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Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

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This fund was hugely successful shortly after it was opened, and in a month it will close. It is very positively profiled in this month commentaries. I decided to compare it with the Vanguard Tax Managed Small Cap fund VTMSX. I found that the outperformance of the MSCFX is due to the first year of its existence, when it was very small and nimble and managed to avoid the plunge of 2011. However, starting from 01/11/2013 the performance of these two funds is nearly identical. An advantage of the index fund VTMSX is that it does not suffer from its size and is not going to close. Any comments?


  • My issue with Mairs & Power is the regional focus, investing primarily in the Midwest and especially in Minnesota. While the maxim invest in what you know makes sense, I wonder what happens if this region of the country experiences an economic slowdown especially for smaller companies that do business there. Also, I wonder why not hire analysts or co-managers who work out of other parts of the country to get to know a broader swath of stocks? Everything else about the shop I like, the fees, low turnover, the tenured managers and tendency to close funds. But I wonder about the sustainability of a Midwest only small-cap fund long-term.
  • People have been wondering that about M&P since Christmas of 1961.
  • TedTed
    edited September 2016
    @Lewis: I know this is hard for you to believe, but the Sun doesn't rise and set only in the eastern region of the U.S. The Midwest is the real America.
    Minnesota Vikings "Skol Vikings"
  • edited September 2016
    @Ted, I never said a damn thing about the Eastern region. Maybe you don't know that Pittsburgh is pretty darn close to the Midwest. Drive a little bit and you're in Cleveland. And I wouldn't invest in a fund that invested exclusively in the Northeast either.

    @David, Agreed. But large Midwestern companies in Mairs other funds like Target and Medtronic have a global footprint so even though they're domiciled in the Midwest they're less affected by the local economy. A small-cap fund would I suspect be a different animal, although in fairness I haven't checked the global exposure to the businesses in the fund.
  • TedTed
    edited September 2016
    @Lewis: Close only counts in horseshoes and hand grenades . These is no way , although a great town, theSteel City is remotely considered in the midwest. But they've had some great teams.
    Men Jpe Green: Coke Commerical:
  • Ted is mistaken (again), about geography this time, where close counts for sure.
    Anyone who's driven cross-country, or is from the (vast) Midwest, or knows any American history, knows that Pittsburg indeed starts things off, not ending till the Rockies.

    What's amazing to me always is that so much of the closer Midwest is in like the eastern quarter of the country.

    LB, was not arguing, just pointing out that everyone has forever mentioned provinciality in connection w/ M&P, going way back over a half-century, all those U-Wisc guys (including to an extent Oakmark, e.g.).
  • IMHO it's all about culture and attitudes, not state lines. How do people act, vote, shop? By these metrics, I tend to view cities like Buffalo and Pittsburgh as midwestern cities. And then there's how people talk:

    Pop vs. Soda (vs. Coke):

    More to the point on regional funds: Who remembers Franklin California Growth Company (still FKCAX)? It gave up its 80% California growth mandate in 2002 (reducing it to 50%, i.e. majority), and then in Oct 2004 dropped California from its mandate altogether.

    I figure if a growth fund can't make it in tech-rich, large economy, California (note that Franklin Templeton is based in California), then the odds are stacked pretty high against funds in smaller regions.

    Northwest-focused funds gave up the ghost also around the same time. I was familiar with Safeco Northwest, which expanded into Canada (BC) in 2002, and gave up the regional focus entirely Oct. 2003.
  • >> the odds are stacked pretty high against funds in smaller regions.

    Right, I imagine most would agree that M&P has trounced the odds decade after decade.
  • Because of, or in spite of, localization?

    From M, via SFGate: The main argument for regional funds is that managers gain an edge by being close to the companies they own.

    But from CS Monitor (1998): Many years ago, regional investing might have made sense. ... But with the proliferation of data sources and telecommunication, I can be just as close to a company in California as I can to one down the street.

    It went on to observe that out of thousands of stock funds, there were only "about two dozen [regional funds] (whose combined assets total $3.3 billion)" . At least back then I could name a handful of those two dozen - Safeco NW, Franklin Calif. Growth, M&P Growth, and Golden Gate Fund GGFDX (SF Bay Area). Name any regional fund management company today other than M&P. I can't (which doesn't mean they don't exist).

    All these regional funds falling by the wayside. I think that qualifies as odds stacked against the genre. Which brings me back to my lead sentence - is M&P doing well because of, or in spite of, its regional focus?

    Most might indeed agree that M&P trounced the odds decade after decade. I suppose it did in the sense that it managed to survive while most regionals didn't. But in terms of performance, it was decidedly mediocre for the three decades between 1970 and 2000. (From 1/1/70 to 12/31/99, a $10K investment in MPGFX grew to $349K, compared to $345K for the average LCBlend fund, and $513K for the S&P 500.)

    This lends credibility to the thesis that it is the fund's management and not its regionality that had given it more recent success.
  • Gosh, I don't know. Does the following go your case's way, since it includes bonds?
    From 1961 inception to 1/1/2000, MAPOX beats DODBX in $10k growth by $59k, $446k+ to $387k+. 15% cumulative, maybe not a lot for almost 40y, but not nothing.
    So regional bonds too, not just stocks?
    From inception to date, almost 55y, it's been 8% edge to MAPOX (cume).
    Somehow I don't think anyone has ever thought of M&P like Safeco or Golden Gate. Maybe they shoulda.
  • @Lewis, davidmoran, msf: The final geography yearly exam has been graded and you all fail. Therefore, it will be necessary for all of you to repeat Geography 101 next semester.
    The Midwestern United States (or Midwest) is a name for the north-central states of the United States of America. The states that are part of the Midwest are: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin.
  • It must be that new geography? Back when I was in school, I was taught the same as Ted.

    But, everything changed when "it all depends on what the meaning of is is".
  • edited September 2016
    Um, I said: "Maybe you don't know that Pittsburgh is pretty darn close to the Midwest. Drive a little bit and you're in Cleveland." Being close is not the same as being in.
    East Liverpool, Ohio on the border between the two states is 40.6 miles away, according to Google Maps.
  • Reading comprehension, again, speaking of remedial coursework:

    >> Anyone who's driven cross-country, or is from the (vast) Midwest, or knows any American history, knows that Pittsburg indeed starts things off, not ending till the Rockies.

    And North Dakota, hahaha.
  • This exchange about what constitutes the midwest is sort of humorous, given that funds invest based on economics, not political lines. The midwest is whatever the fund says it is, no more, no less.

    M&P doesn't even say it focuses on the midwest. It says "some emphasis is given to the ... Upper Midwest, ... which the Adviser "considers to be the states of Illinois, Iowa, Minnesota, North Dakota, South Dakota and Wisconsin". Not even Indiana. As always, read the fine, um, prospectus.

    As far as the Census Bureau's definition of regions goes (which seems to be what some people here are alluding to), this is the same definition that calls Maryland a southern state. That's not what I was taught in school (i.e. that DC was situated between the northern states and the southern states), nor does it match what most people think, according to a (not too scientific) 538 poll. Only 6% of self-identified Southerners agreed that MD is part of the south.

    Regarding the performance of MAPOX: What explains the difference in decades long performance (relative to respective categories) between MAPOX and MPGFX? Keep in mind that these funds were ostensibly managed by the same people. Were they keeping their best equity ideas for the balanced fund (that doesn't seem likely, but I haven't researched), or was the relatively better performance of MAPOX due to its bond sleeve?

    Assuming the latter (IMHO a good assumption until justifiably questioned), it's fair to look to that bond portfolio. There are two issues here: (1) how regional is this part of the portfolio really, and (2) how has the fund performed in different bond markets.

    To the first question: while MAPOX is currently heavily into corporates, that waxes and wanes. M* writes: " On the fixed-income side, the managers own a mix of U.S. government agency debentures and investment-grade corporate bonds. The allocation has varied over time." In 2006 (per annual report) 59% of its bonds were US bonds (mostly Fannie Mae), not regional. Even today (semi-annual report released this week), with 90% of its debt in corporates, there doesn't seem to be a disproportionate amount in the states named by the fund.

    Sure, lots of FoMoCo debt (about 1.4% of the corporates). But 40% of the corporate debt is in financials, and you'd be hard pressed to find a M&P regional company there. Okay, there's Kemper (Ill.) with a tad under 1% of the corporates. Berkshire Hathaway hails from Nebraska, not part of the fund's regional focus. Then you have more financials listed under industrials, like GE Capital (also sold recently), and Dun and Bradstreet (NJ). Big IT creditors include Intel (bigger than FoMoCo), Symantec, Autodesk, Fidelity Nat. Info Services (Fla.) and Western Union, all about 0.8% of corporate debt. Then there's midwest Motorola, with about 0.6%.

    To the second question - how did the fund perform if we decompose by bond market? Using 1/1/80 as a starting point for the bond bull (rounding to decades), MAPOX underperformed DODBX by 13% cumulative. Perhaps with the expected return of a bond bear market, MAPOX will once again outperform. Maybe not, since those pre-1980 managers are long gone. As Dan Fuss notes, he's one of the few bond managers around who's had experience in rising interest rate markets.

    In short, it doesn't appear that M&P gets any particular benefit on the equity side from its narrow (6 state) regional bias. On the bond side, it's hard to see that there even is a regional bias. Regardless, it hasn't outperformed your reference fund of choice since the 70s, when the bond market was very different. None of this detracts from M&P; it just doesn't support the theory that M&P (like Ford) has a better idea.
  • Separate discussions --- whether the feel of the Midwest starts a few miles east of the Ohio border, and what if anything accounts for M&P performance deltas, such as they are.
    Of course start points matter. From beginning of 1980 MAPOX underperforms DODBX and FPURX while outperforming (significantly) 50-70% equity allocation criterion, while beginning at the end of 1980 makes it closer to a tie.
    As an owner I read their prospectus many times, and yes, including ND. The 'better idea' thing was always leaned on pretty lightly. (The way other fund families like to talk about being sort of out of it [GLRBX].)
    My bond query was at least partly tongue in cheek, but I did figure you might well do the digging.
    Jack Kennedy often quipped that WDC was a city of 'Southern efficiency and Northern charm.'
  • edited September 2016
    For those who prefer the deep South there's this fund:
    And for those who prefer the NorthEast:
    Throw in a tech fund and you probably have California covered. Then if you combine all four including M&P, you might have the entire nation. The interesting question is what sort of regional economic risks and sector concentrations you might end up with favoring one region over the other. If you like the Northeast, you will most likely end up heavily in the financial sector, which hasn't been the best place to be lately, but could be deemed undervalued in today's market. Note though: Davis NY Venture is not a pure New York play, but still has that financial services emphasis.
  • msf
    edited September 2016
    Wow, Hancock Horizon Funds - never heard of them, I'm impressed!

    I do think that the heyday of the regional funds was the late 90s or so (the era from which my links came). "Regional stock funds are becoming more popular in the mutual fund industry." Washington Post, March 2, 1998.

    If you thought the Golden Gate Fund (focused on the Bay Area) was a bit too narrow, how about Gateway Cincinnati Fund (closed 2003)? P&G and what else?

    The funds that hung around for some time did so by broadening their mandates - Franklin Calif. Growth reduced its regional exposure from 80% to 50% before getting rid of it. Safeco NW played games to keep Boeing after it moved its headquarters to Chicago (which I guess makes it fair game for Mairs & Power).

    So finding any fund actually focuses on regional companies (as opposed to giving brownie points, i.e. "some emphasis") these days really does impress.

    That said, I think that NY Ventures is stretching it a bit - it's more NY because of its name than its portfolio.

    Looking at NYVTX (it holds only 57 stocks), the ones in the Northeast I see are :

    #5 JPM (Chase)
    #8 UTX (United Tech. CT)
    #10 AXP (Amex)
    #11 BK (Bank of NY Mellon)
    #18 PX (Praxair CT)
    #31 CB (Chubb NJ)
    #32 TYC (Tyco Int'l - US operations HQ in NJ)
    #32 DGX (Quest Diagnostics NJ)
    #33 CFG (Citizens Financial Group, RI)
    #36 PCLN (Priceline CT)
    #40 (L Loews)
    #43 MCO (Moody's).

    Even if I missed a couple, it's hard to consider this a northeast fund.

    Kudos on Hancock Horizon, A for effort on the rest.

  • I thought the Midwest was in the Southeast? (Sorry, bastrdizing a line from 'Idiocracy')

    I held MAPOX for a while but while I don't anymore, if i wanted to tuck some money away in a fund that performed like VWINX but didn't have the straight treasury exposure, I'd give it some thought, for sure. Good fund company, and I could live w/the regional focus for that slice of my portfolio.
  • It must be that new geography? Back when I was in school, I was taught the same as Ted.
    But, everything changed when "it all depends on what the meaning of is is".

    ;) Quite right!
  • In large part thanks to what's been available over the years RIGHT HERE, and going back to the predecessor iteration, yours truly discovered MAPOX and MSCFX and bought it, and I have been a happy camper, since.
  • edited September 2016
    A big problem for M&P is that it used to be seriously sales-restricted by state. Presumably they did not really want smartass Easterners (self-styled) discovering the Upper Midwest, a la PHC.
  • In the beginning of this thread I noted that the outperformance of MSCFX can be solely attributed to the first year of its existence when the fund was very small and nimble, and the money were pouring. Since that time its performance was nearly identical to the cheap Vanguard fund VTMSX. Now MSCFX is closing because it may become too large to manage as efficiently as it was managed at inception. When it is closed, the money flow will become even more slow than now, the flexibility will disappear unless the manager will sell old assets and buy new ones, which will make it tax inefficient. It seems that now it is wrong time to invest in it, unless there is something in this picture that I missed. Any suggestions?
  • edited September 2016
    Wrote out a lot about this, but not really worth starting a debate- it's MFO, we're aware of index funds, you can argue this one with the Bogleheads. Mairs and Power: long history, great track records for all 3 funds, good stewards, the outperformance is due to active share and their investment process. You can't really compare 5 years of returns, it's not realistic.

  • That's the first time I've seen it suggested that funds are more nimble if they are larger and are stuck with lots of cash that they have to invest regardless of what they can find.

    If a fund owns good stocks, it shouldn't want to sell them (M&P tries to find solid stocks that it can hold for several years). If conditions change and a company's stock is no longer a good fit, the fund should sell it. Its cash flow is irrelevant.

    The ability of funds to move easily in and out of securities is dominated primarily by the size of the positions being changed (relative to the size of the market for the security). Cash inflows are secondary. Often large inflows are detrimental, because they force funds to buy too much of a security (driving price up), or too fast (driving price up) in order to mitigate cash drag.

    It is correct that funds are generally more tax efficient if they've got tons of cash pouring in. Their current holdings are dwarfed by the new cash, so any gains generated from the current portfolio are spread among lots and lots of new shareholders.

    But if a fund is already tax efficient, either because it holds securities for years or because its securities don't spin off dividends, the tax impact of large inflows is less significant. All M&P funds invest with the intent of holding securities for years. Also small cap stocks are less likely to pay dividends. So I wouldn't be overly concerned about diminishing tax efficiency for this fund.

    Many fund families that close funds do so too late. This is because they are optimizing their profits, not yours. Performance may tend to drop as funds get too large. But so long as this doesn't impact the fund family (e.g. diminished reputation harming flows into other funds), they're happy to keep money flowing to the large fund. (See Magellan.)

    This is why a fund closure is often taken as a negative signal. But it depends upon the fund family. The mere fact that M&P didn't even try to go nationwide for years speaks to its lack of interest in drawing investments solely for the sake of increasing AUM.
  • I remember the day that the only way to analyze companies was to requested hard copies of the Q's and K's directly from the company. It was not available anywhere else. I can remember some regional funds doing very well back then probably due to the lack of real time information via internet. Professionals are in agreement they all trade off the same information today. I am not familiar with these two funds and not saying it applies to these two funds... just a thought.
  • From Aug 2013 onwards, you could have substituted MSCFX with a fixed portfolio of ETFs: ~34% IJR, 15% PSCT, 13% KRE, 7% SLY, 7% FXR, 7% VPU, and a few smaller positions, of comparable return and smaller volatility. See
  • I use VTMSX as my small-cap holding in a taxable account. IMO, it is very difficult to find consistent performers in actively managed small cap funds. It is easy to see who has hit home runs in the past... but not so easy to figure out who will hit the next home run going forward.

    As gmarceau stated, this is not Bogleheads and index funds are not particularly interesting to write about. But I'm sure every reader here knows that index funds are always a valid option, especially when you lack the conviction or risk tolerance for the actively managed alternatives.

    A few other small cap funds that I've looked at:

    - Brown Company Management Small Company BCSIX: One of the few consistent performers and a frequent MFO Great Owl. Currently closed but has reopened from time to time.

    - Pear Tree/Polaris Small Cap USBNX run by the Polaris team (disregard its prior performance, since Polaris only took over at the beginning of this year). Looks promising but I prefer their all-in-one strategy PGVFX, which was profiled on MFO.

    - Artisan Global Small Cap ARTWX, run by the team behind ARTJX. Also profiled on MFO. Last year, I thought it looked volatile but potentially rewarding. Since then, it's been relatively disastrous. It might yet redeem itself eventually... or it might not.

    - Driehaus Micro Cap Growth DMCRX: If February, this fund was -20% for the year (i.e. past two months). Now, it's almost +13% for the year. If you like volatility, check it out.
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