Try telling Bill Frels and Mark Henneman that buy and hold is dead.
The managers of the Mairs & Power Growth Fund have owned all but one of their top 25 stocks at least a decade. In an industry that rewards risk takers searching for the next big trend, the St. Paul, Minn., fund managers have big stakes in companies that make Spam canned meat, Scotch tape and a paint sold at Lowe's hardware stores.
Their slow, patient approach to investing has paid off — they were named Morningstar's domestic stock fund managers of the year for 2012. Their fund returned 21% last year, beating the 13.4% gain in the Standard & Poor's 500 index.
Frels said the award was a validation of his firm's strategy, especially at a time when many experts have questioned the wisdom of holding stocks long term.
The fund, with about $2.5 billion under management, is an unusual success story because of something it doesn't own: Apple Inc., one of the hottest growth stocks of 2012.
The vast majority of its holdings are in companies headquartered in Minnesota, many of them a short trip from the fund's offices.
It's not uncommon for chief executives to drop by Mairs & Power for a briefing, or for the fund managers to bump into company employees in the community, Henneman said.
Frels and Henneman say they're fortunate to have many quality companies nearby. Minnesota firms Target Corp., 3M Co., Hormel Foods Corp. and Medtronic Inc. are among their top stocks.
Their No. 1 holding is paint company Valspar Corp., which soared more than 60% in 2012 thanks to strong sales at Lowe's stores across North America.
For Mairs & Power, it's not so much buy and hold as it is lock it up and throw away the key. The fund has a microscopic turnover rate of about 5%, far below the 60% average for large blend funds, according to a Morningstar research report.
The managers find good companies and hold on to them, through good times and bad.
"Their low turnover, that's very critical," said David Falkof, an analyst who covers the fund for Morningstar, which gives it a coveted five-star rating.
Frels, 73, joined Mairs & Power in 1992 and has been lead manager of the growth fund since 2004. Henneman, 51, has been co-manager of the fund since 2006. Both managers hold significant personal investments in the fund, evidence that their interests are aligned with investors', Falkof said.
Since Frels joined the fund as co-manager in 1999, it has gained an average of more than 8% annually — beating the S&P; 500 by 6% a year. Although the fund may miss out on some trends, such as technology in the late 1990s, it is built to survive major crises because of its focus on sound companies, many of them in the industrial sector.
In 2008, when most funds suffered devastating losses because of the financial crisis, the Mairs & Power growth fund lost 28.5% — less than 95% of its competitors, which fell 41% on average. The fund holds about 55% in large companies, 30% in mid-caps and 15% in small caps.
What is your fund's strategy?
(Henneman): We're long-term investors. Every mutual fund manager says that, but we really stick to it. When we buy a stock, we're buying a company we expect to be invested in for a long period of time.
Why does your fund invest so heavily in Minnesota companies?
(Henneman): We are blessed to have a number of high-quality companies nearby. The benefits from proximity are huge. We really get to know these companies quite well. We are in the community with people who work for the firms we invest in.
What are the benefits of having so many companies you invest in nearby? Do you just walk over and visit their headquarters?
(Frels): We have companies' management visiting our office on a regular basis. We also like to take field trips and visit with CEOs and CFOs as well. We're proud to say that when 3M elected a new CEO, he was in our office giving us time less than three weeks after he became the CEO of a multinational firm.
This award comes at a time when many people have sworn off buy-and-hold investing. Is this affirmation that picking good companies and holding on is a good strategy?
(Frels): That's been our strategy and the reason for our success. As long as it's working, why change? Lack of patience accounts for some of the biggest mistakes made on Wall Street. People are in too much of a hurry to do things, and we try to avoid that. Obviously, we make mistakes like everyone else, so we're not perfect. But that style, that philosophy has served us well over the years.
Do you worry that by holding your stocks so long that you will miss out on new opportunities?
(Frels): We typically don't make moves just to get into hot areas. There was a period of underperformance in the 1990s [when the fund had a relatively small stake in technology]. We were taking a lot of heat during that time, as you can imagine. Everybody was talking about the new economy. The tech bubble burst and we regained that. We felt vindicated.
What do you do all day, if you're not buying and selling stocks?
(Henneman): We get that a lot. [Laughs.] Certainly there are days that we don't trade. We understand our companies better than anybody else. That doesn't just happen. That's a lot of work. We get out and meet with management teams. In addition, we get to know the employees within the companies. The CEO can obviously tell us things. Sometimes, the middle manager and line employees can give us a different picture. It's a lot of work to stay on top of these companies and really understand what's going on.
How difficult was it to succeed as a growth fund without owning Apple, which provided growth to so many of your competitors?
(Frels): We were kind of nervous in the first half of the year when Apple was flying high and we saw other growth funds with double-digit positions. We stayed with what we know and it worked out well.
(Henneman): We do own Apple. We just call it Valspar.
How much of your own money is in the fund?
(Henneman): For me, it's a very big amount. I feel very strongly about it. I certainly haven't found a better place to put my money. My entire profit-sharing plan is in the growth fund. I also bought additional shares of the fund for myself. I'm all in. And the same would be true for Bill.