A Slow Year for Mairs & Power Growth Fund

The past year has not been kind to Mairs & Power Growth Fund (MPGFX), a member of the Kiplinger 25. Over that period, the quirky fund lagged the broad market by 5.8 percentage points. And Growth’s quirkiness may have something to do with that disappointing performance.

What separates Growth from most U.S. stock funds is its emphasis on geography. The fund, whose management team is located in St. Paul, focuses on companies based in the Upper Midwest. At last report, 30 of its 52 holdings and 59% of its $4.6 billion in assets were in such companies. All three of its top holdings—Ecolab, US Bancorp and Graco—are headquartered in the Minneapolis–St. Paul area.

One result of this regional focus is that the fund tends to hold more industrial stocks (32% of assets) than are found in Standard & Poor’s 500-stock index (10%). Another is that Growth’s managers, Andrew Adams and Mark Henneman, tend to spend less time hunting for winners in, say, Silicon Valley than in Minnesota. And that means technology stocks are often underrepresented in Growth; they currently account for just 6% of its assets (compared with 22% in the S&P 500). Because the tech sector performed strongly for most of the past year, Growth’s relative results suffered.

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But location isn’t the only reason for the low tech stake. The managers seek growing firms with sustainable competitive advantages. But, they say, it’s hard for tech companies to maintain an edge for long. “Apple, Amazon.com, Facebook—we don’t invest in those stocks,” says Adams. “It’s tough to imagine how they won’t eventually be displaced by new technologies.”

But Henneman and Adams make an exception for Alphabet, Google’s California-based parent. They view the firm as a leader in “machine learning”—the technology that enables a computer to, among other things, find hidden relationships in gobs of seemingly unconnected data.

Although Growth has a below-average weighting in tech stocks, its managers appreciate innovation. They recently invested in Tennant, a leading maker of commercial scrubbers and sweepers, in part because the firm has been investing in new technology, including a system that can track machine locations and productivity.