Bloomington firm Stevens Foster invests locally, and keeps the bar high

Lots of people see the good that can come of spending money at a shop owned and staffed by people from the neighborhood.

A financial advisory firm in Bloomington called Stevens Foster Financial Advisors is trying a "buy local" approach, too, but with a sophisticated institutional investment service of the kind that middle-class savers will never be able to buy.

What's interesting about this Stevens Foster strategy, though, is that the decision to go ahead wasn't made until the firm confirmed that what's locally available is also of the highest quality.

There seems to be a lesson here that other business owners who urge consumers to "buy local" might want to consider. Just being the local option may not be enough to prosper.

It's difficult to explain Stevens Foster's service, because it's not a fund or even a fund made up of other funds. Stevens Foster VP of Investments Jonathan Horick, the architect, called it an asset allocation service. When the firm began introducing it to clients earlier this year, no one apparently saw the point of clever marketing, as it's called simply the "Local Manager Model."

The word local here would mean something good only to Minnesotans, of course, but they are the bulk of the Stevens Foster client base.

This firm does more than help clients manage their money, helping these people, including a lot of public company executives, manage pretty much every aspect of their finances. That can mean everything from optimizing health insurance benefits to picking good days to exercise corporate stock options.

Horick joined the firm in 2013 and soon began thinking about leaning more on the expertise of the money managers he knew here in the Twin Cities. Horick, who is 54, has worked in a variety of roles in the industry locally including running what's called a long-short fund, meaning he was looking every day for investments to buy as well as overvalued investments he could bet against.

What he has created is easiest to think of as a portfolio made up of 14 individual components. The idea, though, isn't to move money around between these 14 funds every trading day.

The portfolio is generally to be left alone, getting "rebalanced" once a year just after the start of the year. This means that some money may be moved from assets that have performed well to different kinds of assets, which turns out to be just another version of selling high and buying low.

The local money managers Stevens Foster picked to run these 14 separate pieces include Sit Investment Associates, Leuthold Weeden and Thrivent Financial in Minneapolis as well as Advantus Capital Management in St. Paul.

How were the managers picked? "Clearly, because of their risk-adjusted performance," Horick said. "I knew them all, but that isn't the reason to get into the club. It's because of the breadth of experience they have."

Horick also pointed out that it's been a challenging time for fund managers who actively buy and sell investments, as "passive" investments such as a fund that mirrors an index like the S&P 500 have generally done better of late. In his read of market history, however, there have also been periods when so-called passive investments don't do as well as funds managed by people actively picking investments.

That's why staying power, surviving the ups and downs in the market while sticking to what they know, also mattered when it came to picking managers.

A case in point is the Mairs & Power Growth Fund, one of the Stevens Foster strategy's stock components. It's a nearly 60-year-old flagship fund of a St. Paul firm that got its start in 1931.

"Every single person [involved], Jon's tracked their careers, and what they've done and where," said Bryce Doty, a senior vice president and veteran portfolio manager with one of the firms included in the mix, Sit Investment. "He knows their strengths and their weaknesses. He's playing here to each person's personal strength."

Doty said the specific job of the Sit fund he's comanaging is to provide stability. That means it's made up of a carefully chosen portfolio of bonds that pay interest that easily beats money market fund rates, but short enough in maturity so there won't be a painful loss of market value if interest rates shoot up and the broader bond market tanks.

There are different jobs being performed by the funds of growth stock managers, international stock managers and so on.

As for the performance track record, in the past 12 months the bond portions have done much better than the returns of the bond market benchmark Stevens Foster uses, while the stock portions haven't performed quite as well as the broader stock market averages.

Over the longer term, however, the annualized return of 6.35 percent from 2013 through the end of September did beat the annualized rate of return of the benchmark, itself a weighted blend of well-known investment benchmarks.

Horick said this approach was never intended to be some sort of shoot-the-lights-out fund for aggressive investors anyway. The firm's clients probably have more than enough risk at work, just with stock options and other forms of ownership in the companies where they work.

"If you look at the last 11 bear markets, average downside was 30 percent," he said. "We just … aren't going to do that. A lot of people are talking about 'How can I make money today?' We're talking about how we can defend."

Horick declined to discuss how much client capital was now deployed using this approach, though he did say clients have generally loved hearing that their money could be managed well by Minnesotans they could even meet to talk through investments.

"I could easily sell it just on the idea of a 'good old boy' club, but that isn't what you want," Horick said. "That isn't what anybody should want."

lee.schafer@startribune.com 612-673-4302