The Jensen Portfolio ranked among the worst performers in its mutual fund peer group last year because of slumps in shares of companies that included Merck & Co. and Coca-Cola Co.
Robert Millen, co-manager of the $2.8 billion fund, said the Jensen fund may trail again this year, even after the Merck stake was sold and as he and his colleagues consider whether to sell shares of Coke.
"We've noticed a disconnect in the last two or three years between the value of a company and its stock price," Millen, 58, said in a telephone interview from his office at Jensen Investment Management in Portland, Ore. "That will turn around. It doesn't matter to us whether it's in 2005 or 2006."
The Jensen Portfolio rose 6 percent last year, ranking 36th of 44 "growth" stock funds with more than $1 billion of assets, according to data compiled by Bloomberg. Even with those returns, the fund outperformed 92 percent of its rivals during the past five years, climbing at an average annual rate of 5.3 percent. The Standard & Poor's 500-stock index declined at an average annual rate of 2.6 percent in the same period.
Jensen "could have done better" last year, said Greg Carlson, an analyst at Morningstar Inc., the fund industry research firm in Chicago. "It was the kind of year when more reasonably priced, steady growers did relatively well."
The $2.1 billion Fidelity Leveraged Company Stock Fund, run by Thomas Soviero, was the best performer in Jensen's peer group last year, rising 24 percent.
Shares of Merck were sold by the Jensen fund on Sept. 30, when the drugmaker pulled Vioxx, the world's No. 2-selling painkiller, from the market because of a potential link to heart attacks and strokes. The company's stock fell 27 percent that day.
Cash flow already was declining, and the Vioxx announcement "put Merck out of the picture," Millen said. The fund had owned about 1.3 million shares of Merck. The stock closed Friday at $28.02 after a 10.1 percent drop in response to a federal court's invalidating the patent for Fosamax, its osteoporosis drug.
The Jensen fund added to its holdings of Pfizer Inc. on Dec. 17, when the company's stock fell 11 percent after news that its Celebrex painkiller was linked to an increase in heart-attack risk. The world's biggest drugmaker is increasing its cash flow, and the stock is trading as though investors expect the company's earnings to fall for the next 10 years, Millen said. "We don't think that's practical," he said. Pfizer ended the week at $24.35 a share.
Shares of Coca-Cola dropped 7.8 percent on July 23, after the company said second-quarter sales growth slowed. On Sept. 15, Coca-Cola announced that its second-half earnings would decline. "We have to decide if we're going to continue to own Coke," Millen said. The fund owns 1.7 million shares. Coke closed Friday at $41.49.
