Listen to Kevin Earley and Bob Thompson, portfolio managers of the Mairs & Power Balanced Fund, as they talk with Scott Howard, Vice President of Investor Relations, about current economic and market conditions and the impact on the Balanced Fund.
The first half of 2022 was a difficult period for the market, which has been reacting to higher interest rates and the near-term likelihood of economic weakness and lower earnings. The combination of both rising interest rates and rising credit spreads resulted in the most difficult period for fixed income investors since the early 1980s.
Looking forward, we believe the Federal Reserve (Fed) will continue to raise the Fed Funds rate further during the second half of the year, and the bond market will likely remain volatile as we see if the Fed can deliver a soft landing for the economy.
The Fund’s asset allocation negatively impacted year-to-date performance as stocks fell more than bonds during the first half. While bonds continue to have their worst year in the last 40 years, stocks fell more due to economic uncertainty in the face of higher interest rates and inflationary pressures.
The equity portion of our portfolio outperformed its primary benchmark during the first half of the year, aided by our value tilt and our security selection.
The Fund’s underweight to Technology provided a pronounced positive impact on relative equity returns, and selection within the sector added to performance. Visa and Fiserv were two positive contributors for the Fund in the second quarter. In addition, a significant overweight to Healthcare helped meaningfully with year-to-date outperformance. Eli Lilly, Johnson & Johnson, and Medtronic were positive contributors. Alphabet and Microsoft were two more selections that contibuted to positive relative returns for the Fund.
On the flip side, relative performance was adversely impacted by our underweight allocation towards Energy, the best-performing sector year-to-date because of the recent spike in oil prices. Despite the near-term strength, we maintain that traditional producers and suppliers cannot build sustainable durable competitive advantages over the long run.
The Fund's Materials and Industrial holdings, such as Ecolab, Sherwin-Williams, H.B. Fuller, and Graco, underperformed during the first half of 2022 due to hydrocarbon price increases, raw materials costs and trasportation cost pressures. We believe this price versus cost imbalance is a short-term phenomenon and that gross margins will eventually normalize.
Fixed Income Performance
Fixed income experienced a tough first half as Treasury yields rose further and credit spreads widened.
Looking forward, we see continued upheaval in interest rates and yields. We won't focus on what we can't predict, but we continue to believe the primary deteminant of outperformance in fixed income will be high quality credit decisions based on good fundamental research. As a result, we don't make large interest rate calls and will maintain our strategic position of slightly short duration with an overweight to corporate credits. In addition, portfolio quality has improved over the last two years which we think positions us well for any credit event.
Top 10 Fund Holdings (subject to change)
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The Bloomberg Barclays 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.
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.