Q:  What is the history of the company and the fund?

A : Val Jensen started Jensen Investment Management in 1988 after nearly thirty years of experience in the brokerage business and believed in long term investing. The firm today is still guided by his original belief that investing is a marathon rather than a sprint and wealth creation is best done through a long-term approach of understanding what you investing in, rather than speculating against, or in favor of, markets. The mutual fund was started in 1992 and today has $4.5 billion in assets and the firm manages about $5.9 billion. We have 23 employees based in a suburban Portland, Oregon and we are proud to be independent. One of the things that Val believed in was remaining independent and building a firm that could last forever so we could have the opportunity to control our destiny, whether from a growth perspective, a client perspective, or an employee perspective. Independence gives us a flexibility in terms of what we do and that is worth protecting. Val retired from the firm in 2004 but still serves as Chairman of the board of directors for the fund.

Q:  What are the core principles that guide your investment philosophy?

A : The philosophy is relatively simple and straightforward. We are seeking to mitigate two key risks of investing, business and pricing risk. As a prelude to that we think about investing as if we were investing in the entire business, rather than trying to pick stocks. We think about it more as business owners or buyers of businesses, rather than pickers of stock. That can lead you to a different set of fundamental questions. When we look at businesses, one of the first things we are looking for is an overall concept or foundation of quality in theof business. What quality means to us is that a business has a durable business model, something that has proven itself consistently over time, that there are competitive advantages that allow the business to be a leader in the industries that it serves, rather than a follower which in turnand gives it a pricing power. The business will have a strong generation of cash flow, year in and year out. That is the lifeblood of what allows the business to be successful over a long period of time. The Ccash flow is the primary tool that the management team utilizes to grow the business. We need to see that there are a good set of managers involved in the business with solid tenure, that have a generally strong understanding of the benefits of building a long-term-oriented business versus something that is built around short-term dynamics or incentives. Typically, with the kinds of free cash flow opportunities that our companies have, they are able to reinvest into the business organically, they can make strategic acquisitions that are not probably transformative but are more accretive to the existing business. They can buy back stock and can payout a dividend. Conceptually, a business with growth opportunities can be a strong mitigationng of business risk is that is it a business with growth opportunities. From a fundamental perspective if a company can have a business return that is in excess of its costs of capital, then that excess is wealth creating. If a business can do that consistently over time, now you have an opportunity for consistent wealth generation, and that is eventually valued by the market in the stock price. Is the business worth more in the future than it is today? Theat consistency of the growth, the consistency of the performance in the past, both of those help to give a higher level of assurance that the business will continue to be able to perform year in, year out. The other key to investingside is mitigating the pricing risk. As much as we want to own a quality business we also would like to own a quality stock. Quite simply we do not want to overpay for it. We develop our own measure of what we think it is ultimately worth and we would like to be able to buy it at some margin of safety to that within the market so we can enjoy the benefits of what long-term investing is about. From a philosophical perspective, having the a margin of safety, having the a long-term sustainable wealth creation mechanism, and having the value that is inherently the management’s ability to grow opportunities, all that has to come together.

Q:  What is your investment process?

A : We are looking to find businesses that have a foundation of quality, that have the ability to grow, based on our research, into the future. We need some way of screening out those companies that do not fit those criteria. We are agnostic about sectors, about the size, but we are more interested in the long-term opportunity. Once we try to screen out these businesses certain things start to appear naturally. We start with 5,000 U.S. domestic companies and screen these companies for certain return on capital over a decade. In order for a company to qualify for consideration to our investable universe the company has to produce 15% return on equity, each and every year, for a minimum of ten consecutive years. In our view, it is a manifestation of the quality and foundation that we are seeking when they meet these this criteria. We end up with a uniquely qualified and small universe of companies that can meet those high performance criteria. Once we perform that screen it provides a universe of companies that today is between 160 and 165 companies in total. That is our entire universe that we can start from in order to look for opportunities that ultimately end up in the mutual fund. We have an investment team of seven individuals. We do not have anyone in the team with ultimate authority and it is very much a team based culture and environment. Every one of the seven has an aspect of research that we focus on. We have a daily morning meeting where we talk about any recent activity or news that is relevant to any of the companies in the portfolio. The investment team has four full lead-time lead analysts that handle all of the day-to-day research activities and three of us who share client responsibilities and portfolio management responsibilities in addition to research responsibilities. The process of narrowing the list from 165 to 30 companies in the portfolio is a systematic process of some objective and subjective criteria. We want to focus on the businesses that are showing trends or potential in terms of revenue, earnings and cash flow growth, margin stability and fundamentals suggesting consistent growth in the future. In addition, what matters is what we think about its geographic footprint and where it is headed in terms of growth, or new products, as well as management expertise. When one of the analysts produces an investment thesis for one of our businesses it is typically a three to four week process to go through the company from top to bottom and really understand all aspects. Part of the reason is it takes time is that we do all the fundamental research in-house.

Q:  What are the characteristics of companies you invest in?

A : As a result of our investment process you see that we will probably not have the same volatility in returns that other funds may have. Typically our companies will do reasonably well when things are going good in the economy. But on the downside is where we have the some protection because companies are able to produce consistent returns. Over a full economic cycle, we believe upside returns participation outweigh thecombined with downside losses protection and can generate long-term returns that are beneficial to a client. One of the things that come out of this strategy, as although we are agnostic to sectors and size, we end up with sectors that have difficulty producing any qualifying companies into our universe. We have no presence in utilities, telecom, and no presence in energy. Not because we think they are bad sectors or due to an economic consideration, simply they those sectors do not produce companies that qualify. The reason they do not produce companies that qualify is because there is inherent volatility in their industry, or the underlying product is more of a commodity that will be more subject to the whims of speculation. An example is the mining industry. Commodity-like pricing may not necessarily allow the company to control when the good times will come or how well they can react in the bad times. It is that lack of consistency, thinking back to our days as high net worth investors where our clients were saying they wanted us to grow their money but not lose it, trying to guess when those cycles were going to happen or trying to provide a return based on something that is much more volatile, is something we have never been comfortable inwith. We feel there is something comfortable and powerful in being able to deliver excess return above costs to capital from a long-term perspective.

Q:  Can you give few examples of companies you discover through your research process?

A : We recently added TJX Companiesy, a specialty retailer. TJX provides people with an opportunity to buy name-brand apparel but at much lower prices. They are the leading off-price apparel and home fashion retailer in the United States and worldwide. The biggest way that they find designer material that they sell at discounted prices is they have a huge scale and a very sophisticated network of merchants buyersthey work with. They work with over 15,000 vendors in over 60 countries. They have nearly 1,000 buyers that work with all of these vendors to identify when these designer products are going to become available or what may be available and the prices they can generate for them. One of the things they capitalize on is the inherent inefficiency within the apparel business. Because of the way cycles and seasonality works in apparel, it is a very inefficient process for vendors to try and predict how many of a particular item should be made that and ultimately get distributed into the distribution channel. Any time that inefficiency exists there is an opportunity to capitalize on that. It is an off-price business model. They utilize their flexible and opportunistic buying process to continually bring in fresh, attractive merchandise, but they have a fairly low cost structure. They have a lot of supply chain efficiencies that they constantly work on like such as real estate management. They are going to be more off site so they can get better real estate pricing. The merchandizing creates, as they would put it, a “treasure hunt” experience for their consumers e.g.and finding something that may be $250 in a department store for $50, yet it is exactly the same product. They have a long track record and a long history of doing thisbusiness performance with good same store sales growth and store growth and providing revenue growth for a long enough period of time The other component is whether we think it is attractively priced given its valuation. We go through the other half of the equation, which is our discounted cash flow modeling, and determine what we feel its full value to be. We decided it TJX was an attractive opportunity to bring into the portfolio. We think they have a lot of good potential growth in terms of the sales they are generating, either through same store sales, or through new stores that they have a lot of capacity to grow either in the United States or in Canada and Europe. We added the company to the Fund in December. In our portfolio we also have a presence in sectors that typically lend themselves to that idea of long-term performance and long-term consistency. Typically we have a presences in consumer staples because of the defensive characteristics of strong brand names and in healthcare, because of the barriers to entry and the demographic trends, and industrials, because of the global reach of these companies to help build infrastructure. The other place is technology. There is a wave of technology companies that have begun to build very successful long-term business models that came out of the boom in the nineties, and unfortunately the bust too, but some of those survivors have proven themselves to be strong companies.

Q:  Another example?

A : Accenture is a different kind of company. They have a very strong business with a strategy where they want to be one of the best high-performing service providers on a global basis. They have tremendous depth and breadth in terms of what they can offer from a product perspective. They have 240,000 people providing outsourcing opportunitiesservices, or management consulting opportunitiesservices. One of the things we have seen is that, for the last five to ten years, companies have put a lot of emphasis on trying to be as efficient as possible and taking all of the costs out of the business to improve margins and to improve efficiency. Unfortunately a lot of that has been on the back of cutting labor costs, or moving jobs overseas. A larger partconsideration, from a cost perspective, is how to maintain those higher margins that have been achieved on the back of costs cuts. One of the ways those margins can be maintained, and what we see from a company like Accenture, is utilizing technology as a way to maintain efficiencies. Whether that is done through processes that can be made more efficient through an outside source or eliminating bottlenecks that can be taken out to streamline the process. That is where the expertise of Accenture’s consultants can bring their industry experience to bear on their client’s processes. Their competitive advantage for us is in economies of scope. They have very deep relationships with very large customers and clients around the world, the 2000 of the largest companies in the world. There is a high degree of switching costs once you get into one of these consulting contracts with them. You have to learn another company and another culture. The projects are typically set with a fairly defined set of objectives. They can act almost as a foothold into the business that once you have done one consulting project and can prove yourself, there is an opportunity to gain more. There is certainly a solid barrier to entry for them from their slice of customers because of their market leadership.

Q:  How do you construct your portfolio?

A : We have the opportunity to be thinking about the construction of the portfolio essentially every day. We are not going to necessarily look to be making a lot of changes on a daily basis. We really want those changes to be more about fundamental opportunities that we may be seeing, either because we think that we see something positive or negative happening to the fundamentals of a business that give us an opportunity, or because the market has provided some sort of disconnect in terms of the opportunity that we see just from a simple stock price perspective. Building the portfolio for us is about a combination of which companies represent the best fundamental opportunity combined with how attractively they are priced. We try to assess that as a part of an overall look at the portfolio literally every day, and additonalyat a minimum in deeper detail every quarter, where we can go through at a high level reassessment of how the portfolio has been constructed to make sure that we are not letting something get too expensive, or that we are taking advantage of those places where something is too cheap, particularly if the fundamentals are favorable. It is intended to be team-based, consensus driven, in terms of how we make those decisions. If we think we have questions about something we are going to debate it. Because we do have the flexibility and the desire to be patient it also means that we do not have to make snap decisions in terms of construction dynamics.

Q:  What kind of diversification do you practice? What is your benchmark?

A : The benchmarks that we typically align with have been the S&P 500 index and the Russell 1000 Growth. Because of the characteristics we are looking for, even though we are size-agnostic, we tend to have companies that are more towards the large- or mid-cap. When companies are achieving more than 15% return on equity over ten years or more they are likely to grow large. It is one of the reasons why we try to work as closely with our clients as we do, because of the fact that we do not have presence in certain sectors, we do not necessarily look a lot like the benchmarks we compare to. That said, if clients understand that and we have done our job, they could understand that may not necessarily be a problem. It is about understanding how the product Fund performs and doing your best to ignore end-point bias or point-to-point considerations and really looking at how the strategy is executed. From a diversification perspective we think the product, even though it appears to be concentrated with only 29 companies, actually is well diversified from the standpoint that if you look inside the companies, where they are doing their business geographically or all the industries that they touch inside of a particular sector, they are fairly diversified even if it is concentrated in one name.

Q:  How do you define and manage risk?

A : There is a lot to be said about managing risk in our business. That is the case in any aspect of our business, be it operations, disaster recovery, trading discussions, organization risk. I talked about how we like want to be independent and we are employee-owned. We do have a team-based management style. I think that helps to mitigate some of the risk. From an investment perspective, having independent and internally generated fundamental research on our companies with that longer-term view does help to mitigate risk. The insistence on making sure these companies have high-quality earnings and large excess free cash flows, certainly we believe is a way to mitigate risk. Some aspects of our sell discipline are mandatory. If a company becomes overpriced in the market we are going to sell because we have exceeded the pricing risk, or we have elevated pricing risk. We also sell if it breaks the return on equity hurdle. If a company falls below 15%, by definition it is no longer eligible for our universe and therefore it has to be sold. One of the risks that any active yet concentrated, manager faces is the risk that you fall in love with your companies to a degree. But I think the fact that we have strong fundamental metrics that we are following and that we have a very active team dynamic, in terms of how the portfolio is managed, helps to mitigate that. At any point in time any one of us can question the merits of a company and it does not necessarily have to be driven by the lead analyst following the company. If someone is asking questions there is probably merit as to why they are asking and it is worth investigating so we can come to an appropriate conclusion.