HOME GROWN MUTUAL FUNDS
by Michael Finley
Drive into any Minnesota town and the first sight to greet you is the blue-gray grain elevator, the respository of each town's ag wealth. Drive into the Twin Cities on 35W and the tall blue-gray object you see is the IDS Tower, in its way a financial counterpart to the grain elevator.
IDS Financial Services is only the most visible of a host of Minnesota mutual fund companies. Each mutual fund, ranging in size from a few million dollars to a few billion, is a coop investment -- each investor pooling his or her savings along with the savings of every other investor. Without mutual funds, most individual investors are incapable of diversified investing; with mutual funds, even the smallest investor can go head to head with the linchpins of Wall Street.
For some reason, Minnesota has more mutual funds per capita than most states -- 150 in all. IDS's leadership is part of the reason, but another may be the Minnesota tradition of pooling resources for a common goal. When IDS began its first fund, IDS Mutual, Wall Street was even more formidable to the small investor than it is today. But mutual funds neutralize much of the fear of investing. They put the burden of judgment on proven portfolio managers, and by buying and selling in huge lots, greatly reduce transaction expenses. And they are affordable. For as little as $500, even the smallest investor can start an IRA account that can someday grow to hundred of thousands.
Not only are Minnesota mutual funds plentiful, but they are darn good. As the graph shows, every major stock fund statewide kept pace last year with the S&P 500 average -- a tougher standard than most people think. The past year was not an especially good one for the stock market -- many funds nationwide wound up with negative numbers. But the trend over five and ten years has been very positive.
All of the following fund families, except tiny Mairs Power, offer a variety of funds -- stock, bond, money markets, the works. The graph shows the "flagship" stock fund for each family, and total return (capital appreciation plus yield) numbers for the year ending June 30.
There are a few other funds in the state, too. Great Hall Funds are three money market funds offered by Minneapolis brokerage house Dain, Bosworth & Co. The funds have scant track record to date, but Dain Bosworth appears committed to expanding their number. MIMLIC Mutual Funds of St. Paul, a subsidiary of Minnesota Mutual Life Insurance Co, offers five funds through its sales reps, and through several financial instititions -- a money market, a fixed income, a stock, a mortgage bond, and an asset allocation fund. Likewise, Northwestern National Life Insurance sells a money market fund, Washington Square Cash Fund, through its registered agents.
- IDS. With 36 retail funds, total assets of $27 billion, and a local history going back 70 years, IDS is the grandaddy of Minnesota mutual fund groups. Its size, presence, and conspicuous building single-handedly make the Twin Cities a credible center. IDS also serves as a training ground for money managers like Gene Sit who go off and start their own funds. It is because of IDS that a raft of successful smaller fund groups have sprung up here, like chicks around a hen. One of the inventors of the mutual fund concept, IDS offers funds for just about every imaginable investment objective. Star performers in recent years have included New Dimensions, a growth fund managed by Gordon Fine, and Kurt Larson's High Yield Tax Exempt, the second-largest tax exempt fund in the U.S. IDS's style is a "hand-holding" one, selling through an international network of financial planners, on a commission basis.
- IAI. Founded in 1947, the company's eleven no-load funds went by the name North Star Funds for a long time -- the name change came about because the company got too many calls about for hockey tickets. Its superstar fund, IAI Regional, focuses on companies operating in the seven state region. "Research is first-hand, so the quality is very good," says IAI President Noel Rahn. Regional Fund is $1.2 billion in assets, attracting investors from every state. The fund receives 1,000 inquiries every day -- "without advertising," Rahn adds.
- Fortis Funds. The Fortis family of Woodbury has a long history. Two years ago Fortis was called AMEV, after the Netherlands-based parent company. Before that they were the St. Paul Funds, after the St. Paul Companies. Way, way back they were called the Imperial Funds. Throughout the changes, however, Fortis has been a solid performer, led by ace fund managers like Stephen Poling. Fortis charges a sales commission on most funds, but it has performed ably over the years, making the loads a good bargain.
- Sit New Beginning, Eugene Sit, co-founder and namesake of this no-load fund family, was a guiding7 light at IDS during the 1970s. The Sit funds were started in 1981, and have just attained the coveted 10-year benchmark. "Seventy per cent of our shareholders are right here in Minnesota, so we aren't strangers," says Mike Eckert, VP Sales. Sit's growth and growth and income funds have both been strong performers.
- Voyageur Funds is a Minneapolis-based family, $3 billion strong, specializing in very high quality tax exempt bonds. It has eight of them, with $3 billion in net assets. Voyageur Minnesota Tax Free Fund is the state's largest mutual fund, boasting a remarkable 1.3% total return last year. Also noteworthy is Voyageur Growth Stock, an old fund renamed -- for years it was the mainstay of St. Cloud's now-defunct Granite Fund family.
- Piper Jaffray Funds are the way a large investment house has chosen to offer diversified investing to small and medium-sized investors. Piper Jaffray sells eleven different mutual funds. Two stock funds -- Value and Emerging Growth -- have shown special strength in their short lives. Two more in the works, Europacific and Growth & Income, will be rolled out this fall.
- State Bond Fund Group has been in business since 1914. The company was one of a handful nationally during the Great Depression that "met every obligation in full and on time." Though its family of seven load-charging funds projects an image of fiduciary sobriety, the company has been creative about offering funds for a variety of investment objectives. Based in New Ulm, State Bond has sales offices in Bloomington.
- Mairs Power. Lost among the big name mutual funds in the state is this retiring but accomplished no-load fund family of two, founded in 1961 as an accommodation for St. Paul brokerage Mairs & Power's clients. The two funds, Growth and Income, show up on few lists, and do no advertising, and are sold in only a small handful of states. Yet they they have been keeping pace with the stock market since their inception.
- Lutheran Brotherhood. Selling at a 4% load, Lutheran Brotherhood offers a blue chip stock fund, an income fund, corporate grade bond bond, a high yield bond fond, and a municipal bond fund. As good as Lutheran Brotherhood's Income Fund has been in recent years, however, it is only sold to Lutherans through authorized sales centers. That has not kept Lutheran Brotherhood's funds, started only 20 years ago, from building a $2.3 billion nest of assets.
Should a Minnesota investor invest only in Minnesota funds? Certainly, if that is your pleasure. But be wary of putting all your eggs in the regional basket. Investing 100% of your money in a find like IAI Regional exposes you to a high event risk. A drought, bank failure, regional recession, or the sudden demise of, say, a major airline might take its toll on area stock values. But IAI Regional's strong fundamentals still make it an excellent portion of an asset allocation plan.
Here are a pair of model portfolios of in-state funds:
AGGRESSIVE All-Minnesota PORTFOLIO
- Fortis Advantage High Yield
- Piper Jaffray Emerging Growth
CONSERVATIVE All-Minnesota PORTFOLIO
- Lutheran Brotherhood Income
- State Bond U.S. Government Securities
- Voyageur Minnesota Insured
You can mix or match and come up with your own portfolio that is likely to be as good or better. The beauty of investing in home-grown funds is that you can get the portfolio manager on the phone and harangue him about his weightings, and it will be a local call. Or come on down personally, and give the tires a good kick. §
Michael Finley is a Twin Cities-based writer specializing in finance.
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