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'Risk-Off' Fund Thrives in Tough Times

Stocks in this article: PG EMR ORCL NKE

NEW YORK ( TheStreet) -- Companies doing big business in emerging markets will be the best stock performers during these uncertain times, says Eric Schoenstein, manager of the Jensen Portfolio (JENSX).

The $4 billion mutual fund, which garners a full five stars from Morningstar (MORN), has returned 14% over the past year, putting it in Morningstar's 70th percentile for large-cap growth stocks. During the past decade, the fund has risen an average of 4% annually, outpacing 89% of rivals.

Jensen Investment Management, based in Portland, Ore., requires fund managers to buy shares of companies that post 10 consecutive years of return on equity that measures more than 15%. That tends to lead to companies with sustainable competitive advantages that produce returns in excess of their capital costs, have the ability to steadily grow at faster rates and generate excess cash to fund growth and reward shareholders, according to the company's Web site.

Of thousands of companies that are publicly traded, only about 200 qualify for initial consideration, and about 30 make the final cut. The Jensen Portfolio's top 10 holdings, as of April 20, were: United Technologies (UTX), 3M (MMM), Pepsi (PEP), Adobe (ADBE), Omnicon Group (OMC), Microsoft (MSFT), T. Rowe Price (TROW), Medtronic (MDT), Procter & Gamble (PG) and Abbott Laboratories (ABT).

A glaring difference in industry weightings between the Jensen Portfolio and the S&P 500 can be seen in energy and consumer staples. The mutual fund owned no energy investments, among the biggest gainers this year, in the first quarter, and the S&P 500 had 13%. The fund had 18% of its money in consumer staples, and the benchmark index had 10%. Investors have recently been snatching up consumer staples as they move into defensive mode.

The S&P 500 Index has slumped 7% in the past six weeks, driven down by reports that showed housing is getting worse, industrial production has leveled off and consumers are unwilling to spend more money. That leaves the benchmark stock-market index little changed so far in 2011 after two years of gains. Industries that have outperformed are those favored by the Jensen Portfolio -- so-called defensive stocks that have produced gains over many years.

What follows is an interview with Schoenstein of the Jensen Portfolio on his recent thoughts on the economy and his favorite stock picks.

Where are you finding value in the market right now?

Schoenstein: We're finding it in stocks that have a lot of emerging-market exposure. GDP growth in the U.S. and certainly in developed Europe isn't really much to talk about. The places that are growing, and the companies that are well-established in those emerging markets, are the types of companies that can withstand a lot of the risk and volatility that's currently in the marketplace.

How is Procter & Gamble navigating pressures from higher input costs?

Schoenstein: Procter & Gamble actually is doing quite well. Volume growth is beginning to pick up again, and certainly they have huge emerging-market exposure. A lot of free cash will be generated in those countries. Even though they've got commodity-cost pressures that people have been concerned about, their ability to pass that pricing through will eventually take hold, particularly within the idea that they have a tiered pricing strategy.

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