This fund’s compact portfolio focuses on companies with strong balance sheets that have demonstrated an ability to grow throughout the business cycle. With a low turnover rate, the fund is the perfect antidote for investors worried about higher tax rates once the Bush-era cuts sunset.
To say that the management team of Jensen J (MUTF:JENSX) is selective is an understatement; seeking names capable of delivering growth at a reasonable price, the managers run a compact and stable portfolio that consists of just 20 to 30 names.
What qualifies a stock to join this illustrious club? Not only must the company produce a return on equity (ROE) of at least 15 percent for 10 consecutive years, but it also must have a market capitalization of $1 billion or more. Management then whittles these 150- odd names down to those that offer the best growth prospects and trade at attractive valuations.
This focus on ROE is important. According to research conducted at Harvard University over 40 years ago, companies that produce 15 percent ROE over 10 consecutive years create value for shareholders and tend to have sustainable competitive advantages.
According to the fund’s methodology, once a holding is sold for breaching the ROE requirement, even if it’s just for a single quarter, it can’t be considered again until it posts another 10 consecutive years of ROE above 15 percent. Management reasons that such a decline indicates a loss of competitive advantage.
This focus on quality limits exposure to speculative and overheated names; the fund tends to lag when the bulls take control but performs extremely well in bear markets. Although the fund gave up 29 percent in 2008, its performance ranked in the top 2 percent of Morningstar’s Large Growth category. Last year, however, the fund’s 28.9 percent gain placed it in the 76th percentile for its group.
But the fund shines over the long haul. Over the past decade, it’s outperformed the S&P 500 by more than 20 percent and exhibits much less volatility than the broader market. The fund’s three-year performance puts it in the top 3 percent of its category, while its 10- year record ranks it in the top 5 percent. Management’s attention to quality is a big part of the fund’s success.
As long as the Jensen team continues to believe in the idea that led them to buy into a company, and it continues to meet their qualitative criteria, they’ll stick with the stock regardless of the market’s ups and downs.
This explains the fund’s extraordinarily low turnover rate, a key to limiting investors’ tax burdens. This approach makes a great deal of sense. As portfolio manager Robert Millen puts it, “If you have a company that’s a consistent value-creating company that doesn’t get overpriced, why wouldn’t you want to own it forever?”
Accordingly, quarterly portfolio management typically involves allocation shifts based on valuation and business conditions.
For example, in the most recent quarter management took advantage of the market correction to add shares of software outfit Adobe Systems (NSDQ: ADBE), which stands to benefit from a strong upgrade cycle for Creative Suite 5, and T. Rowe Price (NYSE: TROW), one of only a few such companies to grow assets under management in this difficult environment. The team also increased the fund’s stake in device-maker Medtronic (NYSE: MDT), a quality company whose products are integral to the treatment of debilitating conditions.
As with many other fund managers, the Jensen folks are bullish on Microsoft (NSDQ: MSFT), emphasizing the cyclical potential for revenue growth. Not only do companies typically upgrade their technology after a recession, but Microsoft has plenty of upgrades available, including the Windows 7 operating system, new server products and Microsoft Office 2010. The team expects Microsoft to plow the proceeds of these sales into new innovations and markets.
And management eats its own cooking. Only one of the fund’s managers, who also happens to be the newest addition to the team, has less than $50,000 invested in the fund. Lead manager Robert Millen has more than $1 million invested, while the remaining three managers hold stakes between $100,000 and $500,000.
Jensen J offers everything we look for in a mutual fund: Experienced management that literally buys into the fund and a well-defined strategy that has a proven track record of success.
Although the fund is unlikely to make you rich when the make rallies, it won’t send you to the poorhouse during bear markets—and a low turnover rate has its appeal in what promises to be an era of high taxes.
Hannah Hsu is Research Editor of Louis Rukeyser's Mutual Fund
Disclosure: no positions