This moderate-allocation offering deserves a lot more attention.
by William Samuel Rocco | 2009-10-27 04:00:00
Mairs & Power Balanced has gone largely unnoticed for decades. It is one of the oldest moderate-allocation offerings, having opened its doors in 1961. Yet it has just $130 million in assets. And that's a small amount in relative as well as absolute terms. There are 188 moderate-allocation funds with a greater amount of assets, and 69 such offerings have $1 billion or more in assets.
Seasoned Hands and Strong Results It's unfortunate that so few investors own this fund, as it boasts one of the most experienced management teams and one of the most attractive records in the moderate-allocation category. Bill Frels is one of the longest-serving skippers in the category, and he had decades of money-manager experience before he took the helm in 1992. Ronald Kaliebe spent 25 years as an investment professional before he became Frels' comanager in 2006. Thus, they've worked through a much broader array of market environments than most of their counterparts.
Though this fund hasn't shined in every rally, Frels has generally earned pretty good returns in up markets. Meanwhile, he has regularly come through in down markets. Thanks to his sector biases and security selection, in fact, the fund lost less than its average peer in the late 2007 to early 2009 meltdown, and it eked out a gain during the early-2000s sell-off, while its typical rival incurred a significant loss. As a result, this fund has comfortably outpaced the average moderate-allocation offering over the trailing three-, five-, 10-, and 15-year periods as well as over Frels 17-year tenure. And it has been less volatile than the typical member of its category over all of those periods.
Ample Grounds for Future Optimism The fact that Frels has produced this superior record over an extended length of time--and through a variety of market conditions--isn't the only reason to believe that he and Kaliebe can continue to deliver the goods.
For starters, managers who employ sound and distinctive strategies are well positioned to outperform, and Frels and Kaliebe use such an approach here. They have especially strict stock-selection standards and long holding periods. They won't consider companies unless they're well run, enjoy good growth prospects and strong market shares, and are reasonably priced. Minnesota-based Frels and Kaliebe favor firms that they know especially well because they're headquartered in or near their home state, and those companies they choose outside their region tend to be ones they've followed for years. And they're quite patient with most of their picks: Annual turnover is normally well below 20%. (Three of the current top-five holdings, 3M, Valspar, and H.B. Fuller, are headquartered in Minnesota and have been in the portfolio for many years.)
These atypical but tame traits are balanced by some atypical but bold ones. Frels and Kaliebe pay ample attention to smaller caps, focus on 40 to 50 names, and build sizable sector overweights and underweights. (This fund is normally heavy on the industrial-materials sector due to the preponderance of leading manufacturers in the upper Midwest.) And on the fixed-income side, they concentrate on agency bonds and corporates--and readily consider mid-quality issues--rather than the high-quality government credits that most of their counterparts prefer. The resulting portfolio stands out from the moderate-allocation crowd norm and possesses significant upside potential without excessive downside risk.
Frels has delivered good risk-adjusted returns during his roughly five-year tenure as lead manager of Mairs & Power Growth using essentially the same stock-selection strategy as he does here. That record shows he can handle running a lot more assets. (Mairs & Power Growth's asset base has ranged from $1.7 to $2.7 billion during his tenure.) And despite its small asset base, this fund's expense ratio--which was 0.84% as of June 30, 2009--is well below the median for no-load moderate-allocation offerings and thus is an ongoing advantage.
Conclusion Though this fund deserves more attention, it's not for everyone. Its taste for smaller-cap stocks, its focus on certain sectors, its commitment to owning 40 to 50 equities, and its emphasis on mid-quality corporate bonds will cause problems from time to time and make this fund inappropriate for investors set on a plain-vanilla hybrid offering.
But open-minded investors have ample reason to give this fund a long look. Before they jump in, though, such investors should note that this fund is expected to make a small capital gains distribution later in 2009. Therefore, they may well want to wait until after that distribution is made if they're shopping for a taxable account.
William Samuel Rocco does not own shares in any of the securities mentioned above.
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The Best Balanced Fund You've Never Heard About
This moderate-allocation offering deserves a lot more attention.
Seasoned Hands and Strong Results
It's unfortunate that so few investors own this fund, as it boasts one of the most experienced management teams and one of the most attractive records in the moderate-allocation category. Bill Frels is one of the longest-serving skippers in the category, and he had decades of money-manager experience before he took the helm in 1992. Ronald Kaliebe spent 25 years as an investment professional before he became Frels' comanager in 2006. Thus, they've worked through a much broader array of market environments than most of their counterparts.
Though this fund hasn't shined in every rally, Frels has generally earned pretty good returns in up markets. Meanwhile, he has regularly come through in down markets. Thanks to his sector biases and security selection, in fact, the fund lost less than its average peer in the late 2007 to early 2009 meltdown, and it eked out a gain during the early-2000s sell-off, while its typical rival incurred a significant loss. As a result, this fund has comfortably outpaced the average moderate-allocation offering over the trailing three-, five-, 10-, and 15-year periods as well as over Frels 17-year tenure. And it has been less volatile than the typical member of its category over all of those periods.
Ample Grounds for Future Optimism
The fact that Frels has produced this superior record over an extended length of time--and through a variety of market conditions--isn't the only reason to believe that he and Kaliebe can continue to deliver the goods.
For starters, managers who employ sound and distinctive strategies are well positioned to outperform, and Frels and Kaliebe use such an approach here. They have especially strict stock-selection standards and long holding periods. They won't consider companies unless they're well run, enjoy good growth prospects and strong market shares, and are reasonably priced. Minnesota-based Frels and Kaliebe favor firms that they know especially well because they're headquartered in or near their home state, and those companies they choose outside their region tend to be ones they've followed for years. And they're quite patient with most of their picks: Annual turnover is normally well below 20%. (Three of the current top-five holdings, 3M, Valspar, and H.B. Fuller, are headquartered in Minnesota and have been in the portfolio for many years.)
These atypical but tame traits are balanced by some atypical but bold ones. Frels and Kaliebe pay ample attention to smaller caps, focus on 40 to 50 names, and build sizable sector overweights and underweights. (This fund is normally heavy on the industrial-materials sector due to the preponderance of leading manufacturers in the upper Midwest.) And on the fixed-income side, they concentrate on agency bonds and corporates--and readily consider mid-quality issues--rather than the high-quality government credits that most of their counterparts prefer. The resulting portfolio stands out from the moderate-allocation crowd norm and possesses significant upside potential without excessive downside risk.
Frels has delivered good risk-adjusted returns during his roughly five-year tenure as lead manager of Mairs & Power Growth using essentially the same stock-selection strategy as he does here. That record shows he can handle running a lot more assets. (Mairs & Power Growth's asset base has ranged from $1.7 to $2.7 billion during his tenure.) And despite its small asset base, this fund's expense ratio--which was 0.84% as of June 30, 2009--is well below the median for no-load moderate-allocation offerings and thus is an ongoing advantage.
Conclusion
Though this fund deserves more attention, it's not for everyone. Its taste for smaller-cap stocks, its focus on certain sectors, its commitment to owning 40 to 50 equities, and its emphasis on mid-quality corporate bonds will cause problems from time to time and make this fund inappropriate for investors set on a plain-vanilla hybrid offering.
But open-minded investors have ample reason to give this fund a long look. Before they jump in, though, such investors should note that this fund is expected to make a small capital gains distribution later in 2009. Therefore, they may well want to wait until after that distribution is made if they're shopping for a taxable account.
William Samuel Rocco does not own shares in any of the securities mentioned above.