Why Minnesota Works for Investors Video Presentation

Why Minnesota Works for Investors Video Presentation

November 05, 2019

Mark Henneman, Chairman & CEO of Mairs & Power, presented the case for investing in Minnesota in November 2019 to the Carlson School of Management, University of Minnesota.  This excerpt of the presentation focused on Mairs & Powers long-standing focus on regional investing. Mark discusses the most recents statistics and key factors that make Minnesota stand out among the 50 states, attracting strong companies with excellent management. 

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 Transcript of excerpt from Mark's presentation of Why Minnesota?

Today, what I'd really like to do is just focus on our regional emphasis, and as mentioned, we do invest heavily in companies that are right here in Minnesota, and that's been the case for a long time.

            Looking at the growth fund back in 1958, Minnesota Mining and Manufacturing, we've held this stock continuously for over 60 years in the growth fund. A couple others that are no longer in the fund, but going forward to today, 48 percent of the Mairs & Power Growth Fund is invested in companies that are headquartered here in Minnesota. We've got also some exposure around the five states surrounding Minnesota, so 60 percent is kind of a regional focus.

            And, why would you do that? Why would you focus on investing in one state? Well, that's gonna be the argument here, and I hope at the end you agree with why we do that.

            There are some real advantages to investing in companies in Minnesota. Human capital is a key one; we've got some of the best people here. The University of Minnesota, I promised I'd get back to it. I definitely will. Economic diversity; a lot of cities that are really focused on one or two industries, we've got diversity across a wide range of industries. That is a key advantage to Minnesota.

            But we also have a dominant position in some key verticals; healthcare, agriculture, industrial. We are sustainable. We think that some of the long tail advantages that Minnesota enjoys now will last well into the future, and we are competitive.

            So, these are just some of the companies that we invest in. The largest are the Fortune 500 based here. These are all names that you're familiar with. The next list is some of the Fortune 1000 companies; ones that we're all very familiar with. Now, this is an audience that recognizes this. I love putting this up in New York and in San Francisco, and it's like, what? These are all in the Twin Cities? And, you know, it continues now with large private companies.

            Now, we can't invest in private companies, but we believe that they play an important role in the whole infrastructure of the Twin Cities, and so, I definitely want to highlight them here.

            Moving down into the midcap and smaller companies, you know, this is a core part of our portfolio. So, we invest in companies that have been around for quite a period of time, but are still small enough to be able to be nimble and to grow faster than the economy as a whole. And, Bio-techne, Tennant, and Graco are great examples of that.

            And then, with our small cap fund, we're looking for companies that are gonna develop a durable competitive advantage over time, and so, we're early in on names that we think can be the leaders of tomorrow.

            All right. So, just a quick look at Minnesota. It's just a passing look. You could easily pass it over; population of 5.5 million puts us in the middle of the pack of states. However, $378 billion GDP – our GDP per capita is well above average. We like to think that Minnesota punches above its weight. And, unemployment; 30 years of unemployment less than the national average, and 16 Fortune 500 companies. Again, 5.5 million in population.

            Some other key advantages I highlight on the right is volunteerism and charitable giving. Minnesotans are very focused on their community and are willing to work hard and to give of their treasures to keep that up. We think that's a key advantage, and that's delivered through the arts. Which, you know, we really enjoy some of the best arts – you know, certainly for a community our size.

            And, we don't spend the whole-time watching movies or going to plays; we do spend a lot of time working on innovation and the number of patents that are created out of this state are really quite impressive.

            All right. Economic diversity. We think that's important. It softens the edges. We don't want to experience the wide shifts in the economy. That's one advantage. I'm gonna get into another one, here, but here's a couple of examples. San Francisco. Probably the most productive commercial center in the world. A lot of companies that are based there – S&P 500, 56 of them.

            The one thing about San Francisco? Very skewed towards one sector; that's information technology. And, you hear about how great San Francisco is when technology is in favor, you hear less of it of course when it's not.

           

            Boston. Again, a very productive center, very focused on healthcare. They do not enjoy that kind of diversity.

           

            Houston and Detroit, two strong centers, not quite as impressive as San Francisco and Boston. Look at the lack of diversity there. Houston of course, the energy space, and Detroit in the automobile production. And then, compare that to the Twin Cities, that even distribution across most of the important economic sectors that are in the S&P 500, and that's important in a number of ways.

            Professor Myles Shaver, we've had the opportunity to meet with him for quite a while now, even before he came out with the Headquarters Economy book. And, the thing that he shared with us that we had not really fully appreciated until he talked to us about it, is the virtuous cycle that happens in a city that has so many headquarters and so many different industries represented. And now, since talking to him, we've been spending a lot of time when we interview the companies that we invest in, you know, how does that work? And we are seeing it at play every day.

            And, what Professor Shaver means about that is, that the C suite executives that are considering moving to the Twin Cities will view this as a low risk place to be. So, let's say they take a job at General Mills. They do that thinking, well, if it doesn't work here there's other opportunities. There's Cargill down the road, a short drive to Hormel. So, if things don't work out there, there's other opportunities.

            And so, multiple companies within industries. But what ultimately ends up happening is, key people move not just within industries, but through different industries. And, that's a great opportunity for them; to be able to stay in a community in which they are now raising a family. However, think about what they bring with them. They bring best practices with them from different industries, and we see that a lot, and we think that that is having a major impact on the success of the companies that are based here in Minnesota.

            And, lots and lots of examples I would like to mention. My favorite one today is a company called Bio-techne, and the CEO of Bio-techne, an electrical engineer by training and spent 23 years at 3M where he probably got about the best management training that you can possibly get on Earth. He is now leading Bio-techne. The CFO, similarly, had spent seven years at Honeywell Aerospace, and again, bring best practices from industrial into a healthcare distribution setting. Bio-techne has been the best performing midcap stock in Minnesota for the last five years.

            All right. A few things. We have a well-educated and stable workforce. Our labor participation rate is great. Our K-12 system, top ten. Would love to see that back at number one. That's something we've got to keep a close eye on. You know, a key advantage for us is the quality of the education here, and it starts at K-12. So, we consider it still to be an advantage, but something that we don't want to take for granted. Two-hundred plus post-secondary institution.

            A chart that I pulled out of the Headquarters Economy book shows the stability of our workforce. So, we're right in the quadrant that we want to be. We are building, growing at a solid pace, but not a spectacular pace. We'd always like to grow faster, but the key is that we don't have the out migration. So, we're building and expanding, but we're not building and churning. So, that, I think, is representative of our stable workforce. And, just one final plug, if you haven't read Headquarters Economy, I strongly recommend the book.

            All right. University of Minnesota. Why is that a key part of our process? What makes the University of Minnesota so special?

            Number one, University of Minnesota is a land grant university. As you might recall back in the mid-1800s, Congress created land grant universities for the purpose of making the United States competitive in industry, and to supplement what's going on in the individual communities.

            I would suggest that deep within the DNA of the University of Minnesota is the desire, that need to support our community. And, if you doubt me on that, I would suggest that you take a look at the results from Office of Technology Commercialization. I would also suggest that you look at the programs that are being offered at the home center for startup businesses, or just attend the Minnesota Cup and you'll know exactly what I'm talking about. So, a land grant university tied to the community.

            Very productive on a research standpoint, and $8.7 billion of economic impact, $900 million of annual research. So, among the top institutions – certainly public institutions in the United States, but quite a few land grant universities are doing a lot of great research.

            Minnesota is unique in the sense of where it's located. A lot of those other schools are in these beautiful settings on a nice hill somewhere far away from traffic where it's nice and quiet. The University of Minnesota is set right in the middle of a commercial hub; that's what, I think, is the third leg of that stool that makes the University of Minnesota really quite unique, and we see that when we are investigating the companies that are based in Minnesota and how important the University of Minnesota is to these companies.

            All right. So, there's three verticals that I just want to mention. Agriculture. Right down to the early history of Minnesota, agriculture has been important. Of course, we produce a lot of grains here, and for a while in our history we consolidated the grains and shipped them out, and then we would ship back finished products. And, we had access to the rivers that was important.

            You know, a real important development was the creation of the Great Northern Railroad, which gave this community access to the Asian markets. Shortly after that railroad was created, Minnesota went from a big importer of finished agricultural goods, to one of the biggest exporters in the world. So, I would say that, not only do we still have a big part of our economy based on agriculture, it's really driven this whole mentality of how we export to the rest of the world.

            All right, healthcare. You've all heard the story. The healthcare device industry was born in Earl Bakken's garage, and we continue to dominate that industry. Medtronic, Boston Scientific, Abbott. Also, 3M and Ecolab play key roles there.

            We have the number one hospital. I'm not even gonna argue with anybody about that. It's the Mayo Clinic and they're near our community and play a key role for us.

            Also, the largest private health insurer – United Health Group. They're huge within their core business, but also the data analytics that they're doing I think ensures that they will be a leader going forward.

            All right, industrial. People don't normally think of the Twin Cities with industrial, but I would say that we are spectacularly good. We have done well by exporting. We have also done an excellent job of staying ahead of the commoditization curve. So, you know, a lot of places will have their industry, whether it's steel or whatever. When the business ultimately gets commoditized, it ends up being a drag. You know, the companies here have just a history of always adding value to their products. 3M, Pentair, Donaldson, Toro. New entrant protolabs really are amongst the best, we think, in the world.

            All right. Sustainability. We've got a great natural environment. We've got a plan for renewable sources of electricity, and we have a long-term plan – I think that's really key – that, you know, we certainly have our issues and nobody agrees on everything about our long-term plan – having a plan is important.

            Our central location for transportation. I'm gonna argue that MSP International Airport is the best airport in America. The reason why I say that is because they did an excellent job of placing this airport four hours or less from every place in the continental United States. That is a huge advantage. You can be on either coast and do a meeting and come back either that night or the next day. You can't do that from the other coast. That is a big advantage for us.

            All right. Minnesota is good for business. We have a history of successful companies, we have extensive infrastructure. We think that we're ahead of the game there. Another area that we need to keep our eye on. We don't want to fall behind there. It's just so important for us. We're in the middle of the pack from a business taxes standpoint. A lot of talk about personal taxes; we're certainly not in the middle of the pack there. We're in the high end of taxes. But, for companies that do most of their business outside of Minnesota, you know, we have a relatively attractive climate from a taxation standpoint.

            Modern transportation network. You know, the river still exists, the rail access, and the transportation.

            You know, we talk a lot about the public companies and that's very important for Mairs & Power and for our clients, but I also talk about the success of startups. We've got a very good history of starting up companies. The one thing that I think is really interesting is the startup survival rate. So, companies that startup tend to take it longer here, or really survive those first three years, which is obviously a time that's very critical for small startup companies. And so, we think that the advantages extend well beyond the public companies.

            All right. So, I made the statement that Minnesota has been a great place for investors. I'm gonna just prove it. Here it is, the S&P 500, over 20 years, and here, overlaid, is the Piper Jaffray Minnesota Index, outperforming over a longer period of time. So, over those 20 years, outperforming the S&P 500. And so, you know, it certainly has outperformed in the past. Here's the Mairs & Powers growth fund. We've actually outperformed both of them. Kind of back to my argument that not everything needs to go passive. You know, there are strategies, and it's not just ours. You know, we think that there's a place for active management, and the fact that we've outperformed the S&P 500 and the Minnesota Index is important.

            Now, of course you don't need to hire Mairs & Power to buy Minnesota stocks. I would tell you that, if you like to do your own investing, and you're considering two investments – they're similar, but one of them is Minnesota – I would suggest you pick the Minnesota stock. You've just increased your odds of being successful.

            All right. Going forward. Minnesota continues to move. I mean, we're not sitting still. We are working hard to make Minnesota a great place. We believe that those long tail advantages will continue to outperform the United States, and so, continue to be all-in with Minnesota.