On April 15, 2020, Jensen Investment Management launched the Jensen Global Quality Growth Fund (JGQSX). This new fund is a global version of Jensen Quality Growth: the same discipline, same managers. Jensen Quality Growth Fund (JENSX) is, at least from the perspective of those who look at long-term accomplishments, one of the best domestic large-cap core funds in existence.
What do they do?
Their discipline is remarkably simple: they buy and hold high-quality growth companies. The underlying argument is “quality companies possess sustainable competitive advantages, creating value as profitable businesses that can, over time, provide attractive returns with less risk than the overall market.” They typically own around 25-30 stocks and typically hold a stock for about five years. It is not unusual for the fund to hold a stock for 15 or 20 years, as in the case of Pepsi, 3M, or Omnicon Group.
There’s a four-step process at work:
- limit your universe to firms with a return-on-equity (ROE) greater than 15% for each of the past 10 years and to stocks with a market cap over $1 billion
- screen that shortlist for quality and growth characteristics
- assess the sustainability of their advantages
- build a portfolio around 25-30 of them.
The new Global Quality Growth fund follows the same discipline with a couple of notes:
at least 40% of the portfolio will be non-US, rather than the 3% on Quality Growth
the fund might invest in emerging markets
the fund will hold 25 to 40 names, rather than 25 to 30
the fund will likely remain fully invested at all times
The strategy has worked quite well over time
Using the fund screener at MFO Premium, we screened for the top five domestic large-cap core funds over the entire market cycle, from October 2007 to February 2020. That captures performance in both one of the century’s most traumatic market falls, as well as the longest bull market in US history.
Here are the top five funds, based on their full-market cycle Sharpe ratios.
|GMO Quality III GQETX||9.9||2.1||12.2||0.76||5||1||1||1||1||1||1|
|Jensen Quality Growth JENSX||9.7||2.0||13.6||0.67||5||1||1||1||1||1||1|
|Vanguard PRIMECAP VPMCX||10.6||2.9||15.6||0.64||5||1||1||4||3||3||2|
|Alger Growth & Income ALBAX||8.3||0.6||11.9||0.64||4||1||1||1||1||1||1|
|Vanguard PrimeCap Core VPCCX||10.3||2.6||15.3||0.63||5||1||1||3||2||2||2|
How do you read that? Lipper tracks 137 large-cap core funds with records that cover the full market cycle. Jensen’s annualized 9.7% return beat its average peer by 2.0% a year. Its Sharpe ratio, a measure of risk-adjusted returns, is the second-highest of any fund; it trails only GMO Quality III, which has a $5 million minimum initial investment.
In the last seven columns, any blue-shaded box represents performance in the best 20% of the peer group. That’s important because the last six columns are all about risk.
Maximum drawdown looks at a fund’s worst fall.
Recovery looks at how long it takes to recover from a bad fall.
Standard deviation looks at “normal” day-to-day volatility.
Downside deviation looks only at “bad” volatility; that is, volatility to the downside.
Bear looks at a fund’s performance in bear market months, those where the market has fallen sharply.
Down looks at a fund’s performance in any month when the market has fallen, by a little or a lot.
Across all those metrics, Jensen sits in the top tier which should be very reassuring to investors contemplating seriously unsettled markets. Recent markets, such as 2019’s fiesta, were driven by financial engineering (from zero real interest rates and record tax cuts which underwrote $700 billion in corporate stock buybacks in 2019, the single largest source of demand for US stocks), did not reward high-quality businesses. Jensen’s 23% returns in 2017 and 29% in 2019 badly trailed their average peer’s. The attractiveness of the new fund really hinges on your answer to two questions:
- do you think the rest of the world will remain permanently in our shadow? Research Affiliates puts the probability that European stocks will average at least 5% real returns over the decade at 80%; they project only a 5% chance that US large caps will cross that threshold. And,
- do you think, given the recent evolution of the market, that you’re better off owning the best companies in the world, or the flashiest?
The no-load, retail “J” shares of Global Quality Growth have an expense ratio of 1.25%, which is below average for its Morningstar category, and a $2,500 minimum initial investment.
I know, with some amusement, that there’s barely a hint on the Jensen Investment website that the new fund even exists. That being said, interested investors might check the process and risk management discussions for the domestic version of the fund, Jensen Quality Growth Fund.