A plan to invest more in America from two Twin Cities investors

Shannon O'Leary, chief investment officer of the St. Paul & Minnesota Foundation, was thinking about the vulnerability of supply lines for American companies before COVID-19 swept the world a year ago.

O'Leary has increased investment in U.S. manufacturing and distribution companies, such as Fastenal, C.H. Robinson and Ecolab, and taken other steps to guard against risks from globalization that seem increasingly apparent.

Two examples of those risks made big headlines recently. One is that U.S. automakers are closing plants that can't get enough semiconductors from Asia. And another is the disruption in the Suez Canal from a tanker that was stuck for nearly a week.

"The trend toward just-in-time inventory management of the supply chain is just not enough," O'Leary said. "We need to rebuild around more regionalized, reliable and redundant systems. The U.S. is the perfect place to do this given our technological advancement, capital markets and relative stability in demand."

O'Leary selected Minneapolis-based Peregrine Capital Management to construct a fund that would transcend the typical investment buckets, such as large-capitalization growth or small-cap value. Both had been seeing the same trends of "deglobalization."

The foundation and Peregrine also decided the new fund should focus on companies that subscribe to strong environmental, social and governance principals, or "ESG," also a trend among good performers.

"Shannon had this idea that COVID would prove a structural accelerant to deglobalization of the [U.S.] supply chain," Sam Smith, portfolio manager of Peregrine, said. "We leveraged our three long-standing styles steeped in fundamentals. Small-cap growth and value and large-cap growth. It was a collaborative process."

It has worked out pretty well so far.

The Peregrine "Deglobalization New Paradigm Strategy" rose about 30% over the last six months vs. about 18% for the S&P 500 index of the largest companies in the land and about 22% for the Russell 3000 index of stocks. Of course, that's no guarantee of future performance. The St. Paul & Minnesota Foundation invested about $50 million of its $1.7 billion in assets in the portfolio.

O'Leary wanted an equity portfolio that provides annualized performance of at least 7% to replenish the foundation's giving rate of 5%, as well as cover inflation, which is around 2%.

"We have invested a lot of time and effort in this product and we are investors and believers in the theme," Smith said. "We feel we are ahead of the curve. We think this has legs. There's a focus on domestic investment. And this could be a time of unprecedented economic expansion in the United States."

The deglobalization fund includes about 20% Midwest companies, including Minnesota's Ecolab, Fastenal, C.H. Robinson and Bio-Techne. The companies are consistent performers, innovative, environmental leaders, good employers and community stakeholders.

Another holding is Generac, a Milwaukee-based manufacturer that makes efficient, natural gas-powered generators, energy-storage for solar systems and other products for the residential and light-commercial and industrial markets worldwide. Its stock has tripled in value since January 2020.

O'Leary developed the strategy with her investment committee, including CEO Mark Henneman of Mairs & Power, a top-performing equity manager that traditionally focuses on Minnesota-Midwest companies.

President Joe Biden last week presented a $2.3 trillion plan to repair, rebuild and expand U.S. infrastructure over the next eight years. This won't hurt O'Leary's fund. Biden's plan would stimulate U.S. manufacturing, leading-edge technologies, renewable energy and cut carbon-based pollution.

It will create millions of good-paying jobs, Biden said, for a nation that's down about 10 million because of the pandemic.

The spending will rival the technology and public investments made by China, which by some measures has surpassed the U.S. as the world's largest economy. The plan largely would be financed through a reversal of the $1.9 trillion in tax cuts signed into law in 2017 by President Donald Trump.

Standard & Poor's chief economist estimated last year that a $2.1 trillion boost in infrastructure spending could add as much as $5.7 trillion in income to the entire economy over a decade. A pretty good payback.

O'Leary believes in the American re-shoring trend. It's not a rebuke of world trade, she said, but a return to manufacturing that's critical to our health and economy.

"Was it ever great for the U.S. to outsource large portions of critical medical infrastructure and generic drugs so far from home that we can't get them in a pandemic?" O'Leary said.