17 Jul 2013 Jensen - Q2 2013 Commentary ( Portfolio )
U.S. Performance Summary
Mixed economic data in the U.S., investor concerns regarding potential pullbacks in Quantitative Easing by the U.S. Federal Reserve and slowing growth in emerging economies all weighed on the stock market during the second quarter. Rising market interest rates unsettled the bond markets which added further volatility to the equity markets. In addition, concerns remain about a disconnect between the strong returns of the S&P 500 index and the low growth in revenues and earnings that these index companies have reported.

The U.S. equity market’s return was positive during this quarter, although it did not match the robust return of the first quarter. The Jensen Quality Growth Fund also provided a positive return, however, it underperformed the S&P 500 Index. The Fund’s absence in the Energy sector and stock selection in Materials contributed favorably to performance. The Fund’s underweight in the Financial sector and stock selection in Industrials detracted from relative performance. On a company level, the top performer this quarter was Microsoft, which rallied due to better than expected quarterly results and what appears to us to be the market recognizing the strength and potential of the company’s enterprise software products and comprehensive cloud offerings. The leading detractor on a relative basis was Cognizant Technology Solutions. Cognizant delivered solid first quarter earnings and maintained yearly guidance, but the stock fell due to concerns about potential U.S. immigration legislation introduced this quarter which could potentially impede the company’s use of non U.S. resident employees.


Portfolio Changes
No new positions were added to the Fund during this quarter, nor were there any full sales of positions. The Investment Committee trimmed positions that had increased in value in order to take profits and deployed the proceeds to Fund stocks we believe were more attractively priced. Specifically, position sizes in Microsoft and Procter & Gamble were reduced and additional investments were made in Praxair and Medtronic.

Jensen Outlook
Despite the uncertainty facing the global economy, the companies in the Jensen Quality Growth Fund continue to use their free cash flow to drive growth and position themselves for long-term success. They also maintain their commitment to shareholders by continued dividend increases and share buybacks, such as Medtronic raising its dividend 8% and increasing its share buyback program by 80 million shares. With geographically diverse revenue and earnings streams, our companies and aim to benefit from growth opportunities around the globe. Despite recent concerns regarding a reduction in shorter term growth projections in key emerging market areas such as China and Brazil, we believe the long-term drivers for growth in developing economies are still in place, and that Fund companies should benefit from their global diversification.

In our opinion, the current low growth environment cannot sustain high market returns and long-term investors should be rewarded by investing in high quality growth businesses, such as those included in the Jensen Quality Growth Fund. These businesses continue to post relatively consistent growth in revenue, earnings, and free cash flow in spite of what feels like a perpetually uncertain global economic landscape. We believe long-term investors in these businesses have the potential to be rewarded when the consistency of these companies’ performance is reflected in their share prices. Our approach, including our insistence that a stock trade at a discount to our estimate of full value, allows us to properly balance the portfolio’s potential upside opportunities while seeking downside protection over the long-term.