We'll admit we have a soft spot for Robert Zagunis, the manager of the $2.7 billion-asset Jensen J (JENSX) fund, strictly because he seems to like nothing better than to extol the virtues of his 25-year-old daughter, Mariel.
Mariel Zagunis is a top fencing competitor, having taken the gold medal in individual sabre at the 2004 and 2008 Summer Olympics. So some boasting is to be expected.
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Jensen J
That strict approach may not identify great companies that turn around in less than a decade, such as Apple (AAPL, news, msgs), but it does produce steady returns that avoid the worst pitfalls. The Jensen J fund, which has a five-star rating from Morningstar, has handily beaten the Standard & Poor's 500 Index ($INX) over the past three, five and 10 years.
Q: You're very specific about the individual metrics you look for in companies, but what's your feeling about the economy in general and the outlook?
A: There's been a remarkable volatility in the market. In general, it's exhibiting a lot of non-high-quality characteristics, signaling things are not safe. We (think) that volatility will likely continue. What we love about the companies we invest in is that we expected they would "right-size" in this environment and shrink to protect their margins when the economy fell off a cliff, and they did just that.
With the companies we're investing in having streamlined their businesses and (used) technology to achieve a higher efficiency, you don't really require a huge amount of a pop in the top line to having operating leverage that boosts earnings.
Q: But aren't you worried a jobless recovery isn't going to produce the consumers that will drive a consumer-led economy?
A: We don't expect growth to be as robust as it has been in the past, but everything's relative. The winners will take advantage of weak or volatile situations, take market share, maybe do an acquisition or tap the faster-growing parts of the world. That's all about how the management and the culture of a company take resources and dedicate (them) to the best opportunity for the company and for investors.
Q: Let's talk specifics. How do you tell if you want to invest in something?
A: We look at the quality growth companies as involving basically three things. One, have they been able to develop at least 15% return on equity (each year) over the trailing decade, and have they been able to maintain their ROE above their cost of capital? Two, we look for a consistency of operating performance in terms of free cash flow, in particular. And three, we look for a culture of performance that is going to help the company deliver that kind of ROE and free cash flow for the next 10 years. Where is the management team going, and how will they get the company there really efficiently? The culture of the firm, in other words.
Q: OK, which companies are exhibiting that culture?
A: Abbott Laboratories (ABT, news, msgs) has got all three bases covered, in our view. They have flexed their M&A muscle with three pretty large deals in the last few years, writing checks from their balance sheet, because they could. That included, most recently, the purchase of Piramal Healthcare of India, which gets them into a big growth market. And the acquisitions of Medical Optics and SolvayPharmaceuticals will give a nice bump to earnings next year.
Overall, they are doing everything we like to see. They have been paying a dividend since 1924, so it's a poster child for the kind of company that has a culture of performance. The company's net-profit margins are 17% to 19%, its ROE is north of 25%, maybe as high as 30%. For a company of that quality to have that kind of return, they are doing stuff really well.
Q: Is there upside in the stock?
A: Yes. With Abbott, you have a steady grower, a dividend yield of 3.7%, which should keep going up because they've been doing that forever.
Q: Who else?
A: Among industrials, we like Emerson Electric (EMR, news, msgs), one of our biggest holdings, along with Abbott. Emerson (is) well-positioned for infrastructure development in emerging markets. They have an objective of increasing emerging-markets revenue from about a third of revenue now to 40%. And just in the developed world, they are well-positioned for a replacement cycle in capital investment. There's a lot of really old buildings in the developed world that need new infrastructure of one sort or another.
Continued: The fund's top 10 holdings
