In his 1991 letter to Berkshire Hathaway shareholders, Warren Buffett eloquently described his investment style: 

“We continually search for large businesses with understandable, enduring and mouth-watering economics that are run by able and shareholder-oriented managements.  This focus doesn’t guarantee results:  We both have to buy at a sensible price and get business performance from our companies that validate our assessment.  But this investment approach — searching for the superstars — offers us our only chance for real success.  Click here for a complete version of this paper on how ROE may be used to find great companies. (We) are simply not smart enough to get great results by adroitly buying and selling portions of far-from-great businesses.”

While our investment process differs from Buffet’s, at Jensen Investment Management we also search for what we feel are “superstar” businesses with a history of consistent growth, durable competitive advantages, returns above their capital costs and which are run by shareholder friendly managers.  Our experience suggests that these businesses should provide superior long-term returns to shareholders with less risk than the overall market. 

We believe there is no better way to find these investments than from a universe of consistently high return on equity (ROE) companies.

We believe that ROE may provide an excellent gauge of profit-generating efficiency.  Because growth is limited by ROE (sustainable growth equals ROE times the earnings retention ratio), high ROE companies should grow faster than lower ROE companies, all else equal.  Further, consistency of ROE often reveals quality, growth businesses that generate excess cash for the benefit of shareholders. 

Our universe consists of companies over $1 billion in market capitalization that have recorded at least a 15% ROE for 10 consecutive years.  Our research shows that businesses with consistently high ROE often achieve sustainable competitive advantages, returns above their capital costs and excess cash reinvested in the business or paid out to shareholders.  These attributes can drive business valuation and ultimately stock market return.

William E. Fruhan pioneered these concepts over 40 years ago, through his research at the Harvard Business School, showing that these companies can deliver attractive returns to shareholders.  For an updated study on the merits of investing in high ROE companies and its potential for driving performance, please see the complete version of the Jensen white paper that is available by clicking the link at the end of this piece.

In addition, we believe that, starting with a universe of high ROE companies, return volatility can be reduced through fundamental research that identifies quality growth companies and by acquiring positions at a discount to intrinsic value. A good sell discipline completes the process by selling when the stock has become overpriced or when business fundamentals deteriorate below those found in quality, growth companies.

Jensen Investment Management has been serving clients for 20 years using this disciplined approach based on return on equity (ROE) as a criterion for identifying a pool of companies in which to invest.

For a complete version of this paper, which explains why we believe ROE is important and shows the historical performance of high ROE companies vs. the S&P 500 Index, please click here.
 

Past performance does not guarantee future results.  Investing involves risk; loss of principal value is possible. The Fund is nondiversified, meaning that it may concentrate its assets in fewer individual holdings than a diversified fund, and is therefore more exposed to individual stock volatility than a diversified fund.

Please click here for a current prospectus for The Jensen Portfolio.  It contains information about the Fund’s investment objective, risks, charges and expenses. Please read and consider it carefully before you invest.

The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general.  You cannot invest directly in an index.

Return on Equity (ROE): Is equal to a company’s after-tax earnings (excluding non-recurring items) divided by its average stockholder equity for the year.

The Jensen Portfolio is distributed by Quasar Distributors, LLC.

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