A History of Quality Investing
At his first interview with Jensen Investment Management founder Val Jensen in 2001, Eric Schoenstein was asked which three companies he’d want to own in their entirety. His choices were Gannett, Coca-Cola, and UPS. Back then, Jensen’s website didn’t provide regular updates of portfolio holdings, so Schoenstein didn’t know that Jensen already owned Gannett and Coke.
At the time, Schoenstein didn’t work in investing, but he’d honed many of the same skills as an auditor at a national accounting firm where he learned to analyze company balance sheets. It was a process very much in line with Jensen’s focus on quality and cash flow.
“As an auditor, you’re looking to give an assurance that a business is healthy and has good prospects, and that’s what you do as an investor,” Schoenstein says.
Beginning of a new era
Schoenstein joined Jensen as an analyst, just the 10th employee of the firm. He quickly learned to embrace Jensen’s trademark methodology for analyzing company stock and making investment decisions, a process that leads with quality. In order to qualify for consideration into the portfolio, companies must have returns on equity (ROE) of at least 15% for each of the last 10 years. Jensen chooses to look at ROE because it’s a common denominator across industries and a good indication of profitability.
“I like to think about the ROE criteria like a resume,” Schoenstein says. “It’s the piece of paper that gets you in the door, but the rest is up to you.”
Another key element in the process is teamwork. When choosing which stocks to invest in, analysts and portfolio managers must first present a 30- to 50-page report to their colleagues, then answer grueling questions aimed to uncover every potential risk. The process can take months before everyone gets on board. It can be deliberative and time consuming, but ultimately it results in better risk management, Schoenstein says.
“It might force us to do more work to overcome those concerns. Or maybe we find that those concerns overcome our thesis, which ultimately gets us to a better long-term decision.”
The evolution of a boutique firm
As Schoenstein rose from portfolio manager to a managing director and ultimately the chief investment officer, he presided over a new phase of growth. In 2008, Jensen started the Quality Value Strategy, which uses the same quality discipline as Quality Growth but looks to buy shares at a greater discount to intrinsic value. More than 10 years later, the Global Quality Growth Strategy, an international sibling to the flagship strategy, opened. The firm has since grown to nearly 40 employees.
“We’re now on the third and fourth generation of talent,” he says. “As the firm has gotten bigger, the employee ranks have grown more diverse, and having those voices as part of our dialogues has made us stronger and smarter.”
Quality to the core
What hasn’t changed, though, is an adherence to the quality discipline, which sometimes finds Jensen going against the grain. “By following our discipline, we will miss some of the hockey sticks going up,” Schoenstein acknowledges. “But we also miss the hockey sticks going down.”
Prepared for unchartered waters
As the global economy turns choppy, Schoenstein and the rest of the Jensen investment team fall back on the quality discipline that Val Jensen espoused more than 30 years before. And for good reason. Between the unrelenting pandemic, rising inflation, interest rates, supply chain disruptions, and excess government spending, the stresses came on quickly. Any one of the issues individually could be handled by the economy, Schoenstein says.
“But when taken in totality, all of them at the same time, it’s creating so much uncertainty,” he says.
So Schoenstein and the rest of the investment team focus on what they can control: finding quality companies with staying power and attractive valuation.
“Regardless of rising interest rates, higher inflation, or geopolitical risks, we believe the businesses in our portfolio are built to endure,” Schoenstein says.
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. 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.
Past performance is no guarantee of future results. The information contained herein represents management’s current expectation of how the Jensen Quality Growth, Quality Value, and Global Quality Growth Strategies will continue to be operated in the near term; however, management’s plans and policies in this respect may change in the future. In particular, (i) policies and approaches to portfolio monitoring, risk management, and asset allocation may change in the future without notice and (ii) economic, market and other conditions could cause the strategies and accounts invested in the strategies to deviate from stated investment objectives, guidelines, and conclusions stated herein.
Certain information contained in this material represents or is based upon forward-looking statements, which can be identified by the use of terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue”, or “believe” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of a client account may differ materially from those reflected or contemplated in such forward-looking statements.
This information is current as of the date of this material and is subject to change at any time, based on market and other conditions.
Jensen Investment Management, Inc., is an investment adviser registered under the Investment Advisers Act of 1940. Registration with the SEC does not imply any level of skill or training. Although taken from reliable sources, Jensen cannot guarantee the accuracy of the information received from third parties.
© 2023 Jensen Investment Management
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