Jensen Quality Growth Fund commentary for the fourth quarter ended December 31, 2016.
The Jensen Investment Philosophy
A consistent, sustainable investment process is vital to weathering all economic climates. The strength of our investment philosophy is based on an unwavering commitment to investing in quality businesses. We believe these quality companies possess sustainable competitive advantages, creating value as profitable businesses that can, over time, provide attractive returns with less risk than the overall-market.
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We are extremely-selective.
From a pool of over 5,000publicly-traded
U.S. companies, fewer than 250 companies meet our initial threshold for inclusion in the Jensen Quality Universe. The first step in defining our investment universe is to identify all U.S. companies with a market capitalization of $1 billion or more. The Jensen Quality Universe then includes only those businesses that have produced a return on shareholder equity of 15% or greater in each of the past ten years, as determined by the Investment Team. We search for quality companies by targeting exceptional business performance combined with endurance. For those businesses that qualify, we have found the stamina of these quality businesses to be powerful; possessing sustainable competitive advantages and producing consistent earnings growth which, when compounded, can deliver tremendous value to shareholders.
Jensen Quality Growth Fund Commentary
U.S. Performance Summary
The U.S. equity market, as measured by the S&P 500 Index, produced a return of 3.82% during the fourth quarter. Economic positives such as strengthening employment figures and increased U.S. corporate profit forecasts provided a supportive backdrop. However, in anticipation of the U.S. general election, the market traded down through early November. Post the election, in contrast, the S&P 500 index rallied strongly, favoring the Financials and Energy sectors while disregarding the Information Technology and Consumer Discretionary sectors.
The Jensen Quality Growth Fund ended the quarter with a positive return, but underperformed the S&P 500 Index. The Fund fared well in the pre-election weakness, which provided a measure of downside protection. For the whole quarter, positive stock selection in Information Technology and Health Care boosted relative performance. The Fund’s underweight in Financials was the primary detractor from relative performance. Stock selection in Materials also negatively impacted performance.
At the company level, the Fund’s top performer this quarter was UnitedHealth Group (UNH), the largest health insurer in the U.S. Our long-term investment thesis for UnitedHealth is underpinned by the company’s diverse revenue base by customer type, the scale and scope of its provider network, and its ability to use data to improve health outcomes. We believe the share price was bolstered by the company’s consistent top-and bottom-line results that exceeded expectations. We added to the Fund’s position in late 2015 and continue to view it as a core portfolio holding.
The largest detractor to performance was Becton Dickinson (BDX). Becton dominates the global market for needles and syringes. The company produces more than 29 billion products per year, creating a distinct scale advantage. During the quarter, Becton reported sales and earnings growth ahead of expectations, announced a 10%+ dividend increase, and provided a strong outlook for Fiscal 2017. Notably, all of the fourth quarter share price underperformance occurred in the post-election period, suggesting that weakness in the BDX share price was due to a sentiment shift among investors. We used the share price pullback to add to the Fund’s position late in the quarter.
No outright purchases or sales of positions were made in the Jensen Quality Growth Fund during this quarter. The Investment Committee was active in trimming positions seen as more fully valued and certain positions were increased to reflect Jensen’s convictions in the businesses and relative valuation opportunities.
The Jensen Outlook
Last year at this time, we maintained a constructive view of U.S. equity markets due to steady global economic growth, the likelihood of a rebound in corporate earnings, and expectations of modest U.S. Fed tightening. Looking forward to 2017, our outlook remains cautiously optimistic, underscored by expectations of an acceleration in earnings growth, stable economic growth among large countries, and the potential for domestic fiscal stimulus. Potential threats to this view are a continuation of the post-election U.S. dollar strength, more-hawkish-than-expected U.S. Fed Policy, and further global geopolitical upheaval.
The Investment Committee at Jensen remains confident in the philosophy and process underpinning our management of the Fund. Our goal remains the construction of a portfolio of companies poised continue to create business value. To that end, we continue to focus on the long-term ownership of businesses with sustainable competitive advantages, resilient financial results, and attractive long-term growth opportunities. Importantly, we believe these attributes allow companies to generate business returns consistently above their cost of capital, resulting in sustainable shareholder value creation.
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