Barron's Online Exclusives posted an interview (subscription required) on Tuesday with Robert Zagunis who manages the Jensen Fund (JENSX). Despite having lagged the S+P 500 in 2003, 2004 and so far in 2005 the fund has a 5 Star rating from Morningstar.
The interview delved a little into how the fund has a long term outlook, that the managers expect to hold stocks for ten years and that a lot of their work is focused on ROE and "picking stocks that will outperform in the long term."
The top ten holdings per the Barron's piece are:
SYK* KRB OMC GE EFX PDCO EMR PG ABT MHP
*client holding
According to Yahoo Finance the top ten account for 47% of the fund although that was as of March 31 and there is one change in the top ten since then. According to both Yahoo Finance and Morningstar the fund has zero in energy and utilities. Um, haven't those two sectors been the top two sectors in the S+P for a while?
This speaks to why I am not a fan of bottoms up portfolio construction. This is from the standpoint of seeing the forest for the trees. There have been clear and obvious positives for energy and utilities for a while now. While I don't know what the screening criteria are for JENSX I think it is safe to think that no names from these two sectors made the cut.
I think if the manager had just picked his head up away from his computer screen he might have seen that oil and gas prices have gone up a lot and energy stocks might benefit.
Lest anyone thing this is an argument for indexing it is not. In top down stock picks come last in the process. Once you know you want to be overweight energy you then start to look for what to own. If you get the sector right you have less riding on what stocks you pick. Value is added by picking better performers but the effect can be captured with most of the names in that sector. Compare that with trying make money in the semiconductor group in 2004. Doable, but much more difficult.
Number crunching and screening as a first step, as opposed to a last step, often (not always to be clear) leads to missing big themes in the market.
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17 comments:
Roger,
Please read the JENSX prospectus as it outlines their criteria for companies. They are buying the 'best of the best' and if they happen to sell a stock from the portfolio they need to wait 5 yrs before they can purchase this company again. There is much more than buying some 2 yr. energy trend. They are looking over the long run.
thanks for leaving a comment. The five year restriction seems odd to me. I may have it upside down but this type of restriction seems like yet another reason to avoid actively managed OEFs.
I don't doubt for a minute that Zagunis and Co. are better stock pickers than I am but the framework in which they work seems unneccessarily restrictive, per the comment.
Missing big themes (I would say the energy theme has visibility for longer than the last 2 years) makes the job of managing money much harder than it needs to be. Yield and energy have been what has been working for quite a while and they have missed it. I tend to believe that forward looking analysis plays a role in portfolio construction, that they missed energy and missed dividends from a couple of years ago leads me to question their forward looking analysis.
Roger - RE: bottoms up stock picking - I would think that picking stocks from the top down, as opposed to bottom up would be much tougher for portfolio managers.
When picking stocks from the top own, you not only have to be right about the stocks you picked but you also have to be right about the economic picture you've forecasted.
If the economic forecast doesn't turn out as planned, a manager's holdings can get "busted out" and lag the overall market. IMHO, I would think that picking stocks based on fundamentals like ROE, P/E, et. al. is a good way of selecting stocks that have a better than 50% chance of outperforming the broader market.
Aaron,
I view the issue 180 degrees differently. for me seeing a trend in a sector is much easier.
How often have P/E ratios been a good forward looking indicator? They were "too high" from 1995 on. They were low at the end of 2001.
If you look on this blog at how I put together investment themes you see that the apporach is VERY simple; like the US population is getting older, healthcare might benefit nicely. From there comes the detail of where in the sector to own. This part of the process has kept me away from big American Pharma (one of my better calls).
I think a bottoms up approach is what got a lot of people into PFE and AIG at the wrong time.
Two sides to every trade, I guess.
gotta say I disagree with your bottomup/topdown view. It all depends on how you design your initial screen. My value screens had homebuilders popping up all over the place in 2000, and oil and gas popping up all over in '03. If I missed those trends, it wasn't the screen's fault.
I agree with anonymous that valid screens should by definition find classes of stocks tend to outperform over time (historically or otherwise).
From what I can see, the biggest potential drawback to filter rules in general is that they tend to be backwards looking and are highly inflexible if one doesn't keep in mind the filter's assumptions (and therefore its implicit flaws). When I look at EV/EBITDA screens or variants thereof, I know (or I hope I know!) just what sort of information I can and cannot get from that screen.
A few other thoughts:
1) When all is said and done, our portfolio is essentially a pile of correlated risk exposures. Taking a top down approach may imply that you have more exposure to specific sectors and less exposure to individual stocks, all else equal, because your allocation of time is weighed more heavily towards macro analysis than individual stocks. That isn't necessarily a bad thing; but it is nevertheless something to keep in mind. Bottoms-up deep value guys may have that flipped a little- arguably less exposure to sector risk and arguably more exposure to individual stock risk because time allocation is weighed more heavily towards digging into individual companies and not the overall economy (maybe I'm stupid but I've always been of the belief that our allocation of risk should be in some way proportional to our allocation of time). There are good bottoms-up guys and good top-down guys. Most of the time it's all about the risk.
2) I agree that mutual funds as an investment vehicle may be a bit... outdated. Rules and restrictions may "protect the investors," but because those restrictions are typically not created by the money managers themselves, I can't see how the rules allow managers to play into their strengths as they see fit.
3) Dismissing screens as ineffectual by noting that the market P/E ratio stinks is pretty bad logic to me. Not only are people a bit more sophisticated than that, but also that line of reasoning is simply unconvincing.
To the last two comments.
bottoms up stock picking can work, using screens can work, I don't think I ever said otherwise.
I think all I did was layout my opinions about why top down is right for me.
Fair enough. Your blog sounded a little more... absolute than that, but I'm glad we both understand the issues involved.
Roger,
Nice post! And great job on the media appearances. Thus far, my greatest exposure has been on Yahoo :).
Thoughts on bottom-up investing, which is my approach on my blog, Stock Picks Bob's Advice, this approach, when employed successfully, can be successful in determining which groups are actually the strongest.
As you know, I start off with a daily momentum screen, which examines stocks on the top % gainers list, and then looks at fundamentals. Thus far, this approach has been quite successful for me; time will tell whether this will continue to be profitable in the future.
When you do a top-down assessment, you are thinking as well as speculating. You are guessing about future trends. Doing a bottom-up approach allows for a more sensitive way of listening to the market perform and instead of asserting ones own assessment of future trends, allows the market to speak directly to you.
Anyhow, I love your blog and I am absolutely tickled about your continued success in the media!
Bob
Roger...
JENSX has a disciplined investing strategy. Just because energy is hot now, they will not change their discipline. The reason they NEVER had any weigthing in the fund in sectors like Energy and Utilities (and for that matter Financials except for MBNA (KRB)) is because these the first two sectors are capital intensive and do not consistently generate a ROE of atleast 15% (which is a requirement for any stock to be in the fund).
Warren Buffett once said "Stock market is medium that delivers returns from the active to the patient" (or something to that effect).
Finally, look closely at the fund's portfolio on Morningstar and you would see that almost all the fund's holdings are wide moat companies with long term advantages in their respective areas of market place. For ex. sysco (SYY), the food services giant. PEP, KO and BUD are few other examples. I think they beat Buffett to BUD recently.
energy and utilities are hot now? at any point in the market cycle there are groups that lead and groups that lag. figuring out what groups have a shot at leading and then overweighting them makes managing a portfolio much easier. if you get that wrong however but at least underweight the area you expect to lag you probably won't get hurt.
no energy and no utilities is not diversified. I prefer a diversified portfolio.
Roger....
If you want to chase trends then this fund is not for you. Try ProFunds or Rydex funds or Fidelity Select funds.
By prospectus and definition a concentrated fund like JENSX is NOT diversified. If you want a diversified fund (with average returns over the long term, I might add), try VFINX, FSMKX or VTSMX.
Good Luck.
um, i guess you are not very familiar with this site. I am a huge believer in individual stocks, almost preachy in fact. Individual stock selection accounts for 90% of my practice.
As far as chasing trends? If you spend just a little time reading what I have written on this site over the last eleven months it will be clear that I am not late to too many parties.
The only way I can figure these anonymous posts from you, a month and half or two after the fact is you work for the fund.
According to BigCharts.com the fund goes back to late 1992. I looked year by year from 1993-2004 and year to date 2005. JENSX only beat the SPX thrice; 2000 2001 & 2002. There was a problem on the chart for the end of 1997 so I can't be sure either way about that year.
Your comment mentions something about average returns. JENSX has been below THE average 76% of the time, assuming Big Charts is correct about the inception date.
Further since inception JENSX is up what looks on the chart to be 140%. In the same time frame SPX looks to be up a hair over 180%.
This has been a great exchange. I am going to post the whole thing with charts tomorrow. thank you.
Roger...
I'm NOT the same Anonymous that first posted on this site.
Let me also make something real clear, I do not work for JENSX or ANY mutual fund company, period. I'm not even in the financial world. I work for a higher education institution.
As a financial adviser, IMO, you must be more responsible about saying things like "I'm not late to too many parties". Anyway, congratulations on your predictive capabilites. Wow!! I wonder how many clients of your fall (or already fell) for that.
The objective of this fund is NOT to beat S&P 500 year in and year out. This is a below average volatile fund that beats the "market" over the long term, with very good tax efficiency.
Go here:
JENSX tax analysis on M* .
and here for the fund's total returns on M*:
JENSX total returns .
The strategy is to go slow and steady WITHOUT losing money. This ensures that you WILL beat the market over the long term. If you are in a contest with the market, then DO NOT invest in this fund.
Thanks for your comments and good luck predicting the next big trend(s)!!!
i'm not sure why your comments have a personal attack to their tone. I am talking about a mutual fund.
If I am right about the inception date, the fund is lagging by 45% over almost 13 years.
that speaks for itself.
Roger...
I did NOT intend to attack you personally. I'm truly sorry, if my posts convey that or if you got that impression.
Now, back to the discussion. What I'm trying to say is that for regular investors a good investing strategy is not to worry too much about indices or the market in general. Say even if someone is good at predicting trends which entails buying low(er) and selling high(er), much of the returns are eaten by taxes (in regular account) and transaction costs. Please correct me if I'm wrong on this.
Finally, my investing philosophy has always been to invest with my strengths -- I cannot predict or do not have the time to do a lot of research to look for trends. I think it is more important to say no than it is to say yes in investing.
Now, if I'm forcing anyone down this path just because this works for me -- I'm guilty as charged..:)
Good luck and again it is/was not my intention to attack you personally.
I just wanted to add the following:
From the Jensen 2005 Annual report.
$10,000 made on 5/31/1995(inception of Jensen class J) to 05/31/2005:
S&P500 $26,355
JENSX $29,913 (all dividends and CG re-invested, without reflecting the deduction of taxes).
Regards.
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