Rob McIver of the Jensen Quality Growth Fund seeks out companies with high returns on equity
Getty Images Investors face powerful risks right now — international turmoil and inflation. The first has helped lead to a broad decline for stocks this year, while the second means you had better stick with a reasonable long-term strategy to make sure your buying power doesn’t crumble as prices for nearly everything rise.
Rob McIver, a managing director at Jensen Investment Management in Lake Oswego, Ore., is part of a team that runs the Jensen Quality Growth Fund JENSX, which had $11. 2 billion in assets as of Dec. 31 and is rated five stars (the highest) by Morningstar.
Before taking a look at the fund’s methodology and holdings, here are two items to remind you of why a broad investment in U.S. stocks may be your best way to build wealth and stay ahead of inflation over the long term.
First, over the 30 years through March 7, the benchmark S&P 500 Index’s SPX average annual total return (with dividends reinvested) has been 10.3%. There have been good years and bad years, and significant pullbacks more often than investors would like, but that figure measures up well against the 7.5% annual inflation rate in January, based on the consumer price index .
And for investors worried about current uncertainties, including the tragic events in Ukraine, the pop in oil prices and supply disruptions to come, here’s a chart showing price movement for the S&P 500 SPX from the end of 2019 through March 7: FactSet From its then-all-time closing high on Feb. 19, 2020, through the pandemic bottom on March 23, 2020, the S&P 500 fell 34%, excluding dividends.
After that, it took only until Aug. 11, 2020, for the index to recover and close at a new record high. For all of 2020, excluding dividends, the S&P 500 gained 16%, followed by a 28% gain during 2021. An investor who sold into the declining market early in 2020 to avoid the worst of the decline, with the idea of jumping back in during the recovery, was likely to be too late in returning, thus hurting long-term returns.
The S&P 500 has fallen 11.9% so far this year, excluding dividends. A decline of this magnitude is no fun to wait through, but it is worth pointing out that it follows a 48% increase for the index from the end of 2019 through the end of 2021.
During an interview, McIver said that “one of the lesser appreciated secrets of long-term investing success is time in the market, not timing the market.”
A stringent test for growth stocks
In order to maintain a stable portfolio of companies with “all-weather business models,” McIver and his colleagues continually look at the entire universe of U.S. stocks to narrow the list to companies that have achieved returns on equity (ROE) of at least 15% over the previous 10 years. That broad culling reduces the investable universe for the Jensen Quality Growth Fund to about 280 companies.
The fund managers then look at other factors, such as profit margins, sales growth and earnings growth, to narrow the list further.
“Frankly, since we have been doing this so long, we know most of those companies quite well. There is a large set of institutional knowledge we rely on,” McIver said. He joined Jensen in 2004. The Jensen Quality Growth Fund was established in 1992.
No one screening factor is perfect. For example, Home Depot Inc. HD, which is held by the fund, had negative equity as of Dec. 31, making an ROE figure for 2021 meaningless.
McIver said a company can have negative equity if it has been losing money. But a negative figure for equity “may be the result of a company electing to exclude exceptional restructuring costs from net income but not equity, or by structuring a large debt-financed share buyback that may enhance shareholder value,” he added.
So McIver and his team look beyond ROE, “to holistically analyze the financial statements to determine whether a business represents an investment opportunity that is worthy of further consideration,” he said.
Other metrics Jensen analyzes include return on invested capital as well as free cash flow, debt-to-capital and debit-to-EBITDA ratios.
A change in market perceptionMcIver quoted a Jensen client who recently said: “At times of stress, I believe in getting rich slowly.” He agrees with this philosophy and said it ties into Jensen’s philosophy of “knowing what you own.”He said investors seem to be in a risk-off mode now, reflecting […]