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By Greg Carlson | 09-23-2010 10:32 AM

Jensen: Price Was Right on Top Tech Firms

Hit by the downturn, valuations on fundamentally strong tech companies put them on the buy list for Jensen recently.

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Greg Carlson: Investors who look at Jensen Fund have probably seen that over time, your strict investment discipline has kept the fund out of or very light in certain sectors and a little heavier in other sectors relative to the S&P 500 or the large-growth category. One sector that seems to have been on the rise just in terms of weightings within the fund is technology, can you talk about how that came to be?

Eric Schoenstein: Yes, absolutely. And your characterization is right. It has risen over the last couple of years. And one of the reasons for that is, technology has been an industry that certainly has always been interesting to us in terms of its performance, the opportunity set, there are high switching costs for customers that buy technology products, particularly in database applications and software. There is a need to have a constant upgrade cycle, but the other side of that is that valuations on technology companies tend to be pretty high. And the premium to the rest of the benchmarks, so to speak, it has been pretty high.

As a result of the downturn, we saw some of those valuations start to really come down. As everyone is pretty well aware, 2008 was a pretty tough year for valuations in the markets, particularly in the fourth quarter, when there was no place really to hide, but as a result of that, it gave us an opportunity to look at some of those same technology names that we'd been studying and see that they were at much more attractive entry points, so we could really bring some additional growth to the portfolio at an opportunity that made sense.

And I think the other thing, too, that we've seen in technology that's probably worth noting, and that also has helped us to perhaps have maybe more exposure in that sector is that, there's more maturity taking place in that sector. In the late '90s, there were a lot of technology names that wouldn't have made sense for the Jensen discipline and for most people; they didn't have revenues and really any earnings, but the companies that did have sound business models and were able to produce fundamental results and can produce them consistently, some of those companies are becoming mature enough that they're reaching a 10-year track record of 15% return on equity.

So, they're becoming part of our universe and as a result of becoming part of our universe, it's giving us more opportunity to study the technology sector in greater depth and see where those opportunities may lie. I think that's also part of the reason why you're seeing technology, as a component of our portfolio, rise in it's a total weighting.

Carlson: Right. So we could see that potentially rise even further?

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