In this Fund update, Kevin Earley, lead manager of the Mairs & Power Balanced Fund, and Brent Miller, co-manager, discuss the Fund’s returns, drivers of performance in 2024, and what to look for in 2025. This was recorded on January 27, 2025.
Executive Summary
As we close the year, we want to announce the planned retirement of Robert W. Thompson, co-manager of the Mairs & Power Balanced Fund, at the end of June 2025. Bob has played an important role in the success of Mairs & Power since he joined the firm in 2016, and his contributions will be greatly missed.
In 2024, the Mairs & Power Balanced Fund returned 9.60%. 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 15.01%, while the Fund underperformed the Morningstar Moderate Allocation peer group, which rose 11.29%.
While the Balanced Fund’s asset allocation contributed positively to relative performance due to the outperformance of equities versus bonds, the Fund’s diversified approach left the portfolio underexposed to the mega-cap Technology stocks that drove the market’s positive performance.
Equities Sector Performance
The Technology sector was the largest contributor to the Fund’s lagging equity performance in 2024 due to an underweight allocation to the sector combined with relative underperformance of individual holdings. The Industrials sector also weighed on results and the Health Care sector faced challenges as well, with higher payouts and product development issues hurting a few of the Fund’s individual holdings.
The Financials sector was a positive contributor to performance in 2024, with several FinTech and major banks benefiting from resilient economic conditions and higher interest rates.
Positive Stock Performance
The Fund's overweight stance in equities was a net positive to full-year performance, with stocks representing 64% of portfolio assets at year-end. Positive contributions came from Fiserv (FI), which outperformed due to heavy investments in digital and mobile technology solutions, as well as JP Morgan Chase & Co. (JPM) and Wells Fargo (WFC), which benefited from a steeper yield curve, leading to improved earnings expectations. American Express (AXP) also saw gains from higher consumer spending and lower expected levels of charge-offs. Eli Lilly (LLY) was another positive contributor, driven by optimism for its GLP-1 weight loss treatment.
Negative Stock Performers
As was previously noted, the most significant factor impacting relative underperformance was the Technology sector, particularly the absence of NVIDIA (NVDA) and Broadcom (AVGO) from the portfolio. Companies like Toro (TTC), Graco (GGG), and Rockwell Automation (ROK) underperformed due to weak demand and inventory issues. UnitedHealthcare (UNH) and Medtronic (MDT) impacted relative performance as well.
Fixed Income Performance
The fixed income portion of the Mairs & Power Balanced Fund outperformed its primary benchmark, the Bloomberg U.S. Government Credit Index, in 2024. Corporate bond spreads compressed during the year and held at relatively low levels into the end of the year, benefiting the Fund due to its overweight position in corporate bonds and strategic security selection. The Federal Reserve's rate cuts happened more slowly than anticipated, largely due to heightened expectations for continued economic growth and stickier inflation. These factors contributed to rising interest rates, with the 10-year Treasury yield increasing from 3.88% at the start of 2024 to over 4.5% by year end. The Fund's short duration relative to the index proved advantageous in this environment.
Outlook for 2025
Looking ahead, the Fund’s managers believe the outlook for profit growth remains favorable, with expectations for low double-digit corporate earnings growth and broader participation across companies. The Fund will continue to manage its portfolio to achieve an appropriate balance between risk and return, maintaining a long-term focus on stock selection and valuation discipline. On the fixed income side, the strategy will remain focused on bottoms-up credit selection and capturing excess spread versus Treasuries, with a slightly short duration relative to the benchmark to minimize sensitivity in 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.
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.