By Jason Zweig | Dec. 14, 2016 9:00 pm ET
Image credit: Pixabay
Mutual-fund executives recently held a pow-wow trying to win back loyalty and trust from investors who have been leaving them in droves.
The answers, as Josh Brown blogged earlier this week, are simple. But they aren’t easy. Being different doesn’t come naturally to people, especially not to people whose businesses were built on avoiding risk. Standing apart from the herd takes independence and courage and calm. Above all, it takes what Warren Buffett has called “an inner scorecard” — the determination to measure yourself by your own absolute standards, not by the soft conventional wisdom of looking to your right and looking to your left to make sure you’re not an inch out of line from the next guy.
More than two decades ago, I interviewed a fund manager who personified those virtues. George Mairs died in 2010, but he was a model of how to run a decent mutual fund that differs from the market and makes its clients feel as if they are part of a distinctive community. I post that old article here, because I think it has more than historical interest; it offers some guidelines on how the investment business could do better.
Zen Stock Picking
Forbes Magazine, Dec. 19, 1994
At the typical stock-fund office, phalanxes of computer screens glow like the control room of a nuclear reactor. The portfolio manager is an intense young MBA. He can recite earnings estimates by rote for each of the 100 stocks in his billion-dollar fund. He’s a high-pressure guy, the atmosphere is electric with excitement, and the phones are always ringing. All this costs money, but the managers have to justify themselves. What are they for if not to trade in and out of stocks?
Yet all this striving does nothing for most fund investors. Although the industry has its good years, over long periods of time the average U.S. stock fund does worse than a market index. No wonder: Typical annual expenses run to 1.3% of assets.
George Mairs, 66, does things differently. Mairs & Power, Inc., founded by Mairs’ father in 1931, has nine employees and runs a total of $300 millon out of the old First National Bank Building in St. Paul, Minn. Nearly all that money is in separate accounts. Mairs & Power Growth Fund has $41 million in assets; a balanced mutual fund, Mairs & Power Income Fund, runs $13 million.
Mairs, who studied economics at Yale and at St. Paul’s Macalester College, squires a visitor into his firm’s tiny conference room. “We only added this room last year,” apologizes Mairs (pronounced Mars).
Here the phones don’t ring off the hook, nor do frenetic traders buy and sell with half-eaten pizzas littering their desks. Mairs & Power Growth, launched in 1958, owns just 28 companies. More than three-fourths of these are based within 20 miles of the fund’s offices. Mairs & Power Growth has a 4% portfolio turnover rate, meaning that it holds on to its average stock for an astonishing quarter of a century.
Mairs & Power Growth has owned Minnesota Mining & Manufacturing since 1958; Norwest, the bank holding company, since 1960; First Bank since 1961; Jostens Inc., the supplier of educational products, since 1964; Deluxe Corp., the check printer, since 1966; Medtronic, Inc., the producer of pacemakers, since 1969. Each is based in the Twin Cities.
“It’s a fluid portfolio,” Mairs protests with no hint of irony. “We sold IBM in 1989, and we’ve sold another two or three stocks since.” Then it occurs to him: “Why, we even sold one earlier this year!” That was Network Systems Corp., a Minneapolis-based computer peripherals company that had been in the fund since 1986.
“Higher turnover just makes no sense to me,” says Mairs. “I don’t know why anyone would want to pay current taxes instead of deferred taxes.” By holding instead of selling, Mairs allows his gains to compound without the drag of taxation.
Does this low-key approach work? It sure does. Mairs & Power Growth’s net asset value per share has climbed over the past decade from $21.52 to $39.94. At most high-turnover funds, even some with excellent results, the net asset value has barely budged, because profits are dumped out on shareholders, who must then pay capital-gain taxes on them.
So Mairs & Power is managed like a tortoise, but it runs like a hare. For the past five years it has skedaddled past the competition, beating the Standard & Poor’s 500 stock index by 4.3 percentage points annually. For the past decade the fund has nearly tied the market, putting it in the top third of all funds. Mairs & Power charges only 0.98% in annual expenses and no sales load; that low cost, plus moderate risk (Forbes gives teh fund a B grade in up markets and a down-market C), make it a Forbes Best Buy.
Mairs is not a value manager who hunts assets on the cheap; his stocks trade at about the same price/earnings multiple as the overall market. He looks for stocks with sustainable earnings growth, low business cyclicality and dominant products. And — of course — stocks that he can live with for a long time.
Why does Mairs often end up shopping so close to home? If you can make it Minnesota, he smiles, you can make it anywhere. “This is a tough state to do business in,” he says. “With high taxes, workers’ compensation and health-care costs, companies have to be run extremely well.” Thanks to that efficiency, he says, 40% of his companies derive at least a third of their revenues from abroad. He may be a homebody, but his stocks are not.
There’s a second reason Mairs doesn’t often go outside the Gopher State: “While we do not subscribe to the efficient market theory, we recognize that it has some validity,” he says. “If 10,000 managers are all receiving the same information at the same time, it’s hard for us to add any value except in the companies that are close to us. We suspect we know them as well as anyone in the country does.”
When most fund managers want to talk with 3M Chairman Livio DeSimone, for example, they have to jockey for space at an analysts’ meeting. Mairs can stroll over to the Rotary Club, where DeSimone occasionally speaks. “Knowing some of these people in the community,” he says, “gives us a special appreciation for their talents.”
At least three Minnesota companies in Mairs’ fund are not followed by any Wall Street stock analysts: TSI Inc., a Shoreview-based maker of laboratory instruments (market capitalization, $39 million); MTS Systems Corp., an Eden Prairie-based producer of industrial simulators (market cap, $96 million); and Graco, Inc., a Golden Valley-based maker of pumps for paints, sealants and coatings ($212 million).
His fund’s tiny size enables Mairs to take sizable bites of such minnows; each is at least 2% of the fund. Liquidity is no concern, since he so rarely sells. He began buying Graco in 1970, MTS in 1981 and TSI in 1986.
Mairs & Power Growth is unlikely to get too big for its shareholders’ own good. It can be bought only be residents of five states: California, Minnesota, New York, Pennsylvania and Wisconsin. To register the fund in every state, says Mairs, would be too expensive and time-consuming.
Sometimes it can pay to think small.