Listen to Kevin Earley and Bob Thompson, portfolio managers of the Balanced Fund, as they talk with Scott Howard, VP, Investor Relations Manager, on July 16, 2020 to provide an update on current economic and market conditions and their impact on the Mairs & Power Balanced Fund.
The Mairs & Power Balanced Fund experienced a dramatic tale of two quarters in the first half of 2020. The equities side of the portfolio saw a significant decline in the first quarter as the pandemic took hold. In the second, the Fund’s stock holdings rebounded as government stimulus programs began to take effect.
On the fixed income side, the corporate bond market sold off tremendously in March. The Fund is allocated primarily to corporate bonds, and those were hit very hard in March, and in the first quarter overall. But in the second quarter, the Fund recovered about one-third of the corporate bond performance that it had lost.
The Balanced Fund has underperformed its equities benchmark so far this year. There have been two notable headwinds here:
- Our underweight allocation in Technology, which has been the market’s best performing sector. We do own Microsoft and Google parent Alphabet, which helped somewhat.
- Our overweight in Financial, a sector that has been hit hard this year. The stocks that significantly hurt Fund performance were the large bank holding companies, notably JP Morgan, Wells Fargo and U.S. Bancorp. Their underperformance is due to the expectation of increased credit losses during the economic slowdown, as well as a flattening yield curve, which will make it difficult for them to earn interest income.
The sectors that helped our performance were Health Care and Consumer Staples, which held up particularly well during the first quarter selloff. Among our stronger performers were Eli Lilly and Roche in Health Care and Hormel in Consumer. We have trimmed some of our positions in these sectors to pursue buying opportunities elsewhere.
Fixed Income Performance
Corporate bonds typically pay about 1% or more over treasuries. During a recessionary time, treasuries greatly outperform corporates. But we’ve held to our corporate bond allocation strategy for a decade, and the corporate bond market has always recovered. In the second quarter, it did just that, with corporate bonds once again outperforming treasuries.
Needless to say, the current environment remains quite uncertain. (A COVID-19 vaccine would clear up a great deal of that uncertainty.) But there has been considerable government support for the economy and for individuals. So the market is looking ahead to 2021 and 2022 and seeing better economic conditions.
- Equities: We expect continued volatility. But as long as we’re able to make progress on containing the virus, and government continues to provide support to the economy, the next couple of years appear to be trending upward.
- Fixed income: The Federal Reserve appears to be fully supportive of the economy, and we expect it to keep interest rates low. So we also anticipate corporate bonds could continue to provide relatively good returns. Those returns won’t duplicate those of the first half, which were remarkably strong. But overall, the corporate bond market prospects appear solid.
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.
Yield curve is a visual represenation of the yield relationship between bonds of the same credit quality and different maturities.