Jensen Quality Growth Fund

On May 21^st, we spoke with Robert McIver, one of the portfolio managers of the Jensen Quality Growth Fund. He  discussed Jensen’s stock picking process and elaborated on why the Jensen fund experienced a downturn in the recent quarter.

We have written about Jensen in the past, but let us start by reviewing Jensen’s process:

Step 1: Jensen sifts through 5,000 publicly traded companies and narrows the universe down.  To be included, stocks must have market capitalizations above $1 billion and a 15% Return on Equity (ROE) each year for the previous ten years. The 15% ROE requirement is a very strict one. Recently Jensen dropped AMETEK from its portfolio because its ROE declined to 14.8%. Mr. McIver also emphasized that the 15% ROE must be consistent over 10 years. To cite an example, Apple’s ROE has been over 15% for 7.5 years. Although Apple is a robust company, Jensen won’t consider it for another 2.5 years.

Step 2: Jensen then looks at the 200 – 250 companies that meet those two criteria and selects those with the strongest combination of growth potential, consistency and strength of margins, business returns, financial strength, and other quality characteristics. That narrows the field down to 50 stocks.

Step 3: Jensen then does additional fundamental analysis, seeking companies with substantial and sustainable competitive advantages, growth drivers, and free cash flow potential.

Step 4: Jensen chooses 25 to 30 companies to include in their portfolios that have both these high quality characteristics and that can be bought at very attractive valuations.  Individual positions are between 1% and 7%.

Currently, the average market cap in the portfolio is $62 billion and there are 30 holdings.

Turnover is low in part because Jensen places such a premium on sustainability of a company’s competitive advantage through the ten years of over 15% ROE.  Currently Morningstar calculates a 7% turnover ratio.  Jensen’s buying process is numerically selective; similarly its maintenance and selling process is also very qualitative. Jensen’s investment team consists of various business executives who have managed companies themselves. When the investment team disapproves of companies’ management decisions, they will sell the stock. Mr. McIver gave us three examples of recent stock sales.

·         Johnson and Johnson was sold from the portfolio because management responded poorly to some operational difficulties. Furthermore, the company’s drug pipeline appears too thin to combat its growing number of patent expirations making it harder to generate sales growth.

·         Clorox was sold from the portfolio because the company did not have much exposure outside of US markets. Also, management’s acquisition of Burt’s Bees was integrated poorly and, in Mr. McIver’s opinion, destroyed shareholder value.

·         Sysco Foods was sold because Jensen felt management’s decision to invest in their distribution centers was an inefficient use ofcapital.  

Mr. McIver also mentioned that Jensen’s decline in the recent quarter was simply a result of stock market forces. According to Rob, the companies that Jensen invested in were financially healthy and making correct operational decisions. However, the companies’ stock prices diverged from the companies’ actual performances. Essentially, there was a disconnect between companies’ performances and their stocks’ performances.  Jensen remains very comfortable with its holdings.

 All in all, Jensen is a reputable firm that provides solid long term returns while minimizing risk. Its dedication to fundamental investment strategies helps it weather the toughest economic impacts and come out even stronger.

Returns through 5/31/2012

	YTD	1 Year	3 Years	5 Years	10 Years
Jensen Quality Growth	3.37%	-5.04%	13.19%	1.14%	3.35%
S&P 500	5.16%	-0.41%	14.92%	-0.92%	4.14%

Source: Jensen Management

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(Harvest Financial Partners owns the Jensen Quality Growth fund in client portfolios and uses it as an investment option in a number of retirement plans where Harvest is the investment advisor.  The authors own it in their personal portfolios.  Positions may change at any time.)