Jensen, Auer Find Growth Amid Rubble

The names in Auer's portfolio have managed to achieve remarkable growth. Flowserve(FLS Quote), a maker of valves and pumps, reported an earnings increase of 86%. With Middle Eastern oil producers increasing their orders, sales jumped 26%. But the market seems unimpressed. The shares have dropped from more than $140 in July to around $50 now.

Auer says his strategy has outdone the S&P 500 by a wide margin during the past decade. But lately, Auer Growth, like many growth funds, has lagged the benchmark. "Investors are dumping everything," says Auer. "They don't care about earnings growth."

Another strict growth proponent is Jensen(JENSX Quote), which has returned 4.2% annually during the 10 years ending in October, outdoing 94% of its large-growth competitors. The fund takes companies that have reported annual returns on equity of 15% for 10 consecutive years. Of the 10,000 publicly traded companies, only about 100 pass that formidable test. Companies that survive the screens tend to be dominant businesses with competitive advantages.

Holdings in the portfolio include such powerhouses as Procter & Gamble(PG Quote) and Johnson & Johnson(JNJ Quote). These blue chips have proven that they can be profitable in good times and bad, says portfolio manager Robert Zagunis. "Right now we expect to see some earnings growth for our companies, even though the overall market may be weak," he says.

Jensen sells stocks when their returns on equity drop below 15%. But, so far, most names in the portfolio are well above the minimum, reporting an average return on equity of 27%. "Our stocks could earn a lot less and still be above the minimum requirement," says Zagunis.