Listen to Kevin Earley and Bob Thompson, portfolio managers of the Balanced Fund, as they talk with Scott Howard, VP, Investor Relations Manager, on April 26, 2021 to provide an update on current economic and market conditions and their impact on the Mairs & Power Balanced Fund.
The Mairs & Power Balanced Fund returned 4.92% in the first quarter of 2021, while its benchmark composite index (60% S&P 500 Total Return Index and 40% Bloomberg Barclays U.S. Government/Credit Bond Index) rose 1.93%. The Fund’s other benchmark, the Morningstar U.S. Fund Allocation, gained 4.20% in the first quarter.
The macro tailwinds that aided the Fund’s relative performance in the fourth quarter of 2020 continued in the first quarter of 2021. We received positive relative performance from both the equity and fixed income portions of the portfolio.
The Fund's performance benefited from favorable asset allocation as stocks (where we were overweight) outperformed bonds. Our investment process seeks to drive most of the Fund’s performance through stock selection. This quarter, stock selection was indeed the largest driver of relative performance.
The Fund’s macro leanings towards value stocks, small and mid-cap stocks, and regionally headquartered companies weighed on relative performance in 2020. But the Fund outperformed its benchmark in the last quarter of the year, when the market started to broaden out.
In the first quarter of 2021, our overweight in Financials aided performance as the interest rate environment improved markedly and credit conditions looked better than originally feared. Our underweight in Technology also helped performance, since this sector lagged cyclicals and value stocks. These benefits were partly offset by our overweight in Healthcare, which also lagged cyclicals, and our underweight in Energy.
Two stocks contributed markedly to our favorable selection: Google, which benefited from broad-based strength across all its businesses, particularly advertising. U.S. Bancorp, which benefited from the steepening yield curve and strong credit performance.
On the flip side, drug manufacturer Roche lagged the market due to its stable earnings profile as investors pursued cyclicals, which are better levered to improving global economic conditions. And technology firm Qualcomm underperformed the market due to short-term pressure on chipset supplies.
After a challenging year for profits in 2020, we expect to see a rebound in corporate earnings and dividend growth over the next couple of years. This improvement in profitability is likely to be offset by pressure on market valuation levels, since the market at some point will begin to price in an eventual slowdown in earnings growth. Rising interest rates could be another headwind.
We also are seeing many companies cite supply chain pressures in their quarterly earnings reports. But we believe that the companies that the Fund invests in have competitive advantages that allow them to pass on any short-term cost increases to their customers.
Fixed Income Performance
The fixed income market’s volatility last year allowed us to execute trades that upgraded both the relative yield and the credit quality of the Fund’s fixed income portfolio. For all of 2020, our performance was in line with the government credit bond index, with our credit selection helping relative performance and our slightly short duration stance hurting it.
In the first quarter of 2021, our fixed income portfolio continued to enjoy tailwinds from positive vaccine news and continued improvement in economic growth. Strong economic expectations have been pushing interest rates upwards. This has resulted in solid outperformance for the Fund’s fixed income portfolio, with contributions coming from both our credit selection and our shorter duration stance.
The attractive relative value opportunities that existed a year ago are now more difficult to find. However, we are still discovering good opportunities to generate yields of 3% to 4% thanks to the overall rise in interest rates. We believe credit will continue to be strong due to the improving economy. We're not projecting large moves in interest rates, but overall rate levels could move a bit higher in 2021 if the economy is as strong as expected.
Top 10 Fund Holdings (subject to change)
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.