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.
Everybody has to buy toothpaste, but you don't have to buy new sneakers. You own Nike (NKE). What is your forecast for that company? Schoenstein: An interesting thing about Nike is that 64% of the revenues come from overseas. They have a lot of exposure similar to many of our other holdings. But if you think about it, Nike is a consumer-discretionary company. So the spend isn't necessarily required, as you mentioned with toothpaste; however, they've done such a terrific job at marketing and branding their product, that it has almost created a true branded staple experience in the mind of the consumer. And we think that's a great growth driver. While lots of big tech companies shooting themselves in the foot lately, it's been awfully quiet on the Oracle (ORCL) front. Tell us what's going on there. Schoenstein: They've been doing a lot of basic blocking and tackling. They had a huge acquisition streak that everybody had spent time thinking about. But now that those acquisitions are in place, they can really offer a full sweeping solution, sort of a solution in a box, to so many of their customers. And they can have a lot of repeat business as they gain new systems implementations and then those become sort of licenses that they renew every year for the upgrades and things like that. That really has created a stable revenue stream for them, which we believe can continue. Emerson (EMR) has been a long time holding in the Jensen Fund. Schoenstein: Emerson continues to be very innovative. One of the keys for them is to bring those new technologies -- whether it's in air conditioning, elevators, infrastructure or whatever the case may be -- that will allow their customers to get the best-of-breed solutions as those infrastructure build-outs occur. -- Reported by Gregg Greenberg in New York.
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