Jensen Quality Growth: All-Weather Investing

05/29/2015 10:00 am EST


Jensen Quality Growth Fund focuses on a select list of high quality stocks; recently, it had just 28 positions in its portfolio. Here, co-manager of the fund, Allen Bond, discusses his strategy and highlights three stocks that exemplify his all-weather investing approach.

Steven Halpern: Joining us today is Allen Bond, portfolio manager of the Jensen Quality Growth Fund, which has more than $5 billion in assets under management.  How are you doing today, Allen?

Allen Bond:  I’m great. Thanks for having me on.  

Steven Halpern: The Jensen Quality Growth Fund is well-known for its focus on high quality, all-weather stocks.  First, can you discuss some of the characteristics that you look for when selecting these high quality issues?

Allen Bond:  Sure. Like you mentioned, we’re extremely focused on finding high quality companies. A high quality company to us is a company that is consistently generating business value. To us, that means a business that’s generating business returns that are consistently above cost of capital.

To identify these businesses, we look for businesses with strong and sustainable competitive advantages, consistent free cash flow generation that allows the company to invest in its future and pay out to existing shareholders, and then companies that are resilient and can produce high returns throughout a full business cycle.  

Steven Halpern: Now, to narrow your universe of potential holdings down to just 30 favorite ideas, you require a 15% return on equity for each one of the last ten years. How important is this part of your strategy.  

Allen Bond:  Yeah, it’s an extremely important part of our strategy and it really ties in, we think, very well with our philosophy.  Like I mentioned, our goal to identify value-creating businesses.  We want to invest in those businesses and then invest at a price that allows us, the shareholders, to participate in that business value creation.  

Like I mentioned earlier, business value creation occurs when business returns are consistently above cost of capital.

So how does that tie in with the 15%? If we can find a company that’s been able to generate a return on equity of 15% for at least ten years, we’re highly confident that company is consistently creating business value.

And that’s important to us. Then the screen also helps us identify companies with the attributes that I mentioned.  

Most of the companies that make that screen have competitive advantages, generate ample free cash flow, and because we require ten years, they’ve all been able to generate high business returns throughout a variety of economic and market cycles, and then from there, how do we get to the portfolio that we have today.  

We use internal due diligence to really verify those attributes, do valuation work, and that allows us to arrive at a portfolio today that’s a high-conviction portfolio of 27 stocks.

Steven Halpern:  Let’s look at some of the stocks that meet your criteria.  First, tell us about Accenture (ACN), a global firm that provides management and consulting services.  

Allen Bond:  Well sure, like you mentioned, Accenture is one of the largest firms in the world that does business process and technology consulting work.  

A really simple way to think about Accenture is that it’s really a play on global business productivity improvement initiatives.  We think Accenture’s extremely well-positioned to benefit from that trend.  


They have large and entrenched relationships with the majority of the large firms throughout the world and we think that trend of business productivity improvement’s going to continue.  

Companies want to find ways to make themselves more efficient and more profitable. Accenture can help them do that and that’s resulted in a very strong financial profile for Accenture.  

They’ve consistently generated high returns on capital.  They generate a lot of free cash and they’ve been able to use a lot of that free cash to pay out to shareholders, and the same time, grow the business very, very well.  

Steven Halpern:  Now, United Technologies (UTX) is an industrial company with a wide variety of operations, ranging from elevators to helicopters.  What’s the attraction here?

Allen Bond:  Yeah, United Technologies is, like you said, a global diversified industrial conglomerate; wide range of businesses. There’s probably two main commonalities when we think about United Technologies businesses.  

The first is, in a lot of ways, United Technologies, and the growth in that company, is a function of the buildout globally of infrastructures throughout the world. That’s been a long-term growth driver for the company and we expect that—with some stops and starts—to continue for the long-term.  

The other big commonality is that United Technologies businesses all have high capital costs.  

We think that creates large barriers to entry and it creates a really sustainable competitive advantage for the company that makes us very confident that the company can continue to generate good returns.  

They also generate a lot of free cash, so one of the facts that we like about United Technologies is they’ve paid a dividend every year for nearly 80 years in a row now.  

Steven Halpern:  Now finally, let’s talk about the personal care products firm, Proctor & Gamble (PG). What do you like in this situation?

Allen Bond:  Sure, well, we’ve talked a lot about competitive advantages, and when we think about Proctor & Gamble, we think that is a great example of a company with powerful and durable long-term competitive advantages.  

Obviously, it is one of the most well-known companies in the world, a leading global producer—marketer—of personal care and home care products that are primarily sold to consumers.  We think it’s a great business for the long-term.  

Right now, there are some moving parts with Proctor & Gamble. They’re in the process of trying to streamline the business, really focus on businesses that are high-growth and high-profitability.  That’s, frankly, created some noise in both the business performance and in the stock price.  

We think the stock price right now is a great entry point for a long-term investor, because when you get through all that noise, we still see a company with very dominant competitive advantages from powerful brands and channel strength throughout the world.

This is another company that consistently generates high business returns, consistently generates ample free cash flow, and has been another company that’s been able to pay dividends, pay out to shareholders, and grow consistently over time.  

Steven Halpern:  Again, our guest is Allen Bond of Jensen Quality Growth Fund.  Thank you so much for joining us today.

Allen Bond: Thanks for having me.

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