Jensen's Picks in 'Quality Growth'

Greg Carlson: Hi, this is Greg Carlson. I'm a fund analyst with Morningstar. Joining me today is Bob Millen, a portfolio manager from the Jensen Fund. Bob, thanks for joining me today.

Robert Millen: You're welcome. Glad to be here, Greg.

Carlson: Bob, you and your colleagues at the Jensen Fund invest in a very disciplined fashion. Can you outline the strategy briefly?

Millen: Sure, I can. We are looking for quality growth businesses, businesses that have some sort of economic moat attached to them. We like to describe it as sustainable competitive advantages that give the business higher margins, more stable margins, and allow it provide returns in the business that are consistently above their cost of capital. And then we're always looking for businesses that are run by shareholder managers that have the wherewithal and the attitude to reinvest the excess cash that has built up in the business for the benefits of shareholders.

Lastly, we try to buy these businesses at a substantial discount to their intrinsic value, because we think it provides important downside protection as well as upside opportunity.<TRANSCRIPT>

Carlson: You have a fairly strict criteria in terms of return on equity, right?

Millen: We do. We look for only those businesses that have produced a return on equity in the business of at least 15% for 10 consecutive years.

Carlson: Right, and if a company falls short, the clock starts all over again.

Millen: It does. If a company misses the 15% in any one year, then by our policy, they have to reestablish that string of high performance. So they're out of the universe for at least ten years while they are rebuilding their strength.

Carlson: One of the things I think is interesting about your portfolio is, it does include obviously some of the big, giant household name companies like Microsoft and Johnson & Johnson, but there are also some smaller, lesser-known companies that meet the hurdles as well, such as Emerson Electric.

Millen: Emerson's a good example of company, based in St. Louis, that's involved in building large climate-controlled technology systems, as well as process management and energy-efficient systems or systems that allow companies to become more energy efficient, and have about half of their sales around the globe. So they're quite well-positioned to help the build-out of infrastructure in developing economies.

Carlson: It seems like a diversified sales base is a pretty good indicator that you're going to get steady revenues, or at least help you generate the steady revenues.

Millen: We definitely favor companies that have steady revenues. In fact, we like companies that have a lot of recurring revenues. So as opposed to companies that only manufacture a piece of equipment, we like companies that both manufacture and have the service contracts that then provide an additional source of recurring revenue. So, you're absolutely right, diverse recurring revenues is a hallmark of the Jensen companies.

Carlson: And lately you've been finding companies that straddle the technology and industrial worlds, some conglomerates. Can you touch on a couple of those?

Millen: Yes. One that we have recently added to the portfolio is Oracle, which is the company that is really the only company that has the complete stack of software running all the way from database through middleware to applications that allow businesses to become more efficient. Another example would be a company called Amphenol, which is not a very well-known name. They make connectors for businesses. A good example is a simple connector would be one that connects a keypad to a screen on a cell phone.

So those would be two examples of technology companies that certainly serve the industrial space. Then a company like Danaher, which has been built largely on acquisitions, has a number of very high technology companies that are used in industrial automation.

Carlson: In general, it seems like the fund's weighting in tech-oriented companies has risen recently. Is it just that these companies just haven't been cheap enough for you before?

Millen: That's a good question. Over the past couple of years, we've raised our weighting in technology companies by about 5 full percentage points. We didn't do it because we set out to do it, but we did it because our fundamental bottom-up analysis of companies are showing us that, number one, they represent the best growth opportunities, and number two, they look very attractively priced.

Carlson: Thank you very much for joining us today, Bob.

Millen: You're welcome.