By Philip van Doorn, MarketWatch
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 /zigman2/quotes/202894679/composite PG +0.13% , TJX Cos. /zigman2/quotes/203136811/composite TJX -1.37% and Mastercard /zigman2/quotes/207581792/composite MA -1.86% .
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, /zigman2/quotes/200060694/composite BRK.B +0.67% , 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 /zigman2/quotes/200918620/realtime JENSX -0.33% 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 /zigman2/quotes/210599714/realtime SPX -0.94% :
|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%|
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.”
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 /zigman2/quotes/207314668/composite LIN -0.06% 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.