The Jensen Quality Growth Fund has consistently beaten the S&P 500 Index by buying what its managers refer to as “all-weather businesses” that can endure during tough times.
Rob McIver, one of the $8 billion fund’s managers, discussed Jensen’s stringent stock selection process and some recent changes to the fund in an interview with MarketWatch. Top holdings include Procter & Gamble PG, -2.24%, TJX Cos. TJX, -2.17% and Mastercard MA, -2.38%.
Some investors have given up on actively managed mutual funds because most trail the performance of low-cost index funds and ETFs. Even Berkshire Hathaway, BRK.B, -1.75%, led by CEO Warren Buffett, has underperformed recently. Still, many long-term active strategies that have underperformed over the past 10 or 15 years have measured up well for longer periods.
The Jensen Quality Growth Fund JENSX, -1.59% has avoided that problem. Here’s a comparison of the fund’s average annual returns (after expenses) over long periods to those of the fund’s benchmark, the S&P 500 SPX, -1.79% :
| Average return - 3 years | Average return - 5 years | Average return - 10 years | Average return - 15 years | Average return - 20 years | |
| Jensen Quality Growth Fund | 14.7% | 12.9% | 13.3% | 9.2% | 8.4% |
| S&P 500 Index | 13.4% | 10.6% | 13.3% | 9.0% | 6.3% |
| Source: FactSet | |||||
So the fund has outperformed the index for all the listed periods except for 10 years — a tie.
The fund holds 29 stocks and is owned by Lake Oswego, Ore.-based Jensen Investment Management, which has $9.6 billion in assets under management. McIver is a managing director of the firm and part of a team of six portfolio managers for Jensen Quality Growth.
In an interview, McIver said: “We have had clients and prospects talking about Jensen as being a boring strategy, but in the destabilized political and economic environment, as an investment manager selecting quality stocks, we feel particularly comfortable.”
Quality selection
McIver said the average holding period for stocks in the Jensen Quality Growth Fund is seven years.
The fund’s managers and analysts narrow the universe of about 4,400 U.S.-listed stocks to about 230 companies that have achieved returns on equity (ROE) of at least 15% for each of the past 10 years. If a company’s ROE drops below that threshold, the Jensen team will sell the stock.
Jensen sold its shares of Praxair, which was acquired by Linde LIN, -2.35% in October 2018, because McIver and his colleagues had determined the combined company’s ROE would be less than 15%.
Then the team goes through what McIver called a process to consider “business risk” and “pricing risk” when selecting companies for possible investment. Those processes are also ongoing for stocks within the portfolio.
He emphasized the advantages of “all-weather businesses” with “durable competitive advantages” and high cash-flow generation, to go along with the high ROE.
“We look for those companies to invest that cash for growth,” he said.
Microsoft MSFT, -1.77%, the largest holding of the fund, is an example of an all-weather business, McIver said. Jensen first bought shares of the company in 2005, McIver said, “when it was well out of favor.”
At that time, Jensen’s managers found the company’s free-cash-flow generation “compelling,” he said. Fast forward to 2019 and he still believes there’s an excellent business case for Microsoft because of the continuing drive for businesses to become more efficient. He also believes there is still “a very long runway” for the company to expand its cloud-based subscription service model.
When discussing pricing risk, McIver pointed to a recent sale of Coca-Cola KO, -2.87%, because the company’s share price had exceeded the Jensen team’s estimate of its “full value.” The firm had held shares of Coke since 1992.
Two long-term holdings McIver mentioned were Mastercard and TJX. He said Mastercard has been more profitable than its rival payment processor Visa V, -2.56%, and that this is the type of financial-services company he prefers to invest in, because there is no credit risk. The fund doesn’t hold any bank stocks.
For TJX, McIver praised the company’s “treasure-hunt appeal” for middle-class U.S. consumers because of the ever-changing product lineups in its TJ Maxx, HomeGoods and Marshalls stores.
Two recent purchases
McIver said Jensen had recently purchased shares of Broadridge Financial Solutions BR, -2.62%, which is a good example of a company with an “all-weather” business model. The company specializes in corporate-communications services, including managing proxy voting, annual reports and trade processing.
“What we find attractive about this business it is immune to market volatility,” McIver said. “Proxy activities have to take place as a matter of course.”
He added that Broadridge’s minimum ROE over the past 10 full years was 32%, making for an “incredibly profitable business.” The company’s average annual revenue growth over the past five years has been 12%, with earnings-per-share growth of 17%, he said.
Jensen also made a recent initial purchase of VF Corp. VFC, -2.58% shares. The company is best known for its North Face outdoor brand and Vans footwear brand. McIver said he was impressed with VF’s “brand management,” including its decision to spin off Kontoor Brands KTB, -1.81%, which holds the Wrangler and Lee brands.
Jensen doesn’t hold shares of Kontoor because the spun-off company didn’t meet its ROE requirement.
McIver said VF is a “slower-growing company,” in part because of the Kontoor spinoff, but that it was also a stable business, “given the volatility of the market.” VF’s five-year annualized sales growth has been 2.5%, with EPS increasing 3.5%, he said. The 10-year figures look better, with average annual sales growth of 6.7% and EPS growth of 11.5%, he added.
Top holdings
Jensen published the entire list of holdings for the Jensen Quality Growth Fund as of Aug 5. At that time, the fund was 4% invested in cash and equivalents. Here are the fund’s 29 equity investment positions as of that date:
| Company | Ticker | Share of fund | Total return - 2019 through Sept. 27 | Total return - 5 years |
| Microsoft Corp. | MSFT, -1.77% | 6.6% | 37% | 232% |
| Becton, Dickinson and Co. | BDX, -1.11% | 6.6% | 11% | 134% |
| PepsiCo Inc. | PEP, -2.50% | 6.6% | 25% | 69% |
| United Technologies Corp. | UTX, -2.48% | 5.6% | 30% | 46% |
| Johnson & Johnson | JNJ, +1.55% | 5.3% | 2% | 38% |
| UnitedHealth Group Inc. | UNH, -0.21% | 5.1% | -12% | 169% |
| Oracle Corp. | ORCL, -1.21% | 4.8% | 21% | 50% |
| 3M Co. | MMM, -1.72% | 4.3% | -11% | 32% |
| Stryker Corp. | SYK, -1.70% | 4.1% | 37% | 179% |
| Accenture Plc Class A | ACN, -2.52% | 3.9% | 37% | 167% |
| Ecolab Inc. | ECL, -2.06% | 3.6% | 35% | 80% |
| Alphabet Inc. Class C | GOOG, -2.36% | 3.6% | 18% | 113% |
| Apple Inc. | AAPL, -2.51% | 3.4% | 40% | 137% |
| Cognizant Technology Solutions Corp. Class A | CTSH, -1.12% | 3.0% | -7% | 35% |
| Omnicom Group Inc. | OMC, -1.23% | 2.8% | 9% | 29% |
| Pfizer Inc. | PFE, -2.06% | 2.7% | -15% | 46% |
| Procter & Gamble Co. | PG, -2.24% | 2.7% | 38% | 73% |
| United Parcel Service Inc. Class B | UPS, -0.49% | 2.6% | 25% | 42% |
| NIKE Inc. Class B | NKE, -0.86% | 2.3% | 26% | 119% |
| V.F. Corp. | VFC, -2.58% | 2.3% | 34% | 60% |
| Emerson Electric Co. | EMR, -2.68% | 2.2% | 14% | 24% |
| General Mills Inc. | GIS, -2.72% | 2.1% | 45% | 30% |
| Mastercard Inc. Class A | MA, -2.38% | 1.9% | 43% | 271% |
| TJX Cos. Inc. | TJX, -2.17% | 1.8% | 24% | 97% |
| Amphenol Corp. Class A | APH, -1.98% | 1.7% | 19% | 97% |
| Broadridge Financial Solutions Inc. | BR, -2.62% | 1.5% | 30% | 226% |
| Texas Instruments Inc. | TXN, -1.36% | 1.3% | 37% | 200% |
| Intuit Inc. | INTU, -1.46% | 1.0% | 34% | 222% |
| Waters Corp. | WAT, -0.99% | 0.9% | 18% | 122% |
| Sources: Jensen Investment Management, FactSet | ||||
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