Mairs & Power Growth Fund (ticker symbol MPGFX) is a mutual fund with approx. $2.9 billion in assets managed by Bill Frels and Mark Henneman. Recently, Morningstar awarded Messrs. Frels and Henneman a designation of the Fund Manager of the Year in 2012 in the Domestic Stock Fund category. Currently, Morningstar rates the fund Five Stars / Silver in the US OE Large Blend category, and says that “It has its quirks, but this fund is the real deal.” Let’s assess the fund’s performance by applying the Alpholio™ methodology.

First, the total return chart, which assumes reinvestment of all distributions into the fund and each member of the reference portfolio, respectively:

Cumulative Return of MPGFX and Reference Portfolio

The chart shows that in the entire analysis period from early 2005 to early 2013, the fund’s performance could be closely replicated by that of the reference portfolio. This is further illustrated by the cumulative RealAlpha™ chart:

Cumulative RealAlpha™ for MPGFX

An investor who bought the fund at the beginning of 2005 realized no cumulative regular RealAlpha™ through the beginning of 2013. After 2008, the fund was able to generate some lag RealAlpha™, which tends to reward those directional bets made by the manager that generate value for the fund’s shareholders.

The overall performance statistics are unexceptional:

MPGFX Statistics

While the regular and lag reference portfolios exhibited a slightly higher volatility (measured as a standard deviation of monthly returns in the entire analysis period) than that of the fund, those volatility figures were very close. This indicates that the fund was well diversified and held securities generally present in the reference exchange-traded products (ETPs). As a result, the fund’s selection of individual securities added very little value on top of the reference portfolio, except in 2008 and 2012. The RealBeta™, a measure of core volatility and correlation of the fund’s returns relative to those of the broad market, was just under the value of one.

This is further demonstrated by the buy-sell chart that uses a smoothed RealAlpha™ to generate hypothetical trading signals:

Buy-Sell Signal for MPGFX (Smooth)

The analysis starts with an assumption that the investor initially bought the fund in early 2005 and intended to hold this investment indefinitely, i.e. at least through early 2013. The blue curve depicts the cumulative RealAlpha™ in that entire period. Since there is a degree of high-frequency oscillation in that curve, its longer-term trend can be elicited from a smoothed approximation, depicted by the green curve. Subsequently, a simple decision criterion is applied to determine whether the investment in the fund should be retained. So long as the fund generates positive monthly increments to cumulative RealAlpha™, the investment in the fund is considered beneficial. Conversely, if the fund’s cumulative RealAlpha™ begins to consistently decrease, the investment is no longer considered attractive.

The following chart shows the major investment “themes” of the fund over time:

Reference Weights for MPGFX

In the analysis period, the fund held equivalent positions in VIS (Vanguard Industrials ETF; average weight of 25.2%), DVY (iShares Select Dividend ETF; 13.5%), VHT (Vanguard Health Care ETF; 13%), DIA (SPDR® Dow Jones® Industrial Average ETF; 8.3%), VDC (Vanguard Consumer Staples ETF; 8.2%), and VFH (Vanguard Financials ETF; 7.6%). The largest equivalent position in industrials is consistent with the fact that the fund tends to invest the majority of its assets in stocks of industrial companies located near its headquarters in Minnesota.

For clarity, smaller reference positions are collectively represented by the Other category in the chart. For example, this category includes a cash-equivalent position in SHY (iShares 1-3 Year Treasury Bond ETF; average of 4.2%) and JKL (iShares Morningstar Small-Cap Value ETF; 3%).

As the recent MarketWatch article says:

“Honoring the manager of the year is great, but investors need to be looking for the manager of the next half-decade or longer, and no plaque or trophy will show them that. Focus on the characteristics that make a manager appealing; if you can’t see yourself sticking with a mutual fund manager through years when performance isn’t going to win them any prizes, maybe you shouldn’t jump in with them when they are a big winner.”

We hope that this Alpholio™ analysis provided at least some of “the requisite knowledge of ‘How does he do it?’” mentioned in the article.

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