Listen to Kevin Earley and Bob Thompson, portfolio managers of the Balanced Fund, as they talk with Scott Howard, VP, Investor Relations Manager, on October 19, 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’s favorable year-to-date performance versus our benchmark and peers reflects the continuation of trends that began last fall, when investors became more optimistic around improving economic conditions. Click Here for the standardized performance.
Asset allocation also has been a net positive to year-to-date performance. We have been overweight equities, which outperformed bonds and ended the third quarter at 66% of total Fund holdings. By asset class, our year-to-date performance has been mixed. The stock side of our portfolio has lagged the S&P 500, while the bond side has outperformed its primary benchmark.
The biggest headwind to the Fund’s year-to-date equity performance was our overweight in the Industrial sector, which lagged the broader benchmark. Our stock selection was also a drag on performance. Several holdings have trailed the market in 2021 after strong outperformance last year.
The Technology sector was also a headwind to year-to-date performance. Fiserv has lagged due to concerns about near-term competition in its payments business. Visa has been hampered by the slowdown in international travel, which has hurt its lucrative cross-border payments processing business. And Qualcomm underperformed early in the year due to a shortage of chipset products.
In addition, our performance was negatively impacted by our zero-weight allocation toward Energy, the best-performing sector so far in 2021. We remain comfortable with our positioning. We believe Energy will be challenged over the long term by increased supply for renewable resources, as well as slower long-term demand due to the adoption of electric vehicles.
On the flip side, relative performance was positively impacted by Financials, one of the strongest sectors in the market this year, and one where we have an overweight. Several of our bank holdings have benefited from an improving interest rate environment as well as expectations for lower credit losses associated with broad-based economic improvement.
We also saw strong performance in Communications Services. Google, the portfolio's largest holding, has outpaced the market due to broad-based strength across its product portfolio. In addition, we experienced powerful performance in Consumer Cyclicals thanks to our two retail holdings, Target and Home Depot.
Fixed Income Performance
The portfolio's positive overall returns slightly beat the benchmark during the quarter. This was due to credit selection, the primary element of fixed income outperformance. Year to date, the generally higher rates have played in our favor, since the Fund is slightly short duration. The continued tightening of spreads on some corporate bonds has also helped. On a year-to-date basis, the overall returns of the bond index are down nearly 2%, while the Fund has posted a positive absolute return. Again, our credit selection was the primary driver.
After its September meeting, the Federal Reserve made it clear that it intends to start winding down its bond-buying program within a year, and that it will likely be navigating short-term rate hikes in the next two years. The market reaction was a slight uplift in rates, although this largely offset some rate declines from earlier in the quarter. The fixed income market is now prepared for slightly higher rates.
Credit spreads are quite tight, making the relative attractiveness of corporate bonds somewhat more limited than in the past. We continue to find good opportunities as we invest consistently and defensively for the long term, relying on credit underwriting and taking advantage of relative valuation between different areas of fixed income.
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.
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.