A Picky Picker at Jensen Posts Solid, Safe Returns

Market fads come and go, but Jensen Portfolio sticks to its knitting. The fund's managers, headquartered in Lake Oswego, Ore., invest in high-quality U.S. growth companies, which co-manager Bob Millen argues are still attractively priced in a market that he thinks is fully valued.

Jensen's formula has worked well in both bull and bear markets. Over the past 10 years through Sept. 14, the fund returned an annualized 4 percent, an average of four percentage points per year better than Standard & Poor's 500-stock index and five points a year in front of the average large-company growth fund. Year-to-date through Sept. 14, Jensen gained 17.1 percent, trailing the index by 1.2 points.

Moreover, Jensen achieved those market-beating returns while taking less risk than the overall stock market. Over the 10-year period that ended June 30, the fund captured 96 percent of the return in up markets but suffered only 65 percent of the losses in down markets.

Millen defines quality growth companies as those that have solid balance sheets and are capable of consistently improving earnings at a rate higher than the average publicly traded company.

Jensen sets a high bar in choosing stocks to own. It considers only U.S. companies with market values in excess of $1 billion that have produced returns on equity -- a measure of profitability -- of 15 percent or more for at least 10 consecutive years (the fund has cut loose holdings such as Wells Fargo and Intel for dropping below the 15 percent threshold).

Jensen buys these great businesses only when they become great stocks -- that is, when they're priced at a 20 to 40 percent discount to Jensen's estimate of a company's intrinsic, or true, value. The managers base their determination of a company's intrinsic value on their estimate of the amount of free cash flow (the cash profits that are left after the capital expenditures needed to maintain the business) it is likely to generate over the next 10 years.

He looks for powerful intellectual property, such as patents or brands, and strong overseas operations.

One longtime position is Colgate-Palmolive. Colgate has a competitive advantage because it has built a stable of superior brands over decades. Nearly 80 percent of revenue is generated overseas, much of them in expanding developing nations in Latin America and Asia.

Jensen's largest holding at last report was 3M. Selling 55,000 products in 200 countries, innovative 3M is loaded with intangible assets, such as patents that don't show up on the balance sheet.

A newer holding is Oracle, the leader in enterprise software. The programs themselves are Oracle's main intangible assets, and Millen particularly likes the way the company generates recurring revenue from clients through software license updates. Oracle's return on equity over the past decade has averaged a plump 43 percent.

The annual expense ratio for Jensen's Class J shares is 0.86 percent, and the minimum investment is $2,500.