Decoding the Mairs & Power Balanced Fund's 60/40 Strategy in a Rising Rate World

The Mairs & Power Balanced Fund's Q2 2025 performance offers a compelling case study in the resilience—and limitations—of the 60/40 equity-fixed income strategy amid a shifting macroeconomic landscape. As interest rates remain elevated and market volatility persists, the fund's ability to balance growth and income while maintaining a regional focus has become a critical differentiator for moderate investors.

The 60/40 Framework in a Rising Rate Environment

The fund's 60/40 allocation—60% equities, 40% fixed income—has historically served as a buffer against market extremes. In Q2 2025, however, the strategy faced mixed results. The equity portion underperformed, with a 2.66% year-to-date return trailing the 5.43% benchmark and 5.67% Morningstar Moderate Allocation peer group. This drag stemmed from weak sector selections in Health Care, Industrials, and Communication Services, where the fund lacked exposure to high-flying names like NVIDIA and Broadcom. Conversely, the fixed income segment outperformed, driven by an overweight in corporate bonds and a short duration profile that capitalized on the steepening yield curve. The 10-year Treasury yield climbed to 4.5% by year-end 2024, a trend the fund's managers navigated skillfully by minimizing interest rate sensitivity.

Regional Focus as a Strategic Anchor

What sets the Mairs & Power Balanced Fund apart is its emphasis on the Upper Midwest. The fund prioritizes companies in Minnesota and neighboring states (Illinois, Iowa, Wisconsin, North Dakota, South Dakota) that exhibit durable competitive advantages, strong management, and consistent growth. This regional lens acts as a stabilizer in turbulent markets. For instance, the fund's recent addition of WEC Energy (WEC), a Wisconsin-based utility, aligns with its thesis of capturing demand-driven growth in regulated sectors. Similarly, its strategic bet on Amazon (AMZN) during early 2025 volatility reflects a willingness to adapt while staying rooted in its core philosophy.

Discipline in a Disciplined Market

The fund's long-term, low-turnover approach is another pillar of its strategy. By avoiding frequent trading, it reduces transaction costs and maintains a portfolio of companies with proven capital deployment skills. This discipline is particularly valuable in a rising rate environment, where short-term speculation can amplify losses. For example, the fund's underweight in underperforming positions like UnitedHealth Group (UNH) and Bio-Techne (TECH) mitigated regulatory and earnings-related risks. Meanwhile, its focus on companies like Fiserv (FI) and Eli Lilly (LLY) in 2024 underscored its ability to identify undervalued growth opportunities.

Risks and Opportunities in 2025

While the 60/40 strategy has shown cracks in equities, its fixed income strength suggests a path to recovery. The fund's managers project low double-digit corporate earnings growth and broader market participation in 2025, which could offset recent equity underperformance. Investors should monitor two key factors:
1. Duration Management: The fund's short duration in fixed income (relative to the Bloomberg U.S. Government/Credit Bond Index) will remain critical as rate hikes continue.
2. Sector Rotation: A shift toward AI-driven sectors (e.g., utilities, semiconductors) could rebalance the equity portion's performance.

Investment Takeaways

For moderate investors seeking balanced growth and income, the Mairs & Power Balanced Fund offers a compelling blend of regional expertise, disciplined stock selection, and tactical fixed income positioning. While its Q2 2025 results highlight the challenges of navigating a fragmented market, the fund's long-term track record and strategic adaptability—such as its recent foray into AI infrastructure via WEC Energy—position it as a resilient option. Investors should consider this fund as part of a diversified portfolio, particularly if they prioritize stability over aggressive growth in a high-rate environment.

In a world where macroeconomic shifts are the new normal, the Mairs & Power Balanced Fund's 60/40 strategy, anchored by regional focus and valuation discipline, may yet prove its mettle.