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), PepsiCo (PEP) 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), 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.

After screening for a population of potential growth companies, Schoenstein narrows the list to 30 stocks by examining growth potential, free cash flow potential and current valuation. This concentrated approach combined with the ROE requirement has lead to low turnover in the portfolio. In the fourth quarter, no new positions were added to the portfolio. There weren't any outright sales of positions, either.

That investing style captures most of the upside in the market but not all of it. The Jensen Portfolio lagged not only in the fourth quarter but for all of last year, as the fund's annual return of 11.8% trailed the 15.1% return on the S&P 500.

"Traditionally, when the fund is sitting in an aggressive or high-growth environment -- when things are frothy -- we'll tend to capture a fair share of that return but we won't capture all of it," Schoenstein says. "We tend to capture a lot less of the downside. Capturing a good chunk of the upside and not as much of the downside together over a long enough period of time provides a benchmark-beating return."

The fund's success over the long term is remarkable given that it has large positions in stocks like T. Rowe Price and 3M and has passed on high-flyers like Apple ( AAPL) and Netflix ( NFLX).

"The most fundamental characteristic that we find within the portfolio is that they have a consistency to their growth, both historically and what we think will take place in the future," Schoenstein explains. "That consistency gives us a greater degree of confidence that they will continue to deliver that kind of performance in the future."

Even though the Jensen Portfolio's returns trail the broad market in the short term, the fund earned a gold award from Standard & Poor's Equity Research in the domestic large-cap equity mutual fund category, the top honor in the S&P's first-ever mutual fund award program. For investors in the fund, Schoenstein says he frequently hears praise for the growth strategy and defensive strategy, which are not mutually exclusive.

"It is a growth fund but it's not an aggressive growth fund, so therein lies the defensive component," Schoenstein says. "It's a growth fund because these businesses have proven that they can grow in any environment year after year after year. At the same time, we're trying to make sure that we're not overpaying for that growth. We want to pay an appropriate price based on our valuation of expectations for the particular company."

Schoenstein offers investors three of the fund's top picks and explains how each fits into the strict screening criteria for the Jensen Portfolio, found on the following pages.

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Microsoft ( MSFT)

Company Profile: Microsoft is best known for its flagship Windows operating systems, as well as other software applications and consumer products, like the Xbox 360 video game console.

1-Year Total Return: -0.2%

Schoenstein's Take: Information technology has the largest weighting in the Jensen Portfolio at 25% as of Dec. 31, and Microsoft represents the largest equity position in the fund at 5.18% as of Jan. 26. Schoenstein says the IT space represents such a large chunk of the portfolio because of the competitive advantage associated with switching costs.

"It's very hard to switch to a competitor's product, so you have a real recurrence to the revenue stream," he explains. "Over the last few years, we have had a higher exposure to the IT space with Oracle ( ORCL), Adobe ( ADBE), Cognizant ( CTSH) and Microsoft. Those are companies that do have the ability to keep up better with the market and give us more growth on the upside."

Microsoft gets top billing in the fund and has been in the Jensen Portfolio for roughly five years. In order to meet the standard of 15% return on equity each year for 10 years, the portfolio waited to see whether the company would have the same growth it traditionally enjoyed under former CEO Bill Gates. One of the key reasons Microsoft remains a top pick is due to the technology cycle that will force Windows users to upgrade their operating system soon.

"You've had almost a 10-year cycle where people haven't upgraded their operating systems since Windows XP," Schoenstein says. "Windows 7 has been well regarded and well received and yet, there still is a lot of pent up spending in the IT area because of the recession we went through where businesses weren't spending. They need to. You need to maintain efficiencies. You need to continue to allow your employees to perform at the levels that you want them to perform at and match or compete effectively with competition. The operating systems are key to that."

Schoenstein is impressed with Microsoft's recently expanded dividend payment as well as the cash flow it generates. He says he's impressed that Microsoft understands the importance of redeploying cash back into the business or to shareholders through dividends, share buybacks, investments in the business or acquisitions.

Even more impressive, he says, is Microsoft's ability to bounce back after flops. For every success like the Xbox 360 and Kinect, there are maligned products like the Zune, Kin and even Windows Vista. But for all the buzz the consumer side gets, the enterprise side is the real driver and cash generator, Schoenstein says.

"There isn't necessarily the same dependency upon the buzz to continue to create value," he says. "If there's a misstep on the consumer side, it can be pretty painful. If there's a misstep on the business side, you know there is going to be something coming pretty quickly behind that. Windows Vista was not well regarded by the market place, and yet even during that period, the company still continued to grow. Free cash flow never actually declined during that period of time by any material nature.

"When you think about a company that had a product that was a flagship product that wasn't necessarily well regarded by the market place, still being able to grow its free cash flow, that's real power and real quality," he adds.

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Abbott Laboratories ( ABT)

Company Profile: Abbott Labs is engaged in the discovery, development, manufacture, and sale of a broad and diversified line of health care products.

1-Year Total Return: -12%

Schoenstein's Take: In whittling down the list of possible investment ideas, Schoenstein says the Jensen Portfolio looks for companies with recurring revenue streams -- something that protects against real downturns -- as well as something in the business that gives a company an advantage over their competition, assuming they're investing in those advantages that they've created. In the healthcare space, which represents 21.4% of the portfolio, that is found in patent protection.

Abbott Labs, at a portfolio weighting of 4.3%, isn't the largest health-care position the portfolio has but it has the most attractive characteristics. As they pertain to Abbott, there are competitive barriers to entry in the pharmaceutical space, plus patent protection in the device space, Schoenstein says.

"They've got good device products, like stents, which have been quite well received," he says. "But you also have nutritionals, which has a strong platform here in the U.S. that they are taking to emerging markets. There is also the idea that pharmaceuticals have to be the branded, patented ones. Branded generics can be very powerful growth engines for companies like Abbott."

In addition to targeting the key baby-boomer demographic, which is reaching the retirement age and is taking advantage of healthcare to live longer and healthier lives, Abbott offers investors exposure to emerging markets.

"You're seeing people consuming healthcare in order to improve the quality of their lives," Schoenstein says. " Abbott has been making acquisitions in countries like India, where they are acquiring branded generics that they can offer at a lower-price point to emerging market populations."

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Oracle ( ORCL)

Company Profile: Oracle develops, manufactures, markets, distributes and services database and middleware software as well as applications software designed to help its customers manage and grow their business operations.

1-Year Total Return: +44%

Schoenstein's Take: Much like Microsoft, Oracle is a play on the IT space for the Jensen Portfolio. Oracle has a portfolio weighting of 4.2% and, like Microsoft, is attractive on the idea that there is pent up business spending that hasn't taken place, Schoenstein says.

"Oracle is a business where there is a high switching cost," he says. "Once you've made the commitment to go to an enterprise system that is Oracle-based, it's very difficult to then take that system out and replace it with a competitive product. You're then in a recurring or renewal cycle. Oracle gets the initial software license and then a recurring revenue stream that is a benefit."

Oracle's move towards offering customers an all-in-one solution makes the investment more attractive. With the acquisition of Sun Microsystems, Oracle has begun to expand from software into hardware.

"Combine that all together and it's the idea of a solution in a box," Schoenstein says. "It's the all-in-one solution, everything from the hardware to run the applications to the applications themselves to then the upgrades you get from the recurrence of those applications. You have the whole platform available to your customers. When you have that much entrenchment, that installment and recurring revenue stream, that will be very difficult to take out. They just want Oracle to be the application of choice. That's a pretty attractive proposition."

-- Written by Robert Holmes in Boston.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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