A High Bar:
How a Manager Is Widening the Aperture on the Jensen Quality Lens with ESG
Kevin Walkush cut his professional teeth at Amazon in the late 90s and early 2000s as a financial analyst and product manager. He forecasted the company’s income statement and led the retail giant’s UK auctions business. He may be a proud alum, but when it comes to buying Amazon (AMZN) stock for the Jensen Quality Growth and Jensen Global Quality Growth Strategies, where Walkush is a portfolio manager, the company gets no preferential treatment.
Amazon has made its shareholders quite wealthy over the years, but it still can’t pass Jensen’s quality screen.
“Amazon has performed exceptionally well—particularly during the pandemic when it proved a lifeline for consumers stuck at home,” Walkush says. “But it has yet to demonstrate the consistent profitability that we require.”
and Head of ESG
Quality no matter what
Even without Amazon, the Jensen strategies have been able to find enough quality names thanks to its commitment to rigorous research and an unwavering investment philosophy.
The collaborative process starts by screening out stocks with market caps of under $1 billion. Then, the Jensen Quality Growth investment team applies the quality screen, which reduces the universe to just over 300 names. That’s when the team begins their research, dividing up potential stocks for intensive research.
Once the research is done, the portfolio managers and analysts write up a 30- to 40-page report on their pick and present their findings to the rest of the team. Only if there’s consensus on a name does the team move further into valuation work. The result is a concentrated portfolio of high conviction holdings.
When Walkush joined Jensen in 2007, he was already familiar with the quality concept, having been an analyst at Morningstar Inc., the Chicago-based investment research firm. In its analysis, Morningstar emphasizes businesses with wide moats, a term first coined by Warren Buffett.
“Morningstar’s moat concept is similar to our quality approach,” Walkush explains. “Both seek to identify companies that have built durable competitive advantages that can protect their market share and profitability in all types of market conditions.”
A very high bar
“High return on equity is a good proxy for quality,” Walkush says, “because it shows that companies have built strong businesses with defendable competitive advantages that can withstand differing market conditions. It allows Jensen to weed out all but the most well-managed companies.”
Case in point: Apple (AAPL). Although Apple had been a highly celebrated stock and a top pick in many growth funds, it didn’t hit the 15 percent/10-year threshold until 2017.
“[Apple] still had to establish a consistent track record of high profitability before we would consider it,” Walkush says.
Admittedly, the Jensen portfolios missed out on the high-flying early days of Apple stock, and it’s anybody’s guess whether the electronics titan will see that kind of performance again. But missing out on the upside of some stocks also means missing out on momentum-fueled bubbles, like homebuilders in the late 2000s or energy darlings in the 2010s. In Apple’s case, the Jensen team wanted to ensure they were buying sustainable growth and needed to see a longer track record of ROE consistency to feel confident that that was the case.
“First and foremost, quality is a risk lens,” Walkush says.
A broader view of quality
In addition to his portfolio management duties, Walkush was also named Jensen’s Head of Environmental, Social and Governance (ESG) in 2021. “ESG factors were already something the Jensen investment team considered in its research for years, but the role formalizes yet another way to consider quality,” Walkush says. “Now we have better tools to understand potential red flags.”
Across the industry, ESG isn’t well defined and varies from firm to firm, analyst to analyst. That’s why Jensen has developed its own ESG screens to score and rank every company on a weighted basis. Jensen’s ESG rankings aren’t used for portfolio construction, but they are another important data point in the research process.
“When we think about managing our portfolio, we’re looking at fundamentals, valuations and risk,” Walkush says. “ESG helps to inform the fundamentals.”
To be sure, Jensen does not solely focus on ESG and Jensen doesn’t engage in shareholder activism. That said, ESG factors can say a lot about how well—or poorly—a company is managed. Companies with high marks for ESG also tend to do well in other areas. For instance, eschewing concentrated ownership in lieu of a more diversified owner base protects minority shareholders and increases oversight, which can have a positive impact on stock performance.
Where the liabilities are
In addition to finding quality companies, ESG also helps to reduce risk by pinpointing potential risk factors. For example, there might be companies that have profitable operations in one area, but have product liabilities in another, much like the drug makers now facing lawsuits over their role in the opioid epidemic. Factoring in those liabilities can tell analysts a lot about a stock’s profitability and ultimately shareholder value.
“We have a risk-first mentality and ESG fits in well with that,” Walkush says. “ESG helps us identify risk through a different lens.”
A focus on quality also helped the Jensen team find Encompass Health. Read our Insights article on Encompass to learn why Jensen sees a quality play due to positive demographic tailwinds and smart technology use for this rehab provider.
The company discussions in this article are solely intended to illustrate the application of our investment approach and is not to be considered a recommendation by Jensen. The specific securities identified do not represent all of the securities purchased and sold for a Jensen Strategies discussed herein. Our views expressed herein are subject to change and should not be construed as a recommendation or offer to buy or sell any security and are not designed or intended as a basis or determination for making any investment decision for any security. Our discussions should not be construed as an indication that an investment in a security has been or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of any security discussed herein.
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