The JENSEN PORTFOLIO
Annual Report
May 31, 1996
Jensen Investment Management
430 Pioneer Tower
888 SW Fifth Avenue
Portland, OR 97204-2018
503-274-2044
Fax 503-274-2031
LETTER FROM THE INVESTMENT ADVISER
To the Shareholders of The Jensen Portfolio:
The president of one of the divisions of Nestle, the global giant, once asked
his boss, Helmut Maucher, "How do you think things are going?" The Nestle CEO
responded "We won't know until ten years after I retire." Since this
conversation took place in 1990, he will continue to be in doubt for some time
to come.
Dr. Maucher's response does illustrate the inaccuracies inherent in
forecasting the future value of a business. Nonetheless forecasting is a
necessary step in calculating what returns a prospective investment might
generate. The forecasting must therefore begin with an educated estimate as to
which companies have products or services which can best withstand the vagaries
of changing consumer preferences and the rigors of competition. This estimate
would be a futile task were companies less successful in building economic
franchises.
Since there is often confusion about the meaning of the word "franchise" in
this sense, Warren Buffett's definition ought to be, but is not, included in
lexicons: "An economic franchise arises from a product or service that: (1) is
needed or desired; (2) is thought by its customers to have no close substitute
and; (3) is not subject to price regulation. The existence of all three
conditions will be demonstrated by a company's ability to regularly price its
product or service aggressively and thereby to earn high rates of return on
capital."
Companies who possess an economic franchise have the potential to create
greater value than their peers for shareholders. The additional earnings
generated by the franchise can be used to support marketing and production,
repurchase shares, raise dividends and buy companies-and, sometimes, all of the
above. Identifying companies who possess an economic franchise is sometimes
obvious, such as with Coca-Cola. Frequently, however, the product or service is
used during the economic chain that brings an end product to the market-
retreading truck tires, laboratory chemicals, and application equipment as
represented by Bandag, Sigma Aldrich, and Nordson respectively. The Jensen
Portfolio's requirement that a company must have reported at least a 15% return
on equity (ROE) for ten consecutive years is a simple test for the existence of
an economic franchise. (Companies held by the Fund averaged a 24.9% annual
return since 1986; indeed, a number of the companies have reported high returns
over several decades.) Not only do high financial returns support the
continuance of an eco nomic franchise, a second benefit is that a company's
ability to protect and grow an economic franchise increases in each successive
year.
The reward for building a successful franchise in this country is worth the
effort since the domestic market amounts to some 7 trillion dollars annually.
With a successful U.S. franchise, the opportunities to extend a franchise
globally are powerful as the United States accounts for only 5 percent of the
world's population. A young Norwegian analyst recently told us, "Americans have
no conception how important their brands like Coca-Cola, Levi and Nike are to
consumers in Europe." Even so, marketing beyond our borders is challenging due
to the diversity of customs, languages, and regulations; paths are filled with
failed attempts to take a product overseas. Global success, once attained, is
sweet as denoted by the typically higher margins earned.
There is ample evidence supporting the attractiveness of an overseas
franchise from companies which have been major participants in European commerce
since World War II. Beyond Europe, there is vast potential today in Latin
America and Asia. The Wall Street Journal reported recently that the developing
nations are importing more than $1 trillion annually from the advanced
countries-everything from soft drinks and chewing gum to tire retreads. Markets
are big and growing. To illustrate, over the past decade, the so-called Asian
tigers-Hong Kong, Singapore, Taiwan and South Korea-have, taken together,
eclipsed Japan as a market for American exports. Just within the next few years,
the developing nations are expected to account for one half the world's gross
domestic product.
Incidental benefits are obtained by growing globally, not the least of which
is dampening the effects of a crisis. A recent example is the late 1994
devaluation of the Mexican peso which left the Mexican consumer significantly
poorer. While it was harmful to all businesses operating there, companies with a
broad international reach had the benefits of serving a diversity of economies,
with less reliance on one or two specific countries.
Some of The Jensen Portfolio's companies which have a major stake
internationally are:
GENERAL ELECTRIC asserts it will "pick up the pace" in globalization. In
fact, its pace has been accelerating for years. Global revenues over the last
ten years have increased from 20% of the Company's total volume to 38% in 1995-
and somewhere around the millennium, they expect the majority of GE revenues to
come from outside the
United States.
BANDAG is the global leader in the manufacture of tread rubber and retreading
equipment with 63% of its franchisees located outside of the United States. The
Company believes their brightest prospects include mainland China where trucking
is the fastest growing mode of transportation and highway infrastructure
development is a top government priority, and Brazil, whose total market is
equivalent to over one-third of the U.S. retreading market in tread rubber
volume.
WD-40 is marketed in over 115 countries and in 30 different languages.
Outside the U.S. and Canada, the company has concentrated its resources in the
big emerging markets internationally: China, Hong Kong, Taiwan, South Korea,
India, South Africa, Poland, Turkey, Mexico, Brazil and Argentina. During 1995,
sales in Latin America and Mexico increased 47%, Pacific and Asia grew by 12%,
and Europe, Middle East and Africa increased by 20%.
MINNESOTA MINING & MANUFACTURING ("3M") began international operations 45
years ago and now has companies in 60 countries outside of the United States and
markets products in nearly 200 nations. In 1995, 3M's international sales rose
17% to $7.3 billion, 54% of the company's total sales. The company is targeting
international growth because markets are larger and growing faster than the U.S.
market, and their market penetration abroad is lower than in the United States.
The United States accounted for 29% of COCA-COLA'S net operating revenues and
just 18% of operating income. With such a huge presence all over the globe, some
doubt that Coca-Cola has major growth opportunities. Yet in the emerging markets
of China, India, Indonesia and Russia, 44% of the world's population resides
and, on a combined basis, their average per capita consumption of the company's
products is approximately 1% of the United States level.
The addition of the "Opfac" process to our research served to intensify our
study on companies whose global revenues are a significant part of their
business. (Opfac is based on the ratio of the company's estimated intrinsic
value to the company's market value.) Not only do these companies enjoy
excellent margins and report a consistently high return on equity, they generate
large amounts of cash for their shareholders. All of the companies reporting
over a 15% ROE annually for a decade are included in our list are now evaluated
by the Opfac process.
The Jensen Portfolio's performance for the fiscal year ending May 31, 1996,
after all costs and with dividends reinvested was +24.14% versus the S&P 500's
+28.44%. A graphic presentation of performance is on page 3. If you have any
questions, please call us at 1-800-221-4384.
Respectively,
/s/ Val Jensen
Val Jensen
President, Jensen Investment Management, Inc.
The Jensen Portfolio
Total Returns vs. The S&P 500
JENSEN S&P 500
------ -------
8/03/92 10,000 10,000
11/30/92 10,020 10,283
5/31/93 9,187 10,885
11/30/93 9,396 11,321
5/31/94 9,062 11,348
11/30/94 9,475 11,440
5/31/95 10,263 13,640
11/30/95 11,077 15,671
5/31/96 12,386 17,519
For the period ending May 31, 1996
One Year Annualized Since Inception
The Jensen Portfolio 24.14% 6.70%
S&P 500 Stock Index 28.44% 15.76%
The S&P 500 Stock Index is an unmanaged but commonly used measure of
common stock total return performance. This chart assumes an initial
gross investment of $10,000 made on 8/3/92 (inception). Returns shown
include the reinvestment of all dividends. Past performance is not
predictive of future performance. Investment return and principal value
will fluctuate, so that your shares, when redeemed, may be worth more or
less than the original cost.
REPORT of INDEPENDENT ACCOUNTANTS
To the Directors and Shareholders of
The Jensen Portfolio, Inc.
Portland, Oregon
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of The Jensen Portfolio, Inc. (the "Fund") as of
May 31, 1996, and the related statements of operations and changes in net
assets, and the financial highlights for the year then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The financial statements
of the Fund as of May 31, 1995, were audited by other auditors whose report
dated June 21, 1995 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of the securities owned at May 31, 1996 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the accompanying financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of the Fund as of May 31, 1996, the results of its operations, the
changes in its net assets and the financial highlights for the year then ended,
in conformity with generally accepted accounting principles.
Coopers & Lybrand, L.L.P.
Portland, Oregon
July 5, 1996
STATEMENT OF ASSETS & LIABILITIES
May 31, 1996
ASSETS:
Investments, at value (cost $8,855,355) $11,264,840
Income receivable 13,757
Deferred organizational expenses,
net of accumulated amortization 16,232
Prepaid expenses 755
----------
Total Assets 11,295,584
LIABILITIES:
Payable to investment adviser 3,184
Payable to directors 15,130
Accrued expenses 20,240
----------
Total Liabilities 38,554
NET ASSETS $11,257,030
===========
NET ASSETS CONSIST OF:
Capital stock $ 9,167,331
Unrealized appreciation on
investments 2,409,485
Undistributed net investment income 19,358
Undistributed net realized losses (339,144)
-----------
Total Net Assets $11,257,030
===========
Net Asset Value Per Share, 925,900
shares outstanding (100,000,000 shares
authorized, $.001 par value) $12.16
======
See notes to the financial statements.
SCHEDULE OF INVESTMENTS
May 31, 1996
Number of Shares Market Value
- ---------------- ------------
COMMON STOCK 96.97%
Aerospace/Defense 4.73%
10,000 Raytheon Company $ 532,500
---------
Bank 4.69%
16,000 Wilmington Trust
Corporation 528,000
---------
Beverage 11.58%
10,000 Brown-Foreman
Corporation, Class B 406,250
19,500 The Coca-Cola Company 897,000
---------
1,303,250
---------
Chemical Diversified 4.85%
8,000 Minnesota Mining &
Manufacturing Company 546,000
---------
Chemical Specialty 8.70%
9,000 Sigma-Aldrich Corporation 504,000
10,000 W D-40 Company 475,000
---------
979,000
---------
Computer Software Services 4.09%
12,000 Automatic Data
Processing, Inc. 460,500
---------
Drugs 13.17%
14,200 Glaxo Wellcome, PLC-ADR 370,975
9,850 Merck &Company, Inc. 636,556
25,000 Mylan Laboratories, Inc. 475,000
---------
1,482,531
---------
Electrical Equipment 4.78%
6,500 General Electric Company $ 537,875
---------
Food Processing 2.96%
10,000 Sara Lee Corporation 333,750
---------
Household Products 4.54%
6,000 Clorox Company 510,750
---------
Industrial Services 10.42%
47,400 Equifax, Inc. 1,173,150
---------
Machinery 4.45%
8,500 Nordson Corporation 501,500
---------
Medical Supplies 6.36%
16,600 Abbott Laboratories 715,875
---------
Newspaper 4.65%
7,500 Gannett Company, Inc. 523,125
---------
Precision Instruments 3.44%
17,800 EG&G, Inc. 387,150
---------
Tire & Rubber 3.56%
8,050 Bandag, Inc. 400,488
---------
Total Common Stock
(Cost $8,505,959) 10,915,444
----------
Principal Amount Market Value
- ----------------- ------------
SHORT-TERM INVESTMENTS 3.10%
Variable Rate Demand Notes 3.10%
$ 33,396 Sara Lee Corporation $ 33,396
200,000 Southwestern Bell 200,000
116,000 Wisconsin Electric 116,000
---------
Total Short-Term Investments
(Cost $349,396) 349,396
---------
TOTAL INVESTMENTS 100.07%
(Cost $8,855,355) 11,264,840
---------
LIABILITIES,
LESS OTHER
ASSETS (0.07)% (7,810)
---------
NET ASSETS 100.00% $11,257,030
===========
See notes to the financial statements.
STATEMENT OF OPERATIONS
Year Ended May 31, 1996
INVESTMENT INCOME:
Dividends $ 243,827
Interest 14,461
---------
258,288
---------
EXPENSES:
Investment advisory fees 53,125
Shareholder servicing and accounting 26,384
Professional fees 15,077
Directors' fees and expenses 20,363
Amortization of deferred
organizational expenses 13,816
Administration fees 14,889
Reports to shareholders 5,099
Federal and state registration fees 3,270
Custody fees 2,145
Other 3,934
Total expenses before
reimbursement 158,102
Less: Reimbursement from Adviser (30,602)
---------
Net Expenses 127,500
---------
NET INVESTMENT INCOME 130,788
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on investment
transactions 396,245
Change in unrealized appreciation
on investments 1,746,279
---------
Net gain on investments 2,142,524
---------
NETINCREASE IN NET ASSETS
RESULTINGFROM OPERATIONS $2,273,312
==========
See notes to the financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
Year ended Year Ended
May 31, '96 May 31, '95
OPERATIONS: ----------- -----------
Net investment income $ 130,788 $ 135,570
Net realized gain (loss) on
investment transactions 396,245 (218,592)
Change in unrealized appreciation
on investments 1,746,279 1,348,178
---------- ----------
Net increase in net assets
resulting from operations 2,273,312 1,265,156
---------- ----------
CAPITAL SHARE TRANSACTIONS:
Shares sold 1,042,344 1,037,954
Shares issued to holders in
reinvestment of dividends 123,607 117,997
Shares redeemed (1,885,594) (1,219,001)
---------- ----------
Net (decrease) (719,643) (63,050)
---------- ----------
DIVIDENDS PAID FROM NET
INVESTMENT INCOME (156,269) (151,193)
---------- ----------
INCREASE
IN NET ASSETS 1,397,400 1,050,913
NET ASSETS:
Beginning of year 9,859,630 8,808,717
---------- ----------
End of year (including undistributed
net investment income of $19,358
and $3,217, respectively) $11,257,030 $9,859,630
=========== ==========
See notes to the financial statements
FINANCIAL HIGHLIGHTS
August 3,
1992<F1>
Year ended Year Ended Year Ended through
Per Share Data: May 31, May 31, May 31, May 31,
1996 1995 1994 1993
-------- ------- ------- -------
Net asset value,
beginning of period $9.94 $8.80 $9.36 $10.00
Income from investment operations:
Net investment income 0.15 0.14 0.13 0.09
Net realized and unrealized
gains (losses) on investments 2.23 1.15 (0.56) (0.66)
------ ------ ------ ------
Total from investment operations 2.38 1.29 (0.43) (0.57)
------ ------ ------ ------
Less distributions:
Dividends from net investment
income (0.16) (0.15) (0.13) (0.07)
------ ------ ------ ------
Net asset value,
end of period $12.16 $9.94 $8.80 $9.36
====== ===== ===== =====
Total return <F2> 24.14% 14.84% (4.64)% (5.72)%
Supplemental data and ratios:
Net assets, end of period $11,257,030 $9,859,630 $8,808,717 $9,470,139
Ratio of expenses to average
net assets <F3> 1.20% 1.20% 1.13% 0.89%
Ratio of net investment income to
average net assets <F3> 1.23% 1.48% 1.36% 1.54%
Portfolio turnover rate 47.93% 11.27% 5.26% 4.01%
Average commission rate paid $0.0198
<F1> Commencement of operations.
<F2> Not annualized for the period August 3, 1992 through May 31, 1993.
<F3> Annualized for the period August 3, 1992 through May 31, 1993. Without
expense waivers or voluntary reimbursements of $30,602 for the year ended May
31, 1996, $50,889 for the year ended May 31, 1995, $54,481 for the year ended
May 31, 1994, and $61,182 for the period August 3, 1992 through May 31, 1993,
the ratio of expenses to average net assets would have been 1.49%, 1.75%,
1.72% and 1.97%, respectively, and the ratio of net income to average net
assets would have been 0.94%, 0.93%, 0.77% and 0.25%, respectively.
See notes to the financial statements
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT
ACCOUNTING POLICIES
The Jensen Portfolio, Inc. (the "Fund") was organized as an Oregon Corporation
on April 17, 1992, and is registered as an open-end, nondiversified management
investment company under the Investment Company Act of 1940. The principal
investment objective of the Fund is long-term capital appreciation. The Fund
issued and sold 10,000 shares of its capital stock at $10 per share on June 29,
1992 ("initial shares"). The Fund commenced operations on August 3, 1992.
Jensen Investment Management, Inc. (the "Investment Adviser") has advanced the
Fund $56,604 to cover costs in connection with the organization, initial
registration and public offering of shares. The Fund will reimburse these costs
under a five-year amortization schedule until the Fund has net assets of $50
million or more, at which time the Fund will reimburse the Investment Adviser
for all remaining organizational costs. The total organizational costs of
$57,854 (which includes both costs advanced by the Investment Adviser and costs
paid directly by the Fund) are being amortized over the period of benefit, but
not to exceed 60 months from the Fund's commencement of operations. If any of
the initial shares are redeemed during the amortization period, the redemption
proceeds will be reduced by the pro rata share (calculated as the number of
original shares being redeemed divided by the number of original shares
outstanding immediately prior to such redemption) of the unamortized costs as of
the date of redemption.
The following is a summary of significant accounting policies consistently
followed by the Fund.
a) Investment Valuation - Securities that are listed on United States stock
exchanges are valued at the last sale price on the day the securities are valued
or, if there has been no sale on that day, then at the average of the last
available bid and ask prices. Quotations are taken from the market in which the
security is primarily traded. Over-the-counter securities are valued at the last
sale price on the day the securities are valued, or if there has been no sale on
that day, then at the average of the current bid and ask prices. Securities for
which market quotations are not readily available are valued at fair value as
determined by the Investment Adviser at or under the direction of the Fund's
Board of Directors. Variable rate demand notes are valued at cost which
approximates market value. Notwithstanding the above, fixed-income securities
may be valued on the basis of prices provided by an established pricing service
when the Board believes that such prices reflect market values.
b) Federal Income Taxes - No provision for federal income taxes has been made
since the Fund has complied to date with the provisions of the Internal Revenue
Code applicable to regulated investment companies and intends to continue to so
comply in the future and to distribute substantially all of its net investment
income and realized capital gains in order to relieve the Fund from all federal
income taxes.
c) Distributions to Shareholders - Dividends from net investment income are
declared and paid quarterly by the Fund. Distributions of net realized capital
gains, if any, will be declared at least annually. Income and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. The Fund's primary
financial reporting and tax difference relates to the differing treatment for
the amortization of deferred organization expenses. Permanent financial
reporting and tax differences are reclassified to capital stock.
d) Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
e) Other - Investment and shareholder transactions are recorded no later than
the first business day after the trade date. Gains or losses from the investment
transactions are determined on the basis of identified carrying value. Dividend
income is recognized on the ex-dividend date and interest income is recognized
on an accrual basis. The Fund has investments in short-term variable rate demand
notes, which are unsecured instruments. These notes may present credit risk to
the extent the issuer defaults on its payment obligation. The credit- worthiness
of the issuer is monitored, and these notes are considered to present minimal
credit risk in the opinion of the Investment Adviser.
2. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund were as follows:
Year Ended Year Ended
May 31, May 31,
1996 1995
--------- ----------
Shares sold 95,656 112,636
Shares issued to holders in
reinvestment of dividends 11,268 12,970
Shares redeemed (173,423) (133,856)
-------- ---------
Net (decrease) (66,499) (8,250)
======== =========
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of securities, excluding short-term
investments, by the Fund for the year ended May 31, 1996, were $4,941,434 and
$5,947,303, respectively.
At May 31, 1996, gross unrealized appreciation and depreciation of investments
were as follows:
Appreciation $2,545,855
(Depreciation) (136,370)
----------
Net appreciation on
investments $2,409,485
==========
At May 31, 1996, the cost of investments for
federal income tax purposes was $8,855,355.
At May 31, 1996, the Fund had accumulated net realized capital loss carryovers
of $120,552 and $218,592 expiring in 2002 and 2003, respectively. To the extent
the Fund realizes future net capital gains, taxable distri butions to its
shareholders will be offset by any unused capital loss carryover.
4.INVESTMENT ADVISORY ANDOTHER AGREEMENTS
The Fund has entered into an Investment Advisory and Service Contract with
Jensen Investment Management, Inc. Pursuant to its advisory agreement with the
Fund, the Investment Adviser is entitled to receive a fee,
calculated daily and payable monthly, at the annual
rate of 0.50% as applied to the Fund's daily net assets.
Certain officers and directors of the Fund are also officers and directors of
the Investment Adviser.
Firstar Trust Company, a subsidiary of Firstar Corporation, a publicly held bank
holding company, serves as custodian, transfer agent, administrator and
accounting services agent for the Fund.
5. EXPENSE GUARANTEE
In order to limit the Fund's expenses, the Investment Adviser has guaranteed
that certain expenses payable by the Fund (including, but not limited to,
management fees, legal, audit, custodial, printing and other regular Fund
expenses, but excluding brokerage commissions, taxes, interest, organizational
costs and other expenses that are capitalized, and all extraordinary items such
as litigation or indemnification expenses) will not exceed specified levels in
any fiscal year. If the Fund's regular operating expenses exceed the applicable
limit specified below (expressed as a percentage of average daily net assets on
an annual basis), the Investment Adviser will reduce its management fee, or
reimburse the Fund, in an amount equal to the excess:
Average Daily Net Annual
Assets for the Year Expense Limit
------------------- -------------
$100,000 - $10,000,000 2.00%
$10,000,001 - $15,000,000 1.75%
$15,000,001 - $25,000,000 1.50%
$25,000,001 - $50,000,000 1.25%
$50,000,001 - $100,000,000 1.00%
$100,000,001 and above 0.75%
In addition, the Investment Adviser has voluntarily agreed to reimburse the Fund
for its expenses or waive management fees during fiscal 1996 in order to keep
regular operating expenses at no more than 1.20% for the year. Any reduction in
management fees or reimbursement of expenses by the Investment Adviser required
pursuant to the above expense guarantee will be computed and accrued daily, paid
monthly and adjusted annually on the basis of the Fund's average daily net
assets for the year. The Investment Adviser waived $30,602 of management fees
for the year ended May 31, 1996.
6. DISTRIBUTIONS
On June 28, 1996 an ordinary income dividend
of $0.02889245 per share aggregating $26,752 was declared. The distribution was
paid on June 28, 1996 to shareholders of record on June 27, 1996.
END OF NOTES TO THE FINANCIAL STATEMENTS
Effective November 30, 1995, Deloitte & Touche, L.L.P. ("Deloitte") resigned
as the Fund's independent account ants. For the years ended May 31, 1994 and
1995, Deloitte expressed an unqualified opinion on the Fund's financial
statements. There were no disagreements between Fund management and Deloitte
prior to their resignation. On December 13, 1995 the Board of Directors of
the Fund approved the appointment of Coopers & Lybrand L.L.P. as the Fund's
independent accountants. The Fund has received a letter from Deloitte
addressed to the Securities and Exchange Commission stating that Deloitte
agrees with the above statements (other than the statement with respect to
the approval of the Board of Directors, as to which Deloitte expresses
no knowledge).
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<NAME> THE JENSEN PORTFOLIO, INC.
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<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> MAY-31-1996
<INVESTMENTS-AT-COST> 8,855,355
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<GROSS-EXPENSE> 158,102
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<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.16
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
