St. Anthony: Year-old Mairs fund a winner

  • Article by: NEAL ST. ANTHONY , Star Tribune
  • Updated: August 26, 2012 - 7:02 PM

The St. Paul investment boutique's small-cap fund is up 44%.

In the mutual fund world, the big retail houses such as Fidelity, Ameriprise and American Funds seem to launch or close a fund every few months to take advantage of the latest investment trend.

At St. Paul investment boutique Mairs and Power, the investment management team launches a new fund about once every 50 years.

And, like the last two equity funds launched in 1958 and 1961, respectively, the stock pickers at Mairs and Power have done handsomely since they opened Mairs Power Small Cap Fund (ticker: MSCFX) a year ago this month.

"Our timing was pretty good," said small-cap portfolio manager Andy Adams, 40, the youngster of the investment team who has advocated for a small-company product for several years. "The market was down when we launched last Aug. 11. We live and die by Minnesota stocks, and some of them have done really well."

On Aug. 20, Morningstar, the mutual fund analyst, reported Mairs and Power Small Cap was up 44 percent in the year since its inception, including reinvested dividends, making it one of the top 15 performing funds among the thousands of U.S. funds of all stripes.

Of course, one year of success does not make a fund. But the buy-and-hold-good-companies tradition at Mairs and Power is already paying off for shareholders in the new fund. It's up about 21 percent so far this year.

"A lot of their performance has to do with their culture," said Morningstar analyst David Falkof. "Their turnover rates, buying-and-selling companies, are in the low-single digits, while the typical stock fund manager turns over his portfolio 60 to 80 percent. And for small caps, it's closer to 100 percent. That means higher transaction costs for shareholders and the opportunity cost of whether the management got in or out at the right time.

"Mairs and Power really does focus on that three- to five-year investment period and they have held some stocks for decades. It's fairly simple to talk about, but difficult to execute.''

Why? Because you've got to own the right stocks.

Total return for the Mairs and Power Growth Fund, which includes big companies such as Fastenal, Toro, U.S. Bancorp, Medtronic, Pentair and Donaldson, is up about 27 percent over the last year, compared with 23 percent for the S&P 500 index, an index the Mairs Growth Fund has beat handily for years -- a claim most mutual fund managers cannot make.

And this has been a good time to own stocks. Jim Paulsen, chief investment manager at Wells Capital Management, reported on Aug. 20 that the stock market has returned 125 percent, including reinvested dividends, since it bottomed out on March 9, 2009. Paulsen declared this the "best ever" stock market rally since World War II, despite anguish and consternation each step along the way.

The Mairs and Power growth and balanced funds both have earned the coveted Morningstar five-star grade for long-term performance.

Adams said the small-cap fund includes mostly Upper Midwest firms, another Mairs and Power attribute, because the portfolio managers like to be close to the firms they own and know some of the customers.

The small-cap fund includes names such as Medtox Scientific, which was acquired earlier this year at a big premium; Snap-On tools; Associated Banc-Corp, which is starting to benefit from the economic recovery and big-bank consolidation; Pentair; Graco; MTS Systems; TCF Financial; Techne Corp. and Valspar.

The small-cap fund turnover isn't as low as the two larger-cap funds. But at just under 10 percent, it's a fraction of that of its peers.

Additions to the fund this year include Proto Labs, which makes rapid prototypes for manufacturers and became Minnesota's most successful initial public offering in recent years. Mairs and Power also made good money on Stratasys, a similar company that has doubled in value this year thanks to a merger with an Israeli company.

"We believe in buying low and selling high and it's a lot easier for us to get the conviction ... if the company is just up the road from where we live as opposed to halfway around the country or the world," Adams said. "We also believe in the Midwestern work ethic and that we have more than our fair share of good public companies in the region."

What the heck. The strategy has worked well for more than 50 years.

Neal St. Anthony • 612-673-7144 •

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