View of the markets
Interview: Jensen Investments---Millen, Robert---Portfolio Manager
>> martha stewart suffered a setback when a judge refused to order a key witness to give testimony in a civil suit against her and her company, martha stewart living omnimedia. citing her right to question witnesses in the stock lawsuit, stewart’s lawyer sought to interrogate an assistant to her former broker at merrill lynch before he televisio testifies in the criminal case. he has refused to answer stewart’s questions citing his right to avoid self entertainmentination. this is a blow to her defense lawyers who wanted to know what he would testify to next month. and the rate of growth not sustainable as we go into 2004 according to robert millen. you see the chart of the fund he manages. the fun has underperformed the s&p so far this year but outpaced it the last five years. robert millen, jensen investments, joining us from portland, oregon, to share his view of the markets. good to speak with you. we’ve had a strong run-up in the s&p, 21% since the beginning of the year. you say the growth we’ve seen so far this year is not going to carry into the next year. why?
>> if you think about what’s dricdriven the growth this year, it’s largely by companies with less reliable earnings and some of these companies have increased in market value as much as 30% to 50% and if you think about the long-term rate of growth of the earnings of the companies in the market, 20%-plus is in excess of that so putting all those things together tells you it’s not the kind of rate of growth that we can expect and i think investors should not expect to achieve it certainly over the long run.
>> but some investors may expect to see rotation here as we make our way to the new year to even things out in the sectors of the market that have done well will give back gains but those lagging will pick up. you don’t see that?
>> i think that’s possible and it’s difficult to predict what the market will do even over the course of the next year. but certainly we think that people are migrating to higher quality stocks and those that have more consistent and reliable earnings and they should enjoy ongoing growth in the market as they have in the past.
>> your fund has underperformed the s&p this year but outpaced it quite a bit in the last five years. has your investment strategy changed or have you been sticking to the strategy and that’s what caught you in the undertoe at this point?
>> it’s the latter. we’ve never changed our strategy and have always looked for companies for the jensen portfolio that have long-term, consistently high levels of earnings and those that can be bought at a discount to their intrinsic value and what happens with that kind of a strategy, which is a disciplined approach, is that times when the market is going up faster than one would expect in the long-term, we may lag a little bit. but we also preserve quite well in the downturns.
>> let’s talk about the stocks you’re liking right now. mbna is one. why do you like this one?
>> mbna has a very nice track record growing over 20% a year in the last 10 years and have a return on equity of greater than 15% every year for the 10 years, one of the requirements we have for companies in the jensen portfolio. they have very dominant position in the affinity credit card market with over 70% market share which creates high barriers to entry and they have a growth prospect going forward of somewhere in the mid teens. we think the market hasn’t quite reflected that growth power and as a result it’s selling for a very attractive price right now.
>> at this point, though, credit losses have been moving up. some people may say stay away from consumer credit operators if the expectation is we’re going to see more credit problems in the future?
>> mbna, the quality of their customers is the highest in the industry. and as a result, they have less potential risk to credit losses of any of the credit card companies. and i think with an improving economy, those should abate somewhat anyhow.
>> how about a.b.p. here’s a stock that if you look at its peers that have done well, it has lagged this year. why do you like a.d.p. tint?
>> up until this year they had 41 consecutive years of double-digit earnings growth and because of the decline and the effects of the decline in the economy on their key business, payroll processing, they will not show a double-digit growth this year so the market took them down a little bit for that but over the long-term, a.d.p. with grow at at least 10% a year and with the economy improving and interest rates certainly headed upward more likely than downward, this company’s earnings growth should return to the double-digit level soon.
>> robert millen, thank you very much.
>> you’re welcome.
>> portfolio manager at jensen investment management. still to come, carmakers and computer chip manufacturers are leading a profit revival in japan as demand from the u.s. and china grows.
