Nerves of steel

Investing isn’t for the faint of heart. But Wilson couldn’t have imagined the extraordinary circumstances he’d face when he was hired in 2019 as part of the team that would launch the Jensen Global Quality Growth Strategy, an international sibling to the flagship Quality Growth Strategy, which launched in 1992.

As the team was building out its investments, the COVID-19 pandemic was starting to spread in Asia. With the launch just weeks ahead, most of the world began shutting down and stock markets went into free fall. Still, Wilson and his colleagues forged ahead, guided by their thorough research, conviction, and a different way of seeing the world.

“To be a good investor, you have to be unemotional in your approach,” Wilson says. “You also have to be a bit of an optimist and believe that things will be better in the future, which isn’t easy when sentiment in the market quickly swings toward fear.”

Going where others fear

One of the first casualties of the pandemic was travel.  While flights were grounded in the spring of 2020, Wilson researched Madrid-based Amadeus IT Group (AMS), a back-end technology provider that some of the world’s largest airlines rely on to sell tickets and power their websites. Since the company is paid mainly on a per-passenger basis, revenues plummeted when global travel halted due to widespread lockdowns. Wilson and the team, however, looked past the immediate shutdowns. 

“We knew that if and when travel rebounded, their position would be unassailable due to the mission-critical services Amadeus provides its customers,” Wilson says.    

While the team liked Amadeus, they weren’t ready to dive in just yet. They took a wait-and-see approach to understand Amadeus’s plan to emerge from the downturn.  

“We added it once they stabilized their business and became free cash flow positive at volumes that were substantially below pre-pandemic levels,” he said. That meant that any rebound would be a boost for both revenues and free cash flow, providing Jensen with an attractive entry point to a high-quality business that was navigating through short-term uncertainty.

Amadeus stock suffered a steep decline through that spring and summer, until rebounding later in 2020. The stock has proven resilient during the stock market selloff year-to-date 2022 through May, outperforming the MSCI ACWI index by nearly 10 percentage points. 

Another example is UK–based Compass Group (CPG), the largest global food service provider for third parties such as hospitals, schools, corporate offices, and sports arenas. Wilson estimates that Compass Group lost 40% of its sales volume in those early pandemic days, with schools and offices closed and sporting events canceled. 

“How do you pivot when 40% of your volume goes away overnight?” Wilson wondered.   

Deep fundamental research contributed to Wilson’s confidence that Compass could navigate that difficult time, because it had done so before. “Having studied Compass, we saw how the company performed during the last recession, with their pristine balance sheet and diversified customer base allowing them to play offense while peers suffered and retrenched,” he says. 

“With 60% of their revenues operational during the pandemic, Compass had a base from which they could rebound,” Wilson says, “unlike many smaller and less diversified peers.” 

Rebound indeed: As of early 2022, Compass has surpassed its 2019 sales volume with record new business wins and client retention rates exceeding 95%. The stock is up 7.7% in 2022 through May 31, outperforming the MSCI ACWI index by nearly 20 percentage points.  

Independence grounded in research

Jensen is able to make contrarian calls because of the months—sometimes years—the investment team spends researching their stocks. After this much time, there’s little that’s unknown to the portfolio managers and analysts. Therefore, they can act quickly when market conditions change and opportunities present themselves.

The process starts by eliminating stocks with market caps under $1 billion. Then, the Jensen team applies its trademark quality lens by screening for those companies that have returns on equity of at least 15% for each of the last 10 years, as determined by Jensen’s management, not company reporting. That reduces the investable universe to nearly 900 names. After that comes another cut to bring the bench candidates down to 50–70 stocks.

Portfolio managers and analysts then divide up the names for in-depth analysis. From there, each team member produces a 20- to 50-page research report of their findings. Next, the team meets to discuss the names to decide whether to include them. These meetings can be grueling, with colleagues acting as devil’s advocates to make sure they’ve considered every potential downside that could plague a stock. The team must achieve consensus in order to include a name. 

No matter which name he’s looking at, Wilson has his eye out for stocks with competitive advantages that may have the attributes to succeed irrespective of the economic climate. That’s especially true now, given the enormous inflationary pressures that companies are navigating.

“I like businesses with clear value propositions and durable competitive advantages that have stood the test of time,” he says.

And that’s why Jensen’s own durable business model, coupled with fierce independence, is thriving today.