Built to Last:
Using Collaboration to Find Companies with Staying Power
Bond investors are known to be a cautious bunch. For the most part, they are willing to give up some return for stability and safety. Stock investors, on the other hand, are primarily focused on the upside.
As a former fixed-income analyst, Allen Bond—now a managing director and portfolio manager of the Jensen Quality Growth Strategy—found a hearty welcome at Jensen for his methodical approach to security analysis. Bond was used to carefully scrutinizing company balance sheets to understand whether companies could pay back the interest they owed and the principal at maturity.
“As a bond analyst, you’re primarily trying to understand liquidity: ‘Will this company generate enough cash to cover interest payments and pay off principal when the bond matures?’”
Equity investors, on the other hand, are trying to answer the question: Are a company’s growth prospects attractive enough to allow it to create greater value for shareholders? While fundamentally different questions, the analysis is surprisingly similar.
A risk-first mindset
While all investing entails some risk, Jensen doesn’t believe it’s necessary to take on too much risk to participate in the upside. By focusing on quality companies with a proven track record of being good stewards of their capital, Jensen managers are able to avoid some of the landmines that come with the investing territory.
“We think about investing with a risk-first mindset,” Bond says. That’s where Bond’s background in fixed-income is crucial.
“With fixed-income, if everything goes right, you get your coupon payments and you get paid back at the end. That’s your upside,” Bond explains. “But if things go wrong, you can get zero. So your analysis is really focused on making sure you’re not wrong.”
At Jensen, members of the investment team focus on managing two primary risks: business risk and pricing risk. In other words, they want to buy businesses with staying power that can perform in any business climate, and they want to pay a fair price for the stock. Focusing on quality helps to offset some of the business risk, Bond says.
And with the risks mounting daily, between geopolitical conflicts, inflation, rising interest rates, political instability, and a possible downturn, a risk-first mindset is particularly important.
Teamwork sidesteps the risk
So how does Jensen manage risk? With exacting research and collaboration.
At most asset managers, analysts are charged with the heavy lifting of stock analysis, while portfolio managers take their ideas and construct the portfolios, deciding which stocks to purchase and how much to allocate to each. Those roles are distinct, and staff members stay in their lanes.
Jensen is different. Collaboration is central to the way that investment decisions are made. Portfolio managers perform stock analysis and vote on which names to include. It is an intentionally deliberative process focused on long-term investment fundamentals as opposed to short-term market sentiment.
“Our decisions are a consideration of everyone’s views,” says Bond. “We’re trying to take advantage of everyone’s individual ideas.”
It’s also a risk-mitigation strategy. No one person can consider every angle of an investment. But putting six minds together helps get them closer to that goal.
Collaboration at the core
The process starts by filtering out stocks that don’t meet Jensen’s strict quality criteria, which is a history of returns on equity of at least 15% per year for each of the past 10 years. After accounting for market cap and valuation requirements, the result is a universe of just 300 or so names to consider.
From there, members of the investment team divide up the names for further analysis. After weeks of analysis, the portfolio managers and analysts produce a 40- to 60-page report to share with colleagues. Then they debate the merits of each name.
The back-and-forth can be intense at times, meant to find potential weak spots in everyone’s investment thesis. In order to include a name in the portfolio, the team must reach consensus. While painstaking, the method results in thoroughly vetted names that are unlikely to give shareholders nasty surprises.
“In many cases, the most charismatic person in the room will be the one that gets their way, even if that person doesn’t have the best ideas,” says Bond. “But our group approach makes sure that we get individual input so we’re tapping into a diverse range of thoughts.”
Bond’s fixed-income background gives the team yet another dimension for its decision-making.
Investments built for turbulent times
With the market in bear territory, investors are understandably concerned. Jensen’s risk-first approach is especially valuable now.
“The risk of investing has gone up,” Bond says. “Because the stock market is a leading indicator, it’s reflecting the concerns that a recession is pending.”
Rather than try to duck into a defensive posture to try to avoid losses, Jensen continues to focus on quality stocks with competitive advantages and free cash flow that allows them to invest through difficult market conditions. To navigate the uncertainty, Jensen will do what it has always done: rely on thorough research by its team of analysts and portfolio managers.
Past performance is no guarantee of future results. The information contained herein represents management’s current expectation of how the Jensen Quality Growth Strategy 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 strategy and accounts invested in the strategy 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
Find out how Jensen’s unique collaborative research process can help you build a quality portfolio.
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