Jensen Awaits Volatility
Like a rising tide lifts all boats, the highly accomodative monetary policy of the past few years has broadly boosted stock-market performance while compacting return correlations across sectors and individual securities.
That has been good for passive index investors, but less good for active managers, who need a certain dispersion of correlations as a prerequisite for their security selection to outperform the market.
Jensen Investment Management believes its focus on high-quality companies will be rewarded with a change in the current market pattern.
“We’re long into the bull market and I think we’re due to see more volatility,” said Eric Schoenstein, co-portfolio manager of the Jensen Quality Growth Fund “When we do, those companies that have strong fundamentals are more likely to be able to hold up from an asset-value perspective, and therefore hold up from a market-value perspective.”
Based just outside of Portland, Oregon, Jensen is a 26-year-old registered investment adviser with about $6.5 billion under management, through a mutual fund and separately managed accounts.
Schoenstein and his colleagues on the investment team look for companies with financial strength, sustainable competitive advantages and good management, which translate into strong free cash flow and a high return on equity.
“When you have consistent business performance at a high level it results in what I’ll call value creation, and ultimately from a long-term perspective markets recognize the value that’s being created, as the worth of the asset grows,” Schoenstein said. “That is what we believe markets ultimately reflect, from a long-term perspective although not necessarily from a short-term perspective.”
According to data presented on Jensen’s website, the Jensen Quality Growth Fund beat the Standard & Poor’s 500 for the 15-year period that ended June 30, 2014, but it lagged the benchmark index in shorter time frames.
“The strategy is designed as a long-term strategy, and when I say long-term, I mean certainly much longer than what markets generally consider to be long-term,” Schoenstein said.
Recently in the market, “many investors have certainly been rewarded in their equity allocations, but it’s been a reward without direct linkage to the decisions they’ve made in terms of allocations,” he continued. “What I mean by that is the environment we’ve been in — with the Fed policy, quantitative easing and easy-money policies — has led to higher correlations in the markets. All equities seem to rise regardless of the underlying fundamentals.”
2014 has not been a favorable market year for Jensen, but Schoenstein noted the companies owned are doing well and “that business performance bodes well for the future of the companies we are invested in.”
Jensen’s initial screen is that a company needs to have generated a 15% return on equity for 10 consecutive years. That whittles Jensen’s investable universe to 210 companies — Schoenstein cited consumer staples, industrials, healthcare and information technology as representative industries, and 3M, Pepsico, and Becton Dickinson as specific holdings.
Jensen doesn’t have an internal trading desk, but it’s responsible for its clients’ trades as executed by external brokers. In general, Jensen’s holdings aren’t difficult to buy or sell. “Because they are relatively liquid names, we can achieve pretty efficient execution on those trades so that there aren’t excess trading costs,” Schoenstein said.