We invite you to listen to Kevin Earley and Bob Thompson, portfolio managers of the Mairs & Power Balanced Fund, as they give an update on the market, economy and impact to the Mairs & Power Balanced Fund so far in 2024, as well as an outlook for the rest of 2024. This was recorded on July 22, 2024.
Executive Summary
The Mairs & Power Balanced Fund finished the first half of 2024 up 5.48%. The Fund lagged the benchmark composite index (60% S&P 500 Total Return Index and 40% Bloomberg U.S. Government/Credit Bond Index), which was up 8.71%, and the Fund underperformed the Morningstar Moderate Allocation peer group, which rose 6.50%.
The Fund continues to have an overweight to stocks, which slightly benefited performance as stocks outperformed bonds during the period. Stocks rose during the period as continued strength in the economy helped support expectations for earnings growth, while bonds had modest positive total returns as earned interest overpowered fluctuations in bond prices.
Equities Performance
The most significant factor impacting relative equities performance was the Technology sector, where we were hurt by being underweight in the market’s largest and best-performing sector. Most of our Technology underperformance can be explained by the absence of Nvidia from our portfolio. This was partly offset by favorable performance from some of our semiconductor holdings, which benefited from an improving demand outlook and the normalization of industry inventory levels.
The second factor hurting our relative performance was the impact from Industrials, a sector that is showing signs of slowing. Our adverse selection also weighed on results: Graco saw broad-based revenue declines, and Fastenal underperformed due to softening in the manufacturing and nonresidential construction markets. These headwinds were partly offset by nVent, which outperformed due to strong growth from its data center cooling solutions business.
The third factor that weighed on relative performance was our overweight stance in Healthcare. UnitedHealth Group underperformed due primarily to a recent cyberattack and higher payouts for healthcare coverage. Medtronic underperformed because new product development hasn’t been sufficient to drive revenue growth. And Bio-Techne lagged due to a tepid biotech funding environment. These headwinds were partly offset by Eli Lilly, where continued optimism for its GLP-1 weight loss treatment Zepbound helped the stock significantly outperform the Healthcare sector as well as the broader market.
Healthcare’s unfavorable impact was partly balanced by our underweight in the lagging Consumer Discretionary sector. But that was offset by weakness in the food sector, which has been hurt by uncertainties related to the growth of obesity drugs and their potential effect on future food demand.
Google, one of our largest positions and a top year-to-date performer, has benefited from its continued strength in online advertising and cloud computing. It’s also expected to be active in the emerging AI market. On the other hand, Minnesota-based utility Xcel Energy lagged the market due to concerns over potential liabilities related to wildfires in its Texas and Colorado subsidiaries.
Fixed Income Performance
Both credit selection and shorter duration led to relative outperformance in the Fund’s fixed income portfolio during the first half of 2024. The portfolio remains overweight to corporate bonds that are generally of shorter duration than the index.
The market is feeling more confident that interest rate cuts will begin sometime in the second half. If interest rates have in fact peaked, we should begin to see overall fixed income returns improving.
We have been gradually improving the credit quality of our holdings. As a result, the portfolio should hold up relatively well even during an economic downturn. We remain confident that our long-term strategy will outperform the market in most years and over the full economic cycle.
Outlook
In recent quarters, the largest companies have posted the best earnings growth in the market. With the Fed pivoting from rate hikes to rate cuts, we expect lower interest rates to boost the earnings growth of smaller companies, which could lead to broader market performance.
Our equity investment process remains the same: Buy companies with durable competitive advantages at attractive valuations and hold them for the long term. We believe that stock selection will be the key to our long-term investment performance.
On the fixed income side of the portfolio, our process remains focused on bottom-up credit selection, with an emphasis on corporate credits to capture excess spread versus Treasuries. From a duration standpoint, we will remain slightly short versus the benchmark to minimize our sensitivity to the current interest rate environment.
Top 10 Fund Holdings (subject to change)
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Expense ratio: 0.71%
The Composite Index reflects an unmanaged portfolio of 60% of the S&P 500 TR Index and 40% of the Bloomberg Barclays U.S. Government/Credit Bond Index. It is not possible to invest directly in an index.
Morningstar US Fund Allocation-50% to 70% Equity Category is designed to benchmark target-date and target-risk investment products. Index isbased on well-established asset allocation methodology from Ibbotson Associates, a Morningstar company. Index has 60% global equity exposure and 40% global bond exposure. It is not possible to invest directly in an index.
The S&P 500 TR (Total Return) Index is an unmanaged index of 500 common stocks that is generally considered representative of the U.S. stock market. It is not possible to invest directly in an index.
The Bloomberg U.S. Government/Credit Bond Index is a broad-based flagship benchmark that measures the non-securitized component of the U.S. Aggregate Index. It includes investment-grade, U.S. dollar-denominated, fixed-rate treasuries, government related and corporate securities. One cannot invest in an index.
Basis point is a unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001.
Duration is a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates.
Mag 7 or Magnificent 7 are a group of seven stocks: Alphabet, Amazon, Apple, Eli Lilly, Meta, Microsoft, and Nvidia.
All investments have risks and loss of principal is possible. The Balanced Fund is designedfor long-term investors.
Equity investments are subject to market fluctuations and 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 U.S. corporations.
The Balanced Fund is subject to yield and share price variances with changes in interest rates and market conditions. Investors should note that if interest rates rise significantly from current levels, bond total returns will decline and may even turn negative in the short-term. There is also a chance that some of the Balanced Fund’s holdings may have their credit rating downgraded or may default.
The Funds’ investment objectives, risks, charges and expenses must be considered carefully before investing. The prospectus and summary prospectuses contain this and other important information about the Funds, andmay be obtained by calling Shareholder Services at (800) 304-7404, or by visiting www.mairsandpower.com. Read the prospectus and summary prospectuses carefully before investing.
Foreside Fund Services, LLC. is the Distributor for the Mairs & Power Funds
The statements and opinions expressed are those of the speakers and are as of the date of this call. All information is historical and not indicative of future results and subject to change.
Scott Howard is a registered representative of Foreside Fund Services, LLC.
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. Performance as of the most recent month end is available by calling 800-304-7404.