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By Greg Carlson | 05-14-2013 12:00 PM

2 Names to Gain From Industry Trends

A retailer's attractive pricing and a health-care firm's favorable prospects create solid growth opportunities for Jensen manager Eric Schoenstein.

Greg Carlson: Hi there. My name is Greg Carlson, and I’m mutual fund analyst with Morningstar on the active funds team. I am joined here today by Eric Schoenstein, the comanager of Jensen Quality Growth. Thanks for joining me today, Eric.

Eric Schoenstein: Thank you, Greg. Good to be here.

Carlson: I know you’ve done a couple of videos for us over time. Just to remind folks of the strategy with Jensen Quality Growth, it’s a little bit unusual, in that you are only investing in companies with a 10-year track record of at least a 15% return on equity each year.

Schoenstein: That's correct. The reason for that, or I guess the power behind the universe, if you will, is that it helps for us and for our investors then to be able to mitigate business risk as well as pricing risk in their investment portfolios. When you can have a company that performs at the kind of track records that we are looking for, that high level of return on the business that’s theoretically above cost of capital for 10 consecutive years at a minimum, then that has a strong likelihood of mitigating any business-failure risk that could potentially exist. Then from there, once we’ve established that strong universe of companies, then it's our job as investment advisors to then try to select the ones that we think are of the highest quality, or perhaps even more consistency than the universe broadly.

Carlson: Right. You screen for that annually along with a minimum market cap of $1 billion.

Schoenstein: That's correct.

Carlson: And that yields a fairly select universe.

Schoenstein: Yeah, we recently went through the fiscal 2012 measurement of the universe. Today the universe measures about 180 companies. That’s up a little bit from where it’s been in the past, and actually that's been a good thing we’ve been happy to see. We had a couple of years where the universe did shrink somewhat because of the downturn in the economy in 2008-09, not unusually so, but it was something that you keep an eye on. And we’ve seen it now recover back up. I think we are up about a net 15 or so companies in terms of additional opportunities that have shown a 10-year track record, proven themselves over that longer term, and that just gives us more things that we can potentially look at in our investment process.

Carlson: This may be reaching back too far for both our memory banks, but in terms of going back to, say, the pre-2008 peak, was that somewhere around the same level, 180 companies?

Schoenstein: It is actually just about back to where the high peak was. I think the last time we had a high peak before the downturn was like 183 companies, so we are within two or three companies of really being at the all-time peak we’ve had. The good news, I think, to the more important perhaps aspect to that is, it hasn't been driven based on market-cap movements, and sort of the rising market being a reason why more companies are coming into the universe. It's been truly about more of the fundamentals of longer-term successful business models, which for us is the more important aspect to see.

Carlson: And at the bottom, I think in 2008-09 that number reached, about, 140?

Schoenstein: In the low 140.

Carlson: So it’s come up quite a bit.

Schoenstein: Yeah, it’s come up quite a bit, but it was never something--again, we are a concentrated manager, 25-30 names in the portfolio. So even when we had only 140 or so names, we had plenty of additional opportunities to continue to research and look to, and now we just have more so.

Carlson: Just perhaps as a broader barometer, I think it's probably a little encouraging for the economy?

Schoenstein: Absolutely, absolutely.

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