OBLONG BLUE RECTANGLES:

Home-Grown Mutual Funds

By MICHAEL FINLEY
Originally Appeared in MINNESOTA MONTHLY,
October 1989

Copyright © 1992 by Michael Finley. All rights reserved.

IDS Financial Services, of course, is owned by American Express, an -- eek! -- out of state company. But the more than 25 mutual funds IDS offers do for investors precisely what community storage elevators do for farmers -- they create a common pool of wealth, enabling people of modest means to participate in the markets postern to fetlock with people of immodest means.

I'd like to advance the yuppyish notion that mutual funds are in a continuum with Minnesota's deep coop tradition. Setting IDS aside for the moment -- don't attempt this without your physician's OK -- Minnesota has a tradition of creating and nurturing smaller, home-grown, low-profile funds to keep its wealth close at hand.

Several, like Mairs-Power in St. Paul, State Bond in New Ulm, Morrison Asset Allocation in Minneapolis and Granite Funds in St. Cloud, are what the financial press likes to call "boutique" funds -- small, often regional in scope and clientele, surviving by satisfying some niche in the marketplace.

Others, like AMEV in St. Paul, and Voyageur, IAI and Sit New Beginnings in Minneapolis, give every evidence of greater ambitions, should they ever emerge from the shadow IDS casts on the area's financial services industry.

Has anyone out there even heard of Mairs-Power? Founded in 1957 by St. Paul investment advisors George Power and George Mairs as an accommodation for customers unable to afford their own stock portfolios, the income and growth funds have been quietly building wealth for hundreds of investors in Minnesota and Wisconsin (the only two states the funds are licensed to sell in) for thirty years.

Mairs-Power deliberately hides its lamp under the bushel basket. They don't appear in the papers, and they're not registered with NASDAQ. "We don't advertise. It costs too much," said Kathleen Kellerman, treasurer. "Just a line in the St. Paul Yellow Pages." That is either cockamamie marketing or Minnesota unpushiness -- you judge. Still and all, with $25 million in assets, and a solid A and C for up and and down markets from FORBES, Mairs-Power knows where to put it, and how it works.

State Bond Funds, established in 1961 in New Ulm, has only a slightly higher profile. State Bond's funds are listed in newspapers, and occasionally attract national notice -- FORBES rated their Diversified Fund a B for its performance in down markets. The funds total seven in all, and are thought of in the press as average. ("Average" is not always a pejorative, though -- it generally means a fund performed at the same level as the Standard & Poors 500, the benchmark for growth on Wall Street. Matching the S&P500 is far from a disgrace.)

State Bond Funds are heavily loaded at 8.5%, but they are populistically priced with low minimum initial contributions -- $250 open a regular account, and a mere $50 opens an IRA.

In downtown Minneapolis, Ken Dawkins is president of Voyageur Funds, with $260 million invested in its three tax-free funds (Double Exempt Flex Fund, Double Exempt Capital Conservation Fund, and Minnesota Alternative Fund), plus a government securities portfolio.

Voyageur is moving to consolidate its place in the market by scarfing up yet another Minnesota fund group, the Granite Funds of St. Cloud, founded a few years ago and sold mostly as a product for bankers. The Granite funds include a money market, stock, and government fund which, renamed Voyageur, will give Dawkins a foot in the national marketplace for the first time.

Voyageur is a good bet to be among the survivors of any mutual fund shakeout -- its Double Exempt Flex Fund is well regarded, getting an A for its bear market performance in a recent issue of FORBES and nailing down an annual return of 10.4%, a signal achievement for a muni fund. Ranked #7 among top municipal bonds in a recent CONSUMER GUIDE rating, it was the first Minnesota-based double-tax-free fund for years, before AMEV, IDS, and State Bond created theirs.

It would be hard to come up with a more Minnesotan moniker than Lutheran Brotherhood Mutual Funds. The Minneapolis-based insurance group sponsors four funds, with its flagship fund, Lutheran Brotherhood Fund, with $263 million in assets, earning a #3 fund nationwide during bear markets for the last three years, by US NEWS & WORLD REPORT. No other Minnesota fund was on the list of 25.

Bob Day, VP for mutual funds marketing, says that Sit New Beginnings Mutual Fund Group, located in Minneapolis, is doing so well with two of its five funds -- U.S. Government Secs., and National Tax-Free -- that either "could be mistaken as a flagship." But Sit, founded by Eugene Sit, former president of IDS Advisory Corp., is especially proud of its Growth fund, rated by MONEY as a middling fund over 5 years, with a low $66 expense projection. Day calls Growth manager Doug Jones "one of the finest portfolio managers anywhere."

Sit's money-market-like Investment Reserves fund is noteworthy for having fluctuating share value -- even though the value has only fluctuated 1 cent over 3 years time, with a competitive annualized yield of 8%.

Morrison Asset Allocation, located in Minneapolis, is a 6% load fund with what until recently was a unique focus -- an asset allocation mechanism for shifting assets back and forth from stocks to government bonds to cash, as market conditions dictate. When Morrison, a money management group, got into the mutual fund game three years ago, asset allocation was heralded as the next big thing, eliminating investor worries about being invested in "the wrong place." Now, though everyone from AMEV to Fidelity is touting some sort of allocation fund, across-the-board results have not been very impressive. Morrison, with $24 million to work with, was rated D by FINANCIAL WORLD, with a meager 3.5% return for 1988. But the fund, a creation of respected money manager Thomas Morrison, should not counted out yet -- it is young, and has lots of room to grow.

On the eastern rim of St. Paul is AMEV Investors. AMEV's funds were acquired three years ago when the Utrecht-based N.A. AMEV financial services group bought the St. Paul Funds from the St. Paul Companies. (Prior to that, back in the 1960s, they were known as the Imperial Funds.)

Like State Bond's, AMEV's low $500 minimum makes its funds accessible to investors of a thinner stripe than IAI's. Also like State Bond's, most of AMEV's funds are loaded, some as high as 8.5%, with additional expenses bringing the 5 year expense ratio for AMEV Capital and Growth to about $135, and even low-yielding U.S. Government Securities to $93.

Recent performance makes AMEV's loads and charges harder to justify. No AMEV fund was rated above the middle third by MONEY magazine; FINANCIAL WORLD gives Capital and Growth B's; the latest BUSINESS WEEK ratings give Capital a below average, Fiduciary an average, and Growth a poor. FORBES rates Capital an A in up markets, a C in down. CONSUMER GUIDE ranked AMEV Government Securities #5 among government funds for 1988.

"We would worry more about the ratings if we were after short-term results," said Deb Hoffman, marketing manager for AMEV. "The last five years have not been especially good for growth stocks. But we're in for the long haul, unlike some of the flash-in-the-pan types you see in the 30-day top tens."

To AMEV's credit, its equity funds enjoy the portfolio management team of Stephen Poling (named by MONEY as one of the top 20 portfolio managers) and Douglas Longlet. Both enjoy super reputations among their peers, although that reputation was tarnished when they bet heavily on technology two years ago, just as the tech sector began its dismal southward trek. It is said that Poling and Longlet are still apologizing to shareholders, in their sleep.

Some investment companies, insurers and banks offer their own mutual funds, as a sideline or cross-sell. Norwest Bankcorp sells a Prime Value line of funds. Northwestern Mutual Life manages a Washington Square Cash Fund. Then there's Piper Jaffray Investment Trust, a division of the regional brokerage house. Piper Jaffray's Trust, which set up business just five months prior to the October 1987 crash, comes close to the "family of funds" model, offering two stock funds, a stock/bond fund, two tax-exempt municipal bond funds, and three money market funds.

Also, in conjunction with other underwriters, Piper Jaffray sponsors the two closed-end American Government funds: Income Portfolio, a T-bill fund and Term Trust, a GNMA fund. (An open-ended fund sells shares out of thin air, and is listed in the newspaper among "mutual funds"; closed-end fund shares are limited by charter, sell on the open market like common stock, usually at a discount, and are listed as common stocks.)

Piper Jaffray funds are not cheap funds, typically showing expenses in excess of $100 per $1000 invested over 5 years time. Nor have they been, in their brief lifetime to date, big winners -- Government Income yielded only 6.5% in 1988, and Sector, an aggressively managed total return fund, yielded a meager 6.4% over that time. Value, the Piper Jaffray growth/income fund, scored a C-, with a 1988 return of 7.7%, in a recent FINANCIAL WORLD rating.

Compare those kinds of numbers with the achievements last year of IAI Mutual Funds. IAI's three no-load growth funds -- Stock, Regional and Apollo -- all sport 5-year expense ratios of about $45 per $1,000, and were rated by FINANCIAL WORLD A (up 8.5%), A+ (18.8%), and A+ (24.3%), respectively.

IAI Regional, rated above average by BUSINESS WEEK, and lovinglily written up in a recent fund profile in FINANCIAL WORLD, is a paragon of the Minnesota mutual fund -- portfolio manager Bing Carlin invariably appears in the annual winners' circle, investing as he does only in companies doing business in Minnesota, Iowa, Wisconsin, the Dakotas, Nebraska and Montana. How else could you buy a piece of Oshkosh B'Gosh, Cray Research, International Daury Queen and Northwest Airlines with one check?

IAI (Investment Advisers, Inc.)'s funds went by the name of North Star Funds until the 1970s. IAI's Andy Wyatt says the name change was forced by the amount of mail received relating to hockey matters. In addition the mutual funds, IAI manages $6 billion in pension and profit sharing monies.

Although IAI asks a stiff upfront ante (minimum deposit $2500 for non-IRA accounts), the funds are top performers, with the exception of IAI international, a fledgling last year, along with Piper Jaffray.

"It's not easy catching on as a new mutual fund," says Dave Schwandt, a financial planner with Stromme Financial, Minneapolis. "Until your assets reach $25 million, the papers won't list you. Financial planners won't know about you, and so can't recommend you. You have little track record, or worse, a poor track record as you stumble out of the gate."

Even if you make it to the $25 million mark, and are turning out solid yields and gains to a growing number of investors, you're not in the clear. Larger funds have been known to swoop down on newcomers and gobble them up whole, as additions to their teeming families of funds.

Still, if you can survive all those other ifs, a mutual fund is a grand business. Where else can one start a multimillion dollar business, fly with the eagles with nothing but a secretary-clerk and a WATS line, roll in tons of other people's money, call it your own, lose hundreds of thousands one day and win it all back the next, drop 20 points and still make money? Though the economy goes red-belly, and though the pot may diminish, your 12(b1) and other fees keep rolling in. The trick is to grow large enough that your 1% of the pot is enough to continue competing -- with advertising and skilled management -- against the goliaths' 1%.

Smaller funds can also console themselves that bad times hit the big guys as well as the little. IDS's cadre of portfolio managers, whose funds performed generally quite well throughout 1988, are all frustrated by the fearfulness that until very recently infecting the investing public following the October 1987 Thud. As the saying goes, bull markets are built upon a wall of worry. Still, success is sweeter when the pot has something in it.

If, for some loony reason, one wanted to construct an All-Minnesota mutual fund portfolio, one could do worse than make these allocations of $100,000:

Sit New Beginnings Growth 30%

IAI Regional 30%

Lutheran Brotherhood Diversified 20%

AMEV Money Fund 10%

Voyageur Double-Exempt Flex 20%

Morrison Asset Allocation 20%

State Bond Diversified 20%

Mairs & Power Income 20%

Piper Jaffray U.S. Government 20%

And here's the Michael Finley Sidewalk Investment Advisory Promise, something other financial writers are too chicken, too "professional" to make: Put all your savings into one of these plans, and if things don't go absolutely swimmingly, I'll make up the difference to you out of pocket. Honest.

Fifteen years ago, when I last wrote in this space, 70% of stocks and bonds were held by individuals, and 30% by institutions like pension and mutual funds. Today those figures are more than reversed, with only 20% of shares held by individuals, and the rest by institutions.

Maybe the battle really is to the strong, to IDS and its $17.2 billion in mutual fund assets, to Fidelity, $78 billion strong. And maybe the small mutual fund, the Mairs-Powers and Morrison Asset Allocation Funds of the world, and their measly pocketfuls of $25 million plus change, won't make it to the millenium. Just as one day we will all be named Jones or Smith, we will someday invest only in low-load, no-fun Fidelity Magellan or Vanguard Windsor.

Heaven forfend. There should be a Sierra Club to preserve neat businesses like small mutual funds against unnatural predators. Or at the very minimum, to keep bicoastal writers from calling our grain elevators boutiques.

Copyright © 1992 by Michael Finley. All rights reserved.