Minnesota Nice: Where All the Companies Are Above Average

10 Questions With Mairs & Power's William B. Frels

Tenure: Co-manager of Growth fund since December 1999; Manager of Balanced fund since July 1992.

Growth's performance: 16.11% 10-year average annual (Top 1%)

Balanced's performance: 10.91% 10-year average annual (Top 6%)

Information: 1-800-304-7404 or Web site

Source: Mairs & Power, Morningstar

Minnesota, which Fargo co-writer Ethan Coen dubbed "Siberia with family-style restaurants," takes more unfair ribbing than most states.

However, many cynical folks on both coasts overlook the virtues of the Land of Ten-Thousand Lakes: verdant countryside, the hipness of Minneapolis (Prince's hometown), the friendly populace -- and the preponderance of great companies. Garrison Keillor might call it the state "where all the companies are above average."

It just so happens that there is a mutual fund firm whose two funds boast "a heavy representation in stocks of companies headquartered in the Upper Midwest."

Mairs & Power Funds, a smaller fund shop that has been around for about 70 years, has racked up outstanding performance by investing in its own back yard. In this week's 10 Questions, we chatted with longtime skipper Bill Frels to learn more about his firm's investing philosophy.

"We're small, we're owned by the employees, we have no outside investors and no marketing pressures to do certain things at certain times," Frels said. Mairs & Power earns the confidence of its investors: Its two managers and three associates have more than 150 years investing experience in total, its funds keep expenses and taxes low, and returns have been exceptional.

Frels co-manages the (MPGFX Quote)Mairs & Power Growth fund with George Mairs, who plans to retire sometime in the next 12 months. The $1.024 billion no-load fund's three-, five- and 10-year average annual returns -- 8.25%, 9.11% and 16.11%, respectively -- rank in the top 1% of all large-cap growth funds, according to Morningstar. Frels flies solo at the firm's asset-allocation fund, the $55 million no-load (MAPOX Quote)Mairs & Power Balanced fund. That fund's three-, five- and 10-year average annual returns rank in the top 6% of its peers -- 3.8%, 5.46% and 10.91%, respectively.

In our conversation, Frels extolled the virtues of hometown companies such as Medtronic(MDT Quote), Target(TGT Quote), 3M(MMM Quote) and a few lesser-known outfits. He also expressed optimism about the prospects for the U.S. economy.

1. What is the investing philosophy at Mairs & Power?

Put very simply, we want to buy growth and we don't want to pay too much for it.

We just don't like to overpay for growth. Nobody does, of course, but since we're not a momentum player it's especially important for us. We pride ourselves in being long-term investors. We want to buy companies and feel like we're a partner in that investment along with the company.

Also, we are constantly examining our investments and appraising the growth prospects -- not just the earnings growth but the quality of that growth. We also keep an eye on the valuation side.

How does a fund family avoid being a momentum investor in a market full of momentum investors, where valuation gaps on stocks close ever more quickly?

It's a challenge. The fact that information flows so much more quickly now than ever before raises some new challenges. We have to be a little quicker ourselves and monitor movements more closely.

Nonetheless, turnover costs money. Actively moving in and out of stocks triggers higher costs and taxes, and we aim to run tax-efficient funds. We try not to let taxes drive investment decisions, but you have to keep them in mind.

Also, the speed with which information flows sometimes works to our advantage. Many times, not always, you have an overreaction on a particular stock. If you can maintain a proper perspective, you can use overreactions from momentum investors as an opportunity.

2. If anyone ever wanted to invest in Minnesota, your funds would be the right way to go. Would you mind telling our investors why the funds have an Upper Midwest bent?

We consider ourselves fortunate from the standpoint that there are a lot of attractive companies around the Twin Cities, which is where we're based. While the fund has a national charter, we find we have plenty of attractive opportunities right in our own backyard.

Since most of the people at Mairs & Power have grown up in this area, we're familiar with these companies and the people managing the companies. That's helpful when we want to have access to management. You know who to talk to.