ST.

PAUL
A

JANUARY 24, 2015

NEWSPAPER

St. Paul investment company sticks with

the plan and keeps it local
By David Fondler

dfondler@pioneerpress.com
You could say that longtime St.
Paul investing house Mairs & Power
stands on stability.
On one hand, you could call its
long-view strategy and regional
focus old-school and certainly conservative.
On the other hand, that focus,
which has not changed through the
years, seems almost rebellious in
todays investing world. Stock market indexes are rising to ever newer
heights on millisecond computerized trading churn. Meanwhile,
activist investors demand immediate gratification or else often
meaning wholesale leadership
changes, layoffs or both.
And Mairs & Power powers on, giving the companies in its portfolios
the time to develop as investments.
Thats not to say they dont take
risks and respond to the market. The
companys new president, Mark
Henneman, seems eager to buy into
the weakness he sees in the energy
sector from dropping oil prices. But
the opportunities here are based on
discipline, research and personal
relationships with the companies
they are targeting.
One such target through the years
has been Donaldson, a 100-year-old
international maker of industrial filters based in Bloomington. CEO Bill
Cook likes the Mairs approach.
We believe in delivering aboveaverage returns over time, and
steady growth, and Mairs & Power
fits that to a tee, Cook said. Our
objectives are aligned.

To be sure, its not always hip to be

square. The S&P 500 index soared
11.4 percent in 2014. None of the
three Mairs & Power mutual funds
could match that.
Thats going to happen from time
to time, Henneman said. What
were striving to do is beat the market over a complete market cycle,
which is typically seven years.
Meanwhile, change is in the works.
Executive moves made this month in
advance of pending retirements saw
Henneman add the presidents title;
he had been executive vice president
and co-managed the Growth Fund.
CEO Jon Theobald added the chair-

man title. Bill Frels becomes chairman emeritus. Soon, the companys
understated offices on the 15th floor
of the art-deco First National Bank
building will undergo a renovation,
with a wider reception area opening
up to the elevator bank.
So how did those mutual funds do?
In 2014, the $4.3 billion Growth Fund
rose 8.1 percent; the $723 million
Balanced Fund rose 8 percent and
the 3-year-old $162 million Small
Cap Fund rose 6.7 percent.
In a recent interview, Henneman
discussed the firm, its philosophy
and objectives. His answers have
been edited for context and clarity.

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TwinCities.com St. Paul Pioneer Press

WHAT IS THE HISTORY OF THE FIRM

AND ITS INVESTING PHILOSOPHY?
The firm was started in 1931, which
was an unusually difficult time to
start an investment firm, in the heart
of the Depression. I would say that
our strategy of investing in local companies and getting to know them well
was started by George Mairs III, back
in the 1950s.
We are extremely long-term, buyand-hold investors, which is typically
not the way people invest now, looking for short-term opportunities for
stocks.
The typical mutual fund in America has a turnover rate of around 100
percent, which means that the holding period tends to be about one
year. The Mairs & Power Growth
Fund has got a turnover rate of about
5 percent, which implies a 20-year
holding period. So very different
from the industry.
DO YOU SEE THIS INVESTING PHILOSOPHY AS A CHALLENGE OR A SELLING
POINT?
We think its a selling point,
because were pretty differentiated
from the market. These high-turnover
portfolios struggle to perform well.
And because of that, youre seeing a
lot of investors moving to passive
index funds, and our thesis is that the
reason why is the cost involved, not
only in the buying and the selling,
and the commissions, but in having to
be right on all these different trades.
We think that lower turnover, which
incurs lower costs for the investors,
really is a much better way to invest,
particularly for people who have a
long time horizon.
Now, I will agree that there are
some people that are looking for good
results every year, and as a buy-andhold strategy, we can find ourselves
out of whack with the market.
HOW ABOUT YOUR FOCUS ON LOCAL
COMPANIES? IS THAT A CHALLENGE?
We still feel that we are particularly blessed with a large number of
high-quality companies across a
diverse set of industries, and I think

if you look at the number of Fortune

500 companies for a population size of
the Twin Cities, we really stand out as
having an unusually large number of
them; despite the fact that the number has gone down over time, its still
unusually large here.
IS THERE A FEELING THAT THE MARKET MAY BE HIGH RIGHT NOW? ARE
YOU ADJUSTING TO THAT, CONSIDERING YOUR REGIONAL FOCUS?
We would agree that the market is
somewhat expensive. Its not worryingly expensive in our minds; we
would describe it as being at the high
end of a range thats appropriate
given the realties of a slow-growth
environment.
But within that, we are finding
opportunities to buy stocks at attractive valuations; there are always
stocks that are having near-term
issues that create opportunities for
us.
One of the local stocks that we find
attractive right now, Bio-Techne, used
to be called Techne; were really
interested in that. The stock has been
moving sideways in an up-market, so
the relative valuation has become
more attractive. They make primarily
proteins that are sold to R&D labs in
pharmaceuticals. Theyve carved out
this really attractive niche: They sell
primarily to laboratories; theyre
doing experiments trying to develop
new products and also the National
Institutes of Health, very big customer for them.
DO YOU TARGET SPECIFIC SECTORS?
We really look for individual companies. I would say that the health
care sector has been one of the really
strong performers here in the market,
so a lot of the companies that were
invested in over the long haul maybe
are closer to full value as opposed to
attractive value, and a case in point
would be Medtronic, which has been
a pretty strong performer here of late
and now is looking pretty close to
fully valued.
Were going to go wherever the
opportunity is. We dont say we really
focus on a particular sector. Interest-

Saturday

1-24-2015

ingly enough, we think that, clearly,

health care devices are a big deal
here in Minnesota, but we also have
some of the best manufacturing companies in the world, frankly. 3M of
course is the most well-known, but I
would also point to Graco and Donaldson as being spectacularly wellmanaged companies with very attractive end markets.
HOW HAS THE SUDDEN DROP IN OIL
PRICES CHANGED THE LANDSCAPE?
Weve got a good sense of which
companies are going to benefit the
most. Within our holdings, Id say a
Valspar, because so much of their raw
material has oil as an input somewhere. Just all raw materials is whats
happening. And transportation; G&K
should be a huge beneficiary of that.
The stock that I think really benefits is what used to be a local company, Bemis, in Neenah (Wis.).
We dont have a whole lot of energy
(stocks) here, so weve been buying
Schlumberger on perceived weakness. They used to be a French company and now are based in Houston.
They dominate equipment for extracting oil out of the ground, and as you
can imagine, people are very worried
about future revenues in their business, as are we; but cycles come and
go.
One of the advantages of being a
long-term investor is, I can buy the
highest-quality oil services company
at a huge discount right now. When
are things going to turn? I dont know;
I frankly dont even care. When you
have this kind of value, I just buy it.
WHAT ABOUT CONSUMER COMPANIES,
SAY TARGET OR BEST BUY?
When the new CEO of Target came
onboard we got to talk with him
last week we got the sense that at
corporate headquarters, the mood
was shifting pretty quickly, to one of
confidence in the direction the company was going. So we got the sense
that when the stock was at its darkest,
things were already starting to
improve.

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1-24-2015

TwinCities.com St. Paul Pioneer Press

TARGET STOCK HAS CERTAINLY

REBOUNDED. WERE YOU ABLE TO GET
IN ON IT AT THE WEAK POINT?
Im not sure we timed it right at the
bottom, but we certainly werent selling like the rest of the world was, and
we were buying early last year.
WHAT ABOUT BEST BUY?
We have not invested in Best Buy;
thats actually gone OK. The reason
why is we consider their product line
to be too vulnerable to online competition. We just havent been able to
build a thesis for these big-box
retailers that focus on consumer
electronics.
YOU MENTIONED MEDTRONIC, WHOSE
MERGER WITH IRELAND-BASED COVIDI-

EN ANGERED SOME SHAREHOLDERS

BECAUSE OF THE TAX HIT. ARE YOU
STICKING WITH IT AS IT BECOMES
MEDTRONIC PLC?
We would expect that Medtronic
would continue to be an important
part of our portfolio; that being said,
we recognize that the stock is becoming
expensive.
Its
performed
extremely well. And weve taken into
consideration that we think this is
going to be a good merger, so we think
the valuation has gone up because of
this merger, but we think its still
expensive.
YOU TALK ABOUT YOUR FAMILIARITY
WITH THESE FIRMS. DO YOU MEET
PERSONALLY WITH ALL THE EXECUTIVE TEAMS?
Weve got spectacular access to the
C-suite guys, the CEO or CFO, and

3A

often theyll just come right here to

our office. Even the very large companies like 3M recognize that its worth
their while to come talk to us. 3M is a
very big deal to us. I suspect were not
a big deal to 3M in terms of where we
sit on their list.
But they also know that what were
talking to them about is, where are
you placing your bets now? What will
bear fruit five, 10 years down the
road? Rather than talking to the typical investor about how the quarter is
shaping up, theyd rather explain
what their business is all about from
a long-term perspective.
And we get value just from living in
the community and getting a sense for
whats going on with these companies.

Reprinted with permission from Pioneer Press. A MediaNews Group Publication. Copyrighted 2015.
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