Jensen Quality Growth Fund commentary for the second quarter ended June 30, 2016.
H/T Dataroma
Jensen Quality Growth Fund – U.S. Performance Summary
With a return of 2.46%, the U.S. equity market, as measured by the S&P 500 Index, increased moderately during the quarter. While the domestic economic data continued to be modestly positive, other factors caused volatility to rise, most strikingly the Brexit vote which led to a steep decline in the market followed by a swift recovery during the last week in June. The Energy sector was the leading market performer reflecting the commodity rebound and global easing moves, while the Information Technology sector’s negative results reflected global growth concerns.
On a relative basis, the Jensen Quality Growth Fund underperformed the S&P 500 by approximately 70 basis points. On a sector basis, positive stock selection in Health Care and in Industrials boosted relative performance, while stock selection in Information Technology and Consumer Discretionary detracted from relative performance. The Fund’s lack of exposure in Energy and overweight in Information Technology detracted from relative performance, while its overweight in Healthcare boosted relative performance.
At the company level, the Fund’s top performer this quarter was Johnson & Johnson (JNJ). JNJ recently reported a solid quarter with good organic growth across much of the company and gave reassuring guidance looking forward to the remainder of 2016. Solid growth occurred in the pharmaceutical and medical device segments and the consumer segment continues to make good progress recovering from supply chain issues of a few years ago. The largest detractor to performance was Apple (AAPL). Apple’s most recent quarter fell short of market expectations due to slower iPhone sales, which had one of the toughest comps in the last 10 quarters, as well as currency headwinds and some slowing in global growth. While comps are expected to remain difficult for the next couple of quarters, the company has continued to see solid growth in services and our long-term thesis for ownership remains unchanged.
Portfolio Changes
The Jensen Investment Committee added ADP during the quarter. We are pleased to welcome back ADP, the cloud-based, human capital management company, to the Jensen Quality Growth Fund. ADP was one of the Fund’s longest term holdings (at almost 20 years) but was sold in late 2014 for valuation reasons.
We have always believed that ADP is a fundamentally strong company. However, we strive to own shares in high quality businesses such as ADP, yet only if we believe those shares are attractively priced. Since being sold in 2014, the company’s relative valuation has become more attractive due to its modest stock price appreciation coupled with strong earnings growth. When Jensen originally added ADP, it was a traditional payroll processing company that serviced large domestic and multinational companies. The company has since evolved into a human capital management company with an expanded portfolio of broad service offerings delivered through the cloud to small to large multinational companies. In addition, we believe ADP is positioned to add further shareholder value as it continues to migrate customers to its cloud-based payroll processing and human capital management services platform. We at Jensen consider ADP a great core holding due to its strong fundamentals and compelling valuation.
The Jensen Outlook
As we move into the second half of 2016 many of the issues that have plagued the U.S. market over the last few quarters remain unresolved, leaving the likelihood that volatility will be present for the foreseeable future. The extreme and broad based market reaction to the Brexit vote did not result in high quality companies providing the downside protection we would expect, however we believe that company specific strengths often found in these businesses will reassert themselves as determinants of stock prices during the volatile times ahead.
As the bull market continues to age, stock valuations for some quality companies continue to be stretched. At Jensen, however, we maintain our fundamental focus on finding long-term, robust and growing businesses that we believe allows us to recognize the important connection between stock valuations and long-term value creation that may not be recognized in the short term. While current stock valuations exclude some of the companies on our bench from being eligible for the Fund, we believe the current Fund reflects the quality and growth characteristics that define our approach. The current Fund is estimated to provide a 5-year EPS growth rate in the high single digits, reflecting our view that these companies are positioned to do well given their competitive strengths and deep cash flow generation. We believe that the combination of identifying strong quality growth company fundamentals while also maintaining a valuation focus helps us manage risk, provides a measure of capital protection in volatile markets, and gives our clients the opportunity for long-term capital appreciation.
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