As we start a new year, 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 in 2023, as well as the 2024 outlook. This was recorded on January 24, 2024.

 

Executive Summary

In 2023, the Mairs & Power Balanced Fund returned 13.39% versus a 17.76% return for the composite index and a 13.51% return for its Morningstar peer group. The Fund’s stocks and bonds portfolios both made a strong recovery after a challenging returns environment in 2022.

Equities Performance

The most significant macro-level factor contributing to the Fund’s strong absolute market return in 2023 was inflation, which has been trending downward since peaking in mid-2022. The Federal Reserve has signaled an end to the historic rate-hike cycle, which had weighed on market sentiment for the last 18 to 24 months.

Another factor was the performance of the Magnificent Seven. These seven Technology companies now make up almost 30% of the S&P 500’s value, and they drove about 80% of the index's performance in 2023. This narrow market was a challenge for the relative performance of diversified portfolios like ours, though the market did broaden out a bit in the fourth quarter. 

The most significant factor impacting the Fund’s relative stock performance was its underweight in Technology, the market’s best-performing sector. The lion's share of that performance gap was attributable to not owning two of the sector’s largest and best-performing stocks, Nvidia and Apple.

Also hurting relative performance was our overweight stance on the lagging Healthcare sector. This was partly offset by favorable stock selection. Eli Lilly performed very well due to investor enthusiasm for its GLP-1 franchise, which was originally developed for Type II diabetes but has recently been approved for treating obesity. By contrast, Bio-Techne lagged as a tepid biotech funding environment caused the company to push out key financial targets.

Consumer Staples also adversely impacted relative performance. The food sector has been hurt by uncertainties related to the expected growth of obesity drugs and the resulting impact on demand.

These unfavorable impacts were partly offset by positive contributions from other sectors. After a difficult first half marred by banking turmoil this spring, the Financial sector rallied as deposit flows stabilized and the economic backdrop improved. Payment and credit card processors Fiserv, Visa, and American Express benefited from continued strength in consumer spending.

We also received positive relative performance from the Materials sector. Value-added producers Ecolab and Sherwin Williams have successfully implemented pricing initiatives while raw material price pressures eased, allowing them to expand profit margins.

Fixed Income Performance

The Fund’s fixed income portfolio once again beat its benchmark, the Bloomberg Barclays Government Credit Bond Index. The Fund is overweight to corporate bonds and typically has a shorter duration to maturity than the benchmark.

Most of the outperformance in 2023 was driven by corporate spread tightening and credit selection. We outperformed because most of the negative returns were due to rising interest rates. We did see some spread widening in 2023. Our overweight to corporate credit did hurt performance somewhat in 2022, but this was overshadowed by the outperformance driven by our shorter duration.

2024 Outlook

While 2023 market returns were derived mostly from expansion of the market’s price earnings multiple, this year's performance will be more dependent on earnings growth. After little or no growth in corporate earnings last year, the consensus is for double-digit growth in 2024. There also are signs that market performance will broaden out, which should help the Fund’s diversified portfolio.

On the fixed income side of the portfolio, our process remains focused on bottom-up credit selection, with an emphasis on corporate credits in an effort to capture excess spread versus Treasuries. From a duration standpoint, we will remain slightly short versus the benchmark to minimize our sensitivity in the current interest rate environment.

 

Top 10 Fund Holdings (subject to change)

Mairs & Power Balanced Fund   

 

Click Here for standardized performance. 

Expense ratio: 0.69%

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.  

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.