room to grow that segment of its business over the next several years.

U.S. Bancorp (USB), headquartered in Minneapolis, also finished the period as one of the Fund's top five performance contributors. While the quarter remained challenging for many other banks locked into low-margin banking activities, U.S. Bancorp advanced 6.09% for the period, with a solid performance advantage relative to its peers. While many of its competitors contend with defensive measures and diminished growth prospects, U.S. Bancorp's principled adaptation of risk management controls following the financial crisis of 2008-2009 has placed it ahead of the competitive and regulatory curve. Recognized by both their current commercial customers and financial regulators for its integrity and financial soundness, U.S. Bancorp enjoys one of the highest credit ratings available. Over the years, U.S. Bancorp has quietly cultivated and expanded its lucrative commercial lending operations, as well. We have been steadily acquiring and holding the company's stock for some years, purchasing at attractive prices when the market does not recognize its value.

On the other side of the equation, our position in C.H. Robinson Worldwide, Inc. (CHRW) with a decline of 10.20% for the quarter was the largest detractor from performance, in part due to falling short on fourth quarter earnings estimates. A freight shipping firm located in Eden Prairie, MN, C.H. Robinson also provides global supply chain consulting and logistics management.

Packaging and adhesive manufacturer H.B. Fuller (FUL) also disappointed, declining 7.23% due to weak revenue in Europe and slower than expected sales growth in the Americas. This company, along with Emerson Electric Company (EMR), which also detracted from the portfolio, was affected by the market's rotation out of industrials stocks.

Staying true to our disciplined process, we see the underlying valuations of these firms to be intact and are not contemplating any adjustments to their positions at this time. C.H. Robinson and H.B. Fuller are located in the Upper Midwest; we find that there is great value in on-site tours and face-to-face discussions with the decision makers who oversee the companies we select on behalf of our shareholders.

Overall, while we do not expect returns to be as strong for the Fund as we experienced in 2013, we believe our companies to be strong long-term opportunities. With valuation multiples across the market currently slightly above historical levels, further increases in stock prices over the coming months will depend on revitalized earnings and greater corporate revenue.

Mark L. Henneman

Lead Manager

William B. Frels


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) 304-7404 or visiting www.mairsandpower.com. 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 Growth Fund as of March 31, 2014: 3M Company 3.93%, C.H. Robinson Worldwide, Inc. 1.80%, Cray Inc. 0.92%, Emerson Electric Co. 3.48%, H.B. Fuller Company 2.91%, Hormel Foods Corporation 2.67%, Medtronic, Inc. 3.83%, Schlumberger Ltd. 3.30%, Target Corporation 3.22%, U.S. Bancorp 4.17%.

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.

Price to Earnings (P/E) Ratio is a common tool for comparing the prices of different common stocks and is calculated by dividing the current market price of a stock by the earnings per share. The P/E ratio is not a measure of future performance or growth.

Earnings Per Share (EPS) is calculated by taking the total earnings dividend by the number of shares outstanding.

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This article first appeared on GuruFocus.