On August 1, Fidelity took direct aim at index fund competitors Vanguard, Blackrock’s iShares ...
Safer Growth Investing
04/15/2009 11:24 am EST
Russel Kinnel, editor of Morningstar FundInvestor, and analyst Greg Carlson say a fund’s disciplined approach to growth investing will appeal to more cautious souls.
[Large-growth] Jensen Fund (JENSX) hasn't been immune to the carnage in the equity market. In 2008, it lost 29%. However, that’s far better than the 41% loss of the fund’s typical rival.
The fund’s edge over its competitors in 2008 stems from its strategy: Its management team screens nearly 10,000 publicly traded companies for those that have delivered returns on equity (ROE) of at least 15% in each of the past ten years. That whittles the pool of candidates down to 100-125 names. The managers then analyze those companies to determine which ones have the best prospects, and they buy those trading at discounts of at least 40% to their estimate of intrinsic value.
Very few firms meet the team’s standards—the fund usually holds just 25–30 stocks. If a holding fails to continue to meet that 15% hurdle, it’s sold and the ten-year clock starts all over again. That’s been a relatively rare event; portfolio turnover is often in the single digits.
The fund’s singular focus on companies that crank out steady revenues year after year means it often treads lightly in economically sensitive sectors such as energy and debt-heavy firms in the financials, media, telecom, and utilities sectors.
Because the fund avoids most cyclical fare and won’t buy pricey highfliers in the tech and biotech sectors, it often lags its rivals in sharp rallies. But it tends to hold up far better in tough times, when investors are less likely to dump its steady holdings. All told, the fund has posted top-decile returns over ten and 15 years. That said, investors need to be patient with this fund to ride out its cold relative-return streaks.
This fund’s management team has seen two portfolio managers retire in the past five years, and we wouldn’t be surprised to see another in the next couple of years. Nevertheless, this is an experienced crew, and we have a lot of confidence in it. The firm has stringent hiring practices in place—candidates are interviewed extensively to make sure they fit in with Jensen’s culture and its distinctive investing approach. It also typically hires people who have extensive experience not in investing, but in business.
The J shares, the share class for retail investors, charge a modest 0.85%—ten basis points less than the typical no-load large-cap fund. That’s not bad given the fund’s $1.5 billion asset base.
Beyond its 2008 performance, the fund has much to recommend it. Its management team is experienced, the strategy here is fundamentally sound, and the fund’s costs are modest. It will likely lag the pack again when the market rallies fiercely, but this is one of our favorite funds for investors seeking a relatively tame approach to growth investing.Subscribe to Morningstar FundInvestor here…
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