S&P Rank: 3 Stars
Aug. 18, 2003
Steady and Rising
Quick Take: It’s not what it owns, but what it doesn’t own that has weighed on the Jensen Portfolio (JENSX) this year, says Robert Millen, one of the fund’s five portfolio managers. The $1.6 billion fund has very little exposure to information technology stocks, he says, which investors have been bidding up in recent months. The managers tend not to put a lot of money into these companies because most of them are young and haven’t yet put up the kind of numbers they want to see.
The Jensen fund focuses on companies that increase revenues and earnings year-in and year-out. The fund’s managers won’t even consider investing in a company unless it has generated returns on equity of at least 15% in each of the past ten years. That alone excludes a lot of tech firms.
The lukewarm performance of the portfolio’s health care stocks, its heaviest sector weight, has also worked against it since the end of last year, Millen says. This year through July, the Jensen fund gained 5%, versus 15.7% for the average large-cap growth fund. Over the long term, however, the portfolio has handily topped its peers while displaying a lot less volatility, giving investors a much smoother ride. For the ten years ended last month, the Jensen fund rose an average annualized 11.8%, versus 7.7% for its peers.
The Full Interview:
Of the thousands of companies that start the race to make it into the Jensen fund only a small fraction clear the first hurdle, and just a handful of those finish.
Robert Millen and the other four stock pickers who manage the portfolio begin by considering 10,000 or so companies, seeking those that have generated returns on equity of at least 15% in each of the last 10 years. That filters out all butabout 110 candidates.
Then the team looks for companies that have grown consistently and tries to forecast long term prospects for them and their industries. On average, the companies the fund owns increase their sales by 6% to more than 20% annually, while their bottom lines rise by 9% to 20%, Millen says.
“We’re looking for companies that have demonstrated sustainable competitive advantages, and that have the ability to earn at a level higher than their peers,” Millen says.
Free cash flow is a key part of the team’s focus when it comes to buying stocks. They want companies that generate an excess, so that management has the luxury of determining how to invest the overflow by, among other things, making acquisitions, repurchasing stock or paying dividends, Millen explains. Low debt is another preferred characteristic.
The managers also keep an eye out for cheap stocks. They will purchase only shares selling at a discount of at least 40% to the intrinsic value the team calculates for a business, Millen says.
The fund can own companies of any size, but its strict requirements have the effect of limiting it to large-cap stocks, Millen says.
After potential investments have passed through all of the fund’s screens, only some 25 enter the portfolio. That number provides adequate diversity, while facilitating research and enabling winners to significantly boost returns, Millen says.