Rational Exuberance

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Mairs & Power Growth gets good brands--and for cheap.

The numbers put up by the Mairs & Power Growth fund are the stuff of dreams. Over the past ten years this fund has returned an average 16.1% annually, a head-turning 6 percentage points better than the S&P 500. This year it is up 11%, slightly behind the S&P.

And Mairs & Power Growth does well in both up and down markets. During the market's recent unpleasantness, the $1.1 billion (assets) fund recorded two positive years--2000, up 26%, and 2001, up 6%--and only dipped into negative territory in 2002, down 8%, its only losing year since the 1987 crash.

Small wonder the fund is a stalwart of our Honor Roll, now making its fourth consecutive appearance on that August list (see p. 162), as well as being a perennial on our Best Buy roster (p. 171). We give it an A in down markets and a C in up ones.

Its low expense of 78 cents per $100 is another laudable feature. Like creeping rust, expenses eat away at returns, present and future. Run from rented office space in St. Paul, Minn., the fund is fanatical about thrift: It does its own trading, runs no ads and invests mainly in midwestern companies a short drive away.

Finally, there's a long-tenured manager to go with the fine long-term performance record. George Mairs, 75, has run the fund for 23 years. A Jimmy Stewart sound-alike with a matching earnestness, Mairs, in 1952 after an Army stint, joined the firm his father had founded two decades earlier.

"Growth" is a misnomer for the fund; its portfolio trades at 17 times 12-month trailing earnings, far less than the S&P's 27. Fund-rater Morningstar puts it in the "blend" class (between value and growth). It's concentrated, with just 36 holdings, and full of branded companies leading their industries--those with pricing power like drugmaker Pfizer and lawn mower producer Toro, which also sell at attractive valuations. Mairs won't buy volatile, commodity-based sectors like energy or metals. Tech? According to Morningstar, that makes up only 3% of the fund.

The Midwest connection is very apparent with Mairs' holdings. His last two purchases, in the spring, were both smallish Minnesota companies. Biotech firm Techne is a world leader in supplying proteins, the building blocks of drugs, to the pharmaceutical industry. After watching the stock for four years trade as high as $74, Mairs finally bought in at $19; it's now up to $35.

The other local newbie, International Multifoods, is an issue Mairs previously had avoided because the food outfit lacked an arsenal of name brands. That has changed, and so has Mairs' reluctance. Driven by management plucked from Kellogg, the company has acquired valuable Pillsbury products, including Hungry Jack pancake mix and the signature cake and frosting lines. Just as important: International Multifoods grabbed the right to use the Pillsbury Doughboy in its ads. Mairs snapped up the stock at $19. The price today is $25.

Given the fund's average portfolio turnover of just 5%, those two stocks represent more new positions than Mairs usually buys in a year. In fact, his three biggest holdings, at roughly 5% each--retailer Target, medical-device maker Medtronic and Wells Fargo bank--have been in the fund for three decades.

For all its consistency Mairs & Power confesses to a big change coming. Mairs plans to retire before his 76th birthday in June, although he will stay on as an adviser. He will hand over the spreadsheets to William Frels, 63, who has been Mairs' understudy for 11 years. Frels is a Mairs clone in investment philosophy. And if anything, Frels is even more frugal.

A few years ago Frels balked at plans to bring in a bottled- water cooler, which would add a few dollars a day to costs. Mairs overruled him and the spendthrifts in the office got their water cooler. Not much else has changed at Mairs & Power.