Listen to Kevin Earley and Bob Thompson, portfolio managers of the Balanced Fund, as they talk with Scott Howard, VP, Investor Relations Manager, on January 21, 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 10.11% in the fourth quarter, while its benchmark composite index (60% S&P 500 Total Return Index and 40% Bloomberg Barclays U.S. Government/Credit Bond Index) gained 7.66%. For all of 2020, the Fund was up 10.44% and the benchmark rose 15.30%. The Fund’s other benchmark, the Morningstar U.S. Fund Allocation, gained 10.06% in the fourth quarter and was up 11.34% for the entire year.
We were encouraged by our performance versus the benchmark during the fourth quarter, when the market’s recovery started to broaden. Looking ahead, we are optimistic that economic conditions will improve in 2021.
The Fund’s long-term bias towards value stocks, small and mid-cap stocks, and regionally headquartered stocks were all headwinds to relative performance. The most significant factor detracting from the Fund’s 2020 performance was our underweight in Technology, though we have added weight to the sector in recent years.
Our overweight in Healthcare and Industrials also hurt performance, though we offset some of that drag with strong stock selection. We believe our current holdings in these sectors have long-term competitive advantages and attractive evaluations.
Another headwind was our overweight in Financials. Banks and credit card issuers have lagged the market due to concerns over unfavorable interest rates and rising loan losses. These concerns should ease as economic conditions improve.
In the fourth quarter, the Fund added Activision, a leading player in the videogame industry. The company should experience strong, long-term earnings growth due to its industry leadership position, the increasing participation in videogaming, and favorable demographic trends. The Fund also exited General Mills, Great Western Bank, and Chevron due to concerns about their competitive positioning and long-term earnings growth.
Fixed Income Performance
The Fund’s fixed income portfolio experienced a second consecutive year of good returns. Both Treasuries and corporate bonds ended the year with strong results, despite a great deal of volatility last year. Our long-term overweight in corporate bonds hurt performance in the first half of the year as these bonds’ spreads widened significantly due to the negative market impacts from COVID-19. But corporate bonds have always rallied back strongly. Over the full economic cycle, we have generally earned the excess spreads that corporates pay over Treasuries.
Over the past couple of years, we have been trading up in credit quality. During this time, the Fund’s fixed income average rating has remained steady while the average rating of the government credit index has dropped two notches. Our ratings have demonstrated the positive impacts from our credit upgrade trades.
Credit selection added to relative performance in 2020, while our slightly short duration stands detracted from that performance. But we feel comfortable with our positioning going forward. The Federal Reserve plans to keep short-term interest rates very low until both inflation and unemployment get closer to its objectives. Assuming an effective vaccination program and a strong reopening of the economy by the second half of 2021, longer-term interest rates might move up a bit this year.
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.