PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
The Jensen Fund (JENSX
), a portfolio of large-cap growth names, accomplished the unlikely last year: It survived amid the carnage of giants. That's quite an achievement, considering that shares of large corporations -- the market segment Jensen scours for picks -- lost lots of ground in 2000 and 2001. Those years, the group's benchmark, the Standard & Poor's 500, shed 9.1% and 11.9%, respectively. At the same time, the well-publicized problems of big tech companies and the economic slowdown put the pinch on growth funds like Jensen.
Yet, despite its portfolio of big names and its growth-stock-picking style, the Portland (Ore.) fund turned in a rousing 20% total return in 2000 and actually safeguarded investors' money with a break-even 2001. And all this was accomplished with less maneuvering than one might think: The fund sold only two of its holdings last year, according to portfolio manager Robert G. Millen.
"Before we pick companies, we track their results over the long-term, and look back over 10 years of numbers," says Millen. "Then, we project cash flow and earnings over the next 5 and 10 years to make sure we can be comfortable and stick with our picks."
SIFTING THE POOL. The formula worked last year. To appreciate the significance of its 0.0% total return in 2001, keep in mind that Jensen's peers in the large-cap growth group averaged a 21.7% setback over the same period, according to statistics compiled by S&P for BusinessWeek. The fund's longer-term results are just as impressive: For the three years ended Jan. 10, according to Morningstar, its average annual return of 11.2% put it in the top 2% of its investment category. A five-year average annual return of 14.5% puts Jensen in the top 6% of its class.
How do they do it? For starters, Millen and co-manager Robert F. Zagunis say they're willing to look over any of the 10,000 or so stocks that have headquarters in the U.S. and that trade publicly -- but not for too long. Jensen's management carves that large grouping down in a hurry with a few criteria. Millen says he and the fund's four other managers look for companies that have a competitive edge and will keep it in their sights only if its margins are wider and more stable that those of their rivals.
Another key factor: cash-flow growth. Millen says he and his cohorts settle only on companies that kept their coffers well-stocked, plus they want to see that management has at least a 10-year track record of plowing money back into projects that help build their business. With that in mind, the fund seeks companies that had at least a 15% return on equity each of the past 10 years. That filter narrows the fund's sights down to perhaps 100 or so companies, says Millen.
THE FINAL PROCESS. Debt is another consideration. Under Jensen's scrutiny, a company typically can't carry much of a borrowed load. "We want to make sure there's plenty of free cash to pay debt. Typically, the companies we like -- those with strong free-cash flows -- tend to get their debts out of the way," says Millen, who offers up one holding, orthopedic implant maker Stryker (SYK
), as an example. In 1998, it acquired competitor Howmedica, taking its long-term debt load from zero to $1.4 billion. Thanks to a strong market position, the company has since whittled its burden down below $700 million, a figure Millen expects to keep shrinking rapidly.
Those additional demands tend to slim the list down to 50 or so stars, Millen says. The remaining few dozen then must be screened a bit further to be among the 20 to 30 positions the Jensen fund generally carries. Millen says the final process has two parts. The first includes a calculation of a corporation's intrinsic value, number crunching that begins with cash-flow projections for both 5 and 10 years into the future. That helps cut the ranks of candidates further.
Then the Jensen honchos head out to break bread with company management. Upon their return to Portland, they settle on the survivors. The sifting tends to end in a portfolio of companies with prospects solid enough to propel average annual earnings of 10% or greater over the next decade, believes Millen.
10-YEAR WAIT. It makes sense for any fund to pick its stocks carefully, but Jensen has an additional pressure: Anytime the fund actually ends up selling out of a position, its bylaws forbid it from investing in the same company for 10 years. This strategy raises some eyebrows. Morningstar analyst Christopher Traulsen won't deny Jensen's solid performance over the past two years, but he cautions that its ways won't allow it to tap into the strengths of bull markets led by emerging tech companies and growth sectors.
"What you have is almost a value approach to growth investing," he notes. "The fund angles for companies with a long track record of creating shareholder value, but it will tend to lag behind its peers when newer tech companies are at the top of the market."
Millen says the pains are taken for one reason: The fund hates to sell off a stake unless absolutely necessary, and he has made a point of keeping any turnover to a minimum to avoid capital-gains taxes for holders. By Morningstar's tallies, Jensen has done that and more. The fund's turnover last year was a small 32%, while the average large-cap growth fund ravaged its way to a 140% figure. Morningstar also reports that out of a perfect 100 points for tax-efficiency according to its measurements, Jensen scores a very impressive 93.
LATER FOR INTEL. So Millen and his cohorts can be rather unforgiving of a company -- or a sector for that matter. Take Intel (INTC
), a past favorite that made up 4% of the fund's assets in 2000. Over the course of the next year, Jensen pulled the switch and folded its stake in the semiconductor company almost unceremoniously in the spring of 2001. "For years, the chip industry had been a nice growth engine, able to ride the ups and downs of the economy," says Millen. "Suddenly, with a tremendous decline in the PC market, that was no longer the case."
And, according to Jensen's rules, the Santa Clara (Calif.) chipmaker won't be back on the fund's roster for nine more years. "We're disciplined in what we do," says Zagunis. "When a company doesn't meet our minimal standards, it's gone, and we can't just turn around and pick it up again."
MBNA (KRB
) is a position the fund started this fall. Jensen's managers like the second-largest credit-card issuer for a number of reasons, including its lucrative franchise of affinity programs, which allow sports teams or groups such as colleges to issue cards and keep a portion of the profits from their use. "We're real comfortable that they can produce a lot of free cash even in rocky circumstances," says Millen.
BUSHELS OF CASH. Jensen started buying MBNA at the end of September, around the time the company fetched about $30 a share. At the close of the market on Jan. 14, MBNA had risen to $34.80. Millen and Zagunis won't give a target price, but say they're still buying the company as new assets come into the fund.
And assets are coming in with a vengeance. Jensen's track record is attracting new investor money by the bushel, helping to push assets up from $40 million at the start of last year to a current $130 million. And the managers want to put that money to good use: "I'd say between 18 and 20 positions in our portfolio are priced attractively and have the right attributes for us to be buyers under these circumstances," says Millen, who has a good track record and lots of cash -- a lot like the companies he favors.
Anderson teaches journalism at the City University of New York. Follow his Mutual Fund Maven column, only on BusinessWeek Online Edited by Patricia O'Connell
Get BusinessWeek directly on your desktop with our RSS feeds.
Add BusinessWeek news to your Web site with our headline feed.
Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video.
To subscribe online to BusinessWeek magazine, please click here.
Copyright 2002 , by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
