Bill Frels' Mairs & Power Balanced Fund Fourth Quarter Commentary
Recently reported real Gross Domestic Product numbers for the fourth quarter showed a disappointing preliminary reading of -0.1%. Even though the slightly negative figure resulted primarily from lower government spending (mainly defense) and some inventory liquidation, growth in the more important areas of the economy such as consumer and business spending were less than most forecasters had been looking for. While some improvement seems to be taking place in recent employment figures, the basic underlying unemployment rate remains basically unchanged at just under 8%. Although at a reduced rate, corporate profits are believed to have increased during the quarter in response to continuing cost reduction programs as well as an ever increasing contribution from foreign operations.
As a consequence of efforts to improve the rate of domestic economic growth and reduce unemployment, the Federal Reserve continues to implement a very stimulative monetary policy aimed at keeping short-term interest rates at historically low levels. Longer term interest rates have similarly come under downward pressure as a result of successive quantitative easing programs using Federal Reserve credit to make open market purchases of outstanding bonds.
The Balanced Fund finished up the year with another relatively strong performance in the fourth quarter. The Fund produced an investment return of 2.36% compared to a lesser, slightly negative benchmark composite (60% S&P 500 Stock Index and 40% Barclays Gov't/Credit Bond Index) return of -0.07%. Breaking the composite down, the S&P 500 showed a negative return of -0.38% while the Barclays Gov't/Credit Index had a positive return of 0.37%. The peer group Lipper Balanced Funds Index came through with a return of 1.22%. The Fund benefited from an above average representation in the better performing financial, health care and industrial sectors on the equity side of the portfolio while also having a lower representation in the poorer performing sectors, such as consumer staples, technology and utilities. The best individual performers included Bank of America (BAC) (+31.37%), H. B. Fuller (FUL) (+13.49%), Valspar (VAL) (+11.23%), Ecolab (ECL) (+10.94%) and Murphy Oil (MUR) (+10.91 %) while the poorest performers included Sturm, Ruger (RGR) (-8.26%), IBM (IBM) (-7.66%), General Electric (GE) (-7.57%), U. S. Bancorp (USB) (-6.88%) and Target (TGT) (-6.77%). A high percentage of corporate bonds helped performance on the fixed income side of the portfolio with yield spreads continuing to narrow.
For the full year, the Fund came through with a relatively strong return of 17.34% which compared quite favorably to an 11.58% return for its benchmark composite index. The Fund also showed a strong comparison with a peer group Lipper Balanced Funds Index which came in with a lower 11.94% return. Like the fourth quarter, the Fund benefited from above average weightings in the better performing industry sectors and below average exposure to the poorer performing sectors. Turning to individual holdings, Bank of America (+108.6%), Valspar (+60.12%), Ingersoll-Rand (+57.40%), H. B. Fuller (+50.67%) and Pent air (+47.64%) did the best while SUPERVALU (-69.58%), Bristol-Myers Squibb (-7.52%), Xcel Energy (-3.36%), Corning (-2.77%) and BP PLC (-2.57%) fared the worst.
Despite the many negatives continuing to face the economy such as higher taxes, uncertain health care costs and greater regulation, some modest level of overall economic growth in the area of 2% still seems achievable. This forecast results from a number of positive factors including the likelihood of a continuing low level of interest rates, some improvement in the employment picture, a further recovery in housing from very depressed levels and rising export demand from faster growing emerging markets such as China. Corporate profits also seem likely to show continuing growth in response to continuing productivity gains and a rising contribution from foreign operations.
Recent Federal Reserve policy statements suggest a low interest rate policy will continue over the foreseeable future unless unemployment shows a noticeable improvement and/or inflation becomes a more serious issue. Any pronounced weakening of the U. S. Dollar in foreign exchange markets could also cause the Fed to re verse course because of the potential impact on inflation. Assuming a stable interest rate environment and some increase in corporate earnings, the outlook for the stock prices remains favorable. Although stock prices have continued to move up, valuation levels remain reasonable considering the historically low level of interest rates as well as a continuing higher than normal equity risk premium. Finally, market liquidity does not appear to be an issue with money continuing to move out of lower yielding fixed income investments and into stocks. Corporations are also under increasing pressure to use balance sheet liquidity to fund stock buyback programs and/or increase dividends.
William B. Frels
President and Lead Manager
Ronald L. Kaliebe
Vice President and Co-Manager
The Fund's investment objectives, risks, charges and expenses must be considered carefully before investing. The summary prospectus or full prospectus contains this and other important information about the Fund, and they may be obtained by calling Shareholder Services at (800) 304-7404, or visiting www.mairsandpower.com . Read the summary prospectus or full prospectus carefully before investing.
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. As of the prospectus dated April 30, 2012, the Mairs & Power Balanced Fund had an annual expense ratio of 0.80%. For most recent month-end performance figures, visit the Fund's website at www.mairsandpower.com, or call Shareholder Services at (800) 304-7404.
All investments have risks. The Balanced Fund is designed for long-term investors. Equity investments are subject to market fluctuations, the fund's share price can fall because of weakness in the broad market, a particular industry, or specific holdings. Investments in small and midcap companies generally are more volatile. International investing risks include among others political, social or economic instability, difficulty in predicting international trade patterns, taxation and foreign trading practices, and greater fluctuations in price than United States corporations. The fund is subject to yield and share price variances with changes in interest rates and market conditions. Investors should note that if interest rates rise significantly from current levels, bond fund total returns will decline and may even turn negative in the short-term. There is also a chance that some of the Fund's holdings may have their credit rating downgraded or may default.
The stocks mentioned herein represent the following percentages of the total net assets of the Mairs & Power Balanced Fund as of December 31, 2012 : Bank of America 0.24%, H.B. Fuller 1.87%, Valspar 2.50%, Ecolab 0.35%, Murphy Oil 0.56%, Sturm, Ruger .048%, IBM 0.80%, General Electric 1.43%, U.S. Bancorp 1.09%, Target 0.97%, Ingersoll-Rand 1.62%, Pentair 5.29%, SUPERVALU 0.04%, Bristol-Myers Squibb 0.58%, Xcel Energy 0.37%, Corning 0.69%, and BP PLC 0.55%. All holdings in the portfolio are subject to change without notice and may or may not represent current or future portfolio composition. The mention of specific securities is not intended as a recommendation or offer for a particular security, nor is it intended to be a solicitation for the purchase or sale of any security.
Barclays U.S. Government/Credit Index is composed of high-quality, investment-grade U.S. government and corporate fixed income securities with maturities greater than one year. It is not possible to invest directly in an index.
Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. It is not possible to invest directly in an index.
ALPS Distributors, Inc. is the Distributor for the Mairs & Power Funds.