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Jensen: Price Was Right on Top Tech Firms

Greg Carlson

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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Schoenstein: Potentially, it's going to be about the opportunity set. Certainly, technology is one where, as companies look to continue to be as efficient and productive as they are today, a lot of rightsizing and lot of downsizing and efficiency gains were captured during the downturn. Well, as you look to maintain that, so that you can maintain margins in the future, technology and the efficiency it can provide is certainly one of the ways to try to maintain that efficiency. So, we think technology is a very good play in terms of quality and quality growth, and so it's absolutely a candidate for future inclusion and maybe more companies, but we also have other sectors we think are quite attractive as well.

Carlson: Right. You continue to maintain a relatively high weighting in health care for example?

Schoenstein: Health care is a good example. Obviously, there are some clouds there, so to speak, in terms of what's ultimately going to happen with reform. Even though we've had something passed, what impact is it truly going to have, it's still probably a couple of years out, but for companies that are in the space, particularly the ones that we like, where they're offering a broad array of products and services around the globe, reform is maybe not the needle-mover that it might be for other aspects of the industry. And yet, at the same time, we haven't seen much reward for the strong business performance that some of these companies are achieving.

So, it's definitely a sector that continues to show reasonably attractive valuations, particularly when considering the kinds of business performance and dividend opportunity that exists in those companies.

Carlson: Okay. Very interesting. Thanks very much for your time today Eric.

Schoenstein: My pleasure to be here. Thanks, Greg.