Over the past 50 years, the average annual turnover of the holdings in stock-owning mutual funds has multiplied sixfold, to about 100%. Wall Street loves the commissions that such frenetic trading generates, but whether shareholders benefit is highly doubtful. As Warren Buffett (sounding a bit like Sir Isaac Newton) says: "For investors as a whole, returns decrease as motion increases."
Jensen Portfolio (symbol JENSX) is the kind of old-fashioned mutual fund that keeps it simple. The large-company fund looks out ten years when it purchases stocks, then typically holds them for seven years or more. "We want to find a few durable businesses run by honorable people and buy at sensible prices," says Bob Millen, co-manager of Jensen.
By sticking with this strategy, Jensen has delivered fine results over the long haul. It's performed particularly well during market downturns, such as the current one and the 2000-02 bear market. Over the past ten years through July 31, Jensen returned an annualized 6%, an average of three percentage points per year better than Standard & Poor's 500-stock index and nine points ahead of an index of large-company growth funds. Over the past year through August 22, Jensen lost 1%, besting the S&P's results by nine points.
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Jensen's refreshing simplicity really focuses on only one number: return on equity, a measure of profitability. The fund considers only large U.S. companies that have achieved a return on equity of at least 15% for ten consecutive years. At present, says Millen, this requirement limits the universe of companies Jensen can invest in to about 170; Jensen currently has 27 of them in its portfolio.
A high, sustained return on equity leads the managers of Jensen portfolio to companies that are consistent, growing businesses that generate returns on investment well above their costs of capital. Once Jensen identifies such a company, Millen says one of his key jobs is then to determine if management is redeploying excess cash flow in a shareholder-friendly fashion. "We don't focus on whether the company will make its numbers next quarter, but on the durability of its competitive advantages over the next ten years," Millen says.
Jensen has held many of the companies in its portfolio for eight years or more, including Abbott Labs (ABT), ADP (ADP), Coca-Cola (KO), Colgate-Palmolive (CL), Equifax (EFX) and Stryker (SYK), among others. The fund has sold only one stock this year, letting go of McGraw-Hill (MHP) because of doubts about the growth potential of its core Standard & Poor's division. Over the past nine months, Jensen has added three stocks: software maker Adobe Systems (ADBE); Praxair (PX), an industrial gas company; and Waters (WAT), a maker of medical and environmental instruments.
You won't find many cyclical stocks in the portfolio for the simple reason that few of them make the cut for consistent return on equity. The only bank the fund holds is Wells Fargo (WFC), which Millen calls "the best-run bank in America." The only other financial stock is T. Rowe Price (TROW), the mutual fund company. Jensen holds no foreign companies, although Millen notes that the portfolio companies' share of revenues generated overseas has surged from 33% in 2005 to 45% today.
Exciting, no. But as is true in so many fields, the patient tortoise often beats the impetuous hare. "If you just focus on a few simple fundamentals and buy with a margin of safety, then you go a long way to minimize true investment risk," says Millen.
This no-load fund has an annual expense ratio of 0.85%. The initial minimum investment is $2,500.
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