David Falkof: Hi, I'm David Falkof from Morningstar, and I'm here today with our 2012 Domestic-Equity Fund Managers of the Year, Bill Frels and Mark Henneman of Mairs & Power Growth. Congratulations, and thanks for being here.
Mark Henneman: Thank you.
Bill Frels: Thank you, David.
Falkof: I thought we'd first start off with something that I think is very distinct about your approach in that being that your offices are based in Saint Paul, Minn., and many of your largest holdings are based either in Minnesota or in the broader Upper Midwest. And for some investors, they'd sort of balk at that idea of limiting yourself to this particular region of the country, but for you guys it's worked out very well over the long haul and particularly over this past year. So maybe just to start, talk about why being located close to the companies that you own has really helped to make you better investors?
Frels: Well, first of all, we benefit from the fact that there are a lot of well-managed growth-oriented companies in or around the Twin Cities. So, we've got a lot of raw material to work with, and we have always liked to know what we invest in, so that you don't get caught in an Enron or a WorldCom.
Obviously, everyone makes mistakes, and we've made our share of mistakes over the past. But by getting to know management, getting to know their strategies, what they are looking at, and how they are planning to achieve their objectives is critical, at least in our minds, to making good long-term investment decisions.
Henneman: As additional benefits from proximity, we think that getting know other employees who live in the community with us really gives us a complete picture, along with what we learn from management, to really have a through and deep understanding of the companies.
Falkof: Another thing that is unique about your approach is you describe yourselves as growth managers, but you look at portfolio, you are not going to see an Apple or a Google. Instead you see companies like Valspar and Toro. How you really describe your approach to growth investing?
Henneman: Well, we're looking for companies that can deliver a sustainable growth rate and companies can for periods of time deliver 20% or more growth, but we tend to think that that's unsustainable over a long period of time. So we tend to find companies that can deliver high-single-digit to maybe 10% [growth] and something they can do year after year. And we focus on companies like that and feel like that can deliver us better-than-market returns over the long haul.
Frels: We see growth as a sustainable rate above that of the overall economy and corporate profits as a whole. So, while we are definitely focusing on growth rates, [we are not focusing on] those high growth rates that can be quite variable over time.
Falkof: And then I would say you are also very patient with the companies that you own. There are many companies in the portfolio that you've had for decades. Could you just talk a little bit about the importance of taking a patient approach to growth investing?
Frels: I think my experience has taught me that one of the biggest mistakes that are made on Wall Street is not having patience, and along with patience comes the idea of buying at the right price. It's one thing to have a sound strategy, but you need to execute that strategy, as well. And I guess the execution part comes with being disciplined and not be willing to pay too much for the growth that you expect out of a given investment.
Henneman: I think our time horizon is different than a lot of our peers. If we see a good company that's trading at a very attractive price, even though it doesn't appear like there is a catalyst for a short-term improvement, we'll go ahead and buy that stock anyways and put it away, and the catalyst will take care of itself. It's unpredictable when it's going to be, but if we're buying a good company at a good price, we certainly want to wait for it to pay out.