In the second quarter of 2025, the Mairs & Power Balanced Fund experienced a period of underperformance, falling short of its benchmark by 2.77%. This divergence was largely attributable to the equity segment of its portfolio, particularly the substantial holding in UnitedHealth, which faced challenges during this timeframe. Despite these equity-driven headwinds, the fund's fixed income allocation demonstrated resilience and positive returns, primarily due to astute credit selection and a strategic focus on shorter-duration bonds, which capitalized on the steepening yield curve—a scenario where short-term interest rates declined while long-term rates increased.
The market environment throughout the quarter was characterized by pronounced volatility. After briefly entering a bear market, defined by a 20% drop from its peak, the stock market staged a robust rebound, climbing 25% from its lowest point by the quarter's close. This period of intense fluctuation was influenced by a confluence of macroeconomic factors, including lingering uncertainties surrounding international trade tariffs, geopolitical tensions in the Middle East, and concerns over the escalating national debt. These elements collectively contributed to an unsettled financial landscape, making disciplined investment management crucial.
Amidst this backdrop, the fund's managers undertook several significant portfolio adjustments designed to optimize its positioning. During the first half of 2025, new investments were initiated in WEC Energy Group and Amazon, reflecting a forward-looking approach to capitalize on emerging opportunities within the energy and technology sectors, respectively. Conversely, the fund exited positions in Neogen and Principal Financial, signaling a reevaluation of their long-term growth prospects or alignment with the fund's evolving objectives. Furthermore, holdings in major tech conglomerate Alphabet and banking giant U.S. Bancorp were trimmed, indicating a strategic reduction of exposure in these areas, likely in response to valuation considerations or broader market outlooks.
The fixed income portfolio's success during this volatile quarter underscores the importance of a diversified and actively managed strategy. Its ability to generate favorable returns provided a critical counterbalance to the equity segment's struggles. This outperformance highlights the benefits of meticulous security selection within the debt markets and the strategic advantage of managing duration effectively in response to shifting interest rate dynamics. The fund's overall approach, balancing equity exposure with a robust fixed income component, proved vital in mitigating risks and sustaining performance in a challenging investment climate.
Looking ahead, the fund remains committed to its core investment philosophy, adapting its strategy to navigate the complexities of global markets while seeking value and growth opportunities across various asset classes. The adjustments made during the quarter reflect a proactive stance in managing risk and capturing potential upside, ensuring the fund is well-positioned for future market developments. The emphasis on judicious stock picking in equities and disciplined credit allocation in fixed income will continue to be central to achieving the fund's long-term objectives.