Objective
The fund will pursue above-average long-term capital appreciation by investing in 40-45 small cap stocks. For their purposes, “small caps” have a market capitalization under $3.4 billion at the time of purchase. The manager is authorized to invest up to 25% of the portfolio in foreign stocks and to invest, without limit, in convertible securities (but he plans to do neither). Across all their portfolios, Mairs & Power invests in “carefully selected, quality growth stocks” purchased “at reasonable valuation levels.”
Adviser
Mairs & Power, Inc. Mairs and Power, chartered in 1931, manages approximately $4.2 billion in assets. The firm provides investment services to individuals, employee benefit plans, endowments, foundations and close to 50,000 accounts in its three mutual funds (Growth, Balanced and Small Cap).
Manager
Andrew Adams. Mr. Adams joined Mairs & Power in 2006. From August 2004 to March 2007, he helped manage Nuveen Small Cap Select (EMGRX). Before that he was the co-manager of the large cap growth portfolio at Knelman Asset Management Group in Minneapolis. He also manages about $67 million in 64 separate accounts (as of 08/11).
Management’s Stake in the Fund
Mr. Adams and the other Mairs & Power staff have invested about $2 million in the fund. At last report, that’s 83% of the fund’s assets. Mr. Adams describes the process as “passing the hat” after “the lowest key sales talk you could imagine.”
Opening date
August 11, 2011.
Minimum investment
$2500, reduced to $1000 for various tax-sheltered accounts. The fund should be available through Fidelity, Schwab, Scottrade, TD Ameritrade and a few others.
Expense ratio
1.25% after substantial waivers (the actual projected first-year cost is 12.4%) on an asset base of $2.4 million.
Comments
If you’re looking for excitement, look elsewhere. If you want the next small cap star, go away. It’s not here.
If you’d like a tax efficient way to buy high-quality small caps, you can stay. But only if you promise not to make a bunch of noise; it startles the fish.
The Mairs & Power funds are extremely solid citizens. Much has been made of the fact that this is M&P’s first new fund in 50 years. Less has been said about the fact that this fund has been under consideration for more than five years. This is not a firm that rushes into anything.
Small Cap is a logical extension of Mairs & Power Growth (MPGFX). While Mr. Adams was a successful small cap fund manager, his prime responsibility up until now has been managing separate accounts using a style comparable to the Growth funds. That style has three components.
- They like buying good quality, but they’re not willing to overpay.
- They like buying what they know best. About two-thirds of the Growth and Small Cap portfolios are companies based in the upper Midwest, often in Minnesota. They are unapologetic about their affinity for Midwestern firms: “we believe there are an unusually large number of attractive companies in this region that we have been following for many years. While the Funds have a national charter, their success is largely due to our focused, regional approach.”
- And once they’ve bought, they keep it. Turnover in Mairs & Power Growth is 2% per year and in Balanced, where most of their bonds are held all the way to maturity, it’s 6%.
Mr. Adams intends to do the same here. He’s looking for consistent performers, and won’t sacrifice quality to get growth. About two-thirds of his portfolio are firms domiciled in the upper Midwest. While he can invest overseas, in a September 2011 conversation, he said that he has no plan to do so. The prospectus provision reflects the fact that there are some mining and energy companies operating in northern Minnesota whose headquarters are in Canada. If they become attractive, he wants authority to buy them. Likewise, he has the authority to buy convertible securities but admits that he “doesn’t see investing there.” And he anticipates portfolio turnover somewhere in the 10-20% range. That’s comparable to the turnover in a small cap index fund, and far below the 50% annual turnover which is typical in other actively-managed small cap core funds.
Mairs & Powers’ sedate exterior hides remarkably strong performance. Mairs & Power Growth (MPGFX) moves between a four-star and five-star rating, with average to below-average risk and above-average to high returns. Lipper consistently rates it above-average for returns and excellent for capital preservation. Mairs & Power Balanced (MAPOX) offers an even more attractive combination of modest volatility and strong returns.
Bottom Line:
There’s simply no reason to be excited about this fund. Which is exactly what Mairs & Power wants. Small Cap will, almost certainly, grow into a solidly above-average performer that lags a bit in frothy markets, leads in soft ones and avoids making silly mistakes. It’s the way Mairs & Power has been winning for 80 years and it’s unlikely to change now.
Fund website
© Mutual Fund Observer,2011. All rights reserved. The information here reflects publicly available information current at the time of publication. For reprint/e-rights contact [email protected].
