With a gloomy outlook for the pace of the economic recovery, the best strategy right now is long-term exposure to companies that have an international presence, according to Rob McIver, manager of the $2.4 billion Jensen Fund Ticker:(JENSX).
"In the United States and other developed countries, the recovery will be subpar, with higher-than-normal unemployment," he said. "There are real challenges with taxes going higher, and [consumers] probably won’t return to their spending habits for some time."
Mr. McIver, who has co-managed the fund for Jensen Investment Management Inc. since 2004, said he sees the greatest opportunity in the emerging economies, which is why the portfolio is positioned to take advantage of growth in the developing markets.
"Our high-conviction strategy invests in high-quality growth companies that have an all-weather business model," he said.
The portfolio of just 29 stocks is constructed by first screening out any company that doesn’t have at least a 10-year record of 15% or more return on equity.
Among U.S. stocks, that screen trims the potential universe down to 150 names, from 6,000.
"It’s a very rarified universe, and to us, [a history of consistent return on equity] represents a competitive advantage," Mr. McIver said. The fund was up 29% last year, compared with a 25% gain for the S&P 500. In 2008, it declined 29%, while the index dropped 38%.
The fund’s largest holding is Abbott Laboratories Ticker:(ABT), a company that he said is an ideal candidate for the strategy because of its "strong business model and lots of free cash flow."
Most of the companies in the portfolio pay dividends, but that isn't a requirement.
"One of our themes right now is increasing international revenues," Mr. McIver said. "Over the past two years, overseas revenues from companies in the portfolio have increased from 33% to more than 50%."
During the same period, the average increase in earnings by the portfolio companies increased by 11%, and the average dividend yield increase was 17.6%.
Another theme in line with the international focus is the benefits of foreign profits when translated back into a weaker U.S dollar.
An example of this is illustrated through a position in Colgate-Palmolive Co. Ticker:(CL).
"Over 80% of Colgate’s revenues come from overseas," Mr. McIver said. "The company owns 44% of the global toothpaste market, including an 80% share of Latin America."
With an average holding period of more than seven years and an average annual turnover rate of 15%, the disciplined strategy offers a bonus of tax efficiency, but that isn't why they hold stocks for such long periods.
"When we own a company, we look forward for 10 years," Mr. McIver said. "We try to buy businesses rather than just trade stocks."
Despite a dismal outlook for the overall economic recovery, he thinks that his strategy is well-positioned for both the market and the mood of investors.
"U.S. investors have experienced a fundamental reassessment of risk, and we think we’ve got the wind to our back right now," Mr. McIver said. "Higher-quality companies are looking relatively cheap compared to the overall market."
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