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Top Investor Avoids Energy, Buys Microsoft

BOSTON ( TheStreet) -- Eric Schoenstein, whose Jensen Portfolio (JENSX) has more than doubled the returns of the S&P 500 Index over five and 10 years, is avoiding energy stocks such as Exxon Mobil (XOM) and Marathon Oil (MRO) and sticking to large-caps including Microsoft (MSFT - Get Report), PepsiCo (PEP - Get Report) and 3M (MMM).

Schoenstein and his fellow managers couldn't be more contrarian, as investors move into the riskiest assets, including little-known metals to small-cap tech firms to emerging-markets exchange traded funds. In the fourth quarter, energy was the best-performing sector in the S&P 500, and the Jensen Portfolio was held back as a result.

The Jensen Portfolio returned 9.3% in the three months through December, trailing the S&P 500's gain of 10.8%. Exxon and Marathon are up more than 30% over the past six months, outpacing the broader market. The turmoil in Egypt has pushed crude prices even higher, with no immediate resolution foreseen.

Still, the fund returned an annual average of 5.1% during the past five years, even though the recession torpedoed the stock market in 2008 and early 2009. The S&P 500 rose 2.1% in that time.

So why did Schoenstein purposely pass over the energy space?

"It's not so much that we purposely leave them out [of the portfolio]," Schoenstein says of energy companies. "It's not because we don't like the sector. They just don't qualify. The sector can't produce companies that actually meet our standards."

Based in Lake Oswego, Oregon with $3.7 billion in assets, the Jensen Portfolio isn't alone in this contrarian strategy. JPMorgan analysts recently urged caution in the energy industry, citing valuation concerns given the outperformance of many integrated-oil companies.

The Jensen Portfolio is instead betting on large-cap stalwarts. The five largest holdings are software giant Microsoft, investment firm T. Rowe Price (TROW - Get Report), medical-device maker Medtronic (MDT), consumer-goods company 3M and drink-and-snacks seller Pepsi.

Rather than chase performance, the Jensen Portfolio seeks out profitable businesses that provide attractive returns with less risk than the market. As part of the first step in the fund's investment process, Schoenstein and the other members of the investment committee focus in on companies that have a return on equity greater than 15% for each of the past 10 years.

Because of the ROE requirement, energy companies fail to make the grade. Schoenstein says there hasn't been any true consistency produced by any energy companies that they would qualify for the fund's discipline. Similarly, the fund doesn't invest in telecom services or utility companies.
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