• Val Jensen applies rigid standards to holdings, and he gets rock-solid results

Almost overnight a once tiny Portland mutual fund, virtually unknown outside the Northwest, has streaked to national stardom.

The Jensen Portfolio, a no-load growth fund that concentrates on large-cap stocks, has been lionized in the nation's financial press, particularly in the past three months, for its success in navigating the treacherous equity markets of the last few years.

Money magazine last October called it 'the little fund that could.' Barron's, the Dow Jones financial weekly, did an equally glowing profile in December. And Bloomberg Personal Finance magazine in its year-end edition listed Jensen as one of the 21 best mutual funds of the year.

In making its choices, Bloomberg looked beyond performance at 'factors that can steer a fund through very tough times,' said its editor, Steve Gittelson.

The result is that many investors searching for conservative havens are flocking to the Jensen fund. Its net assets ballooned from $118 million at the beginning of 2002 to more than $1 billion by year's end.

Run by Jensen Investment Management, a firm founded in 1988 by now 73-year-old Val Jensen, it follows an unusually disciplined strategy for buying and selling stocks.

Chips so blue they're indigo

Jensen's methods for sorting the wheat from the chaff are what set it apart.

The firm buys the bluest of blue chips; buys them only at bargain basement prices ÑÊno more than 60 percent of what Jensen managers calculate is intrinsic value; insists they have a 'sustainable competitive advantage' in their fields; and insists that they consistently generate high earnings and a bounty of free cash flow ÑÊmoney beyond what they need to operate their businesses.

The most rigid of Jensen's rules: It will look only at companies that have racked up returns on equity, or ROE, of better than 15 percent every year for the last 10 years. ROE is net income divided by average shareholders' equity.

Because its managers are so choosy, the fund ÑÊestablished a decade ago ÑÊholds shares in just 26 companies. But most of those stocks proved their worth last year.

'Twenty-one of our 26 holdings had record earnings,' said Robert Zagunis, a co-manager of the fund.

Some of last year's best performers: pharmaceutical giant Merck & Co., the conglomerate 3M Co. and specialty medical products company Stryker Corp.

For the last three years ÑÊamong the stormiest the market has seen in decades ÑÊthe Jensen fund outperformed the Standard & Poor's 500 Index and most similar funds each year ÑÊeking out a 2.25 percent gain while the S&P 500 showed an annualized loss of 14.53 percent.

'Outperformance' these days, however, usually means doing less poorly than the competition. Last year the Jensen fund finished down 10.97 percent (its first down year in eight), but that qualified as stellar compared to the 22.1 percent decline of the S&P 500.

Standards mandate a sure sell

The ironclad standards Jensen applies in screening stocks eliminate all but 110 of the 10,000 publicly traded companies in the United States. Interestingly, the names on that list don't change much from year to year.

When does the fund sell a holding? If a company fails to meet the 15 percent ROE criterion in any one year, it's sold no matter what. And Jensen won't consider buying it back until it shows another 10 years of superlative returns. This happened in 2000 with Intel Corp., once the fund's largest position.

'I just wish we had sold it earlier,' said Gary Hibler, the fund's president. 'When we first started selling, it was at $144 a share (before a 2-for-1 split), and when we unloaded the rest 14 months later it was down in the low $30s.'

The other time the fund sells is when a company significantly exceeds its intrinsic value ÑÊa number arrived at using a proprietary formula that calculates the present value of a company's estimated cash flows for the next 10 yearsÊÑÊor it can be replaced with another top-notch company that is selling at a steeper discount to that value.

One byproduct of the fund's buy-cheap, hold-long philosophy is an extraordinarily low turnover of its investments, which minimizes transaction costs as well as taxable capital gains.

As long as its emphasis on quality of earnings continues to win converts ÑÊthat is, until greed and euphoria rule the market again ÑÊthe Jensen fund is likely to continue growing.

'We think we could handle growth north of $11 billion' in net assets, Zagunis said, even though the fund has just 12 employees in its offices at the PacWest Center in downtown Portland.

Jensen's management team all view themselves as 'business analysts, not market analysts.' And most have strong Northwest roots. Jensen is a graduate of Washington State University; Zagunis of Oregon State University; and Hibler holds a Ph.D. in chemistry from the University of Oregon.

They have varied backgrounds. Jensen was a stockbroker; Zagunis and another principal, Robert Millen, were bankers. Hibler was director of operations for a health care company. And David Davies, an accountant, was formerly chief financial officer of a telecommunications company.

All have their entire retirement accounts invested in the fund or with the fund's adviser, Jensen Investment Management.

'We eat our own cooking,' research analyst Eric Schoenstein said.

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