Semi-Annual Report
(The Jensen Portfolio Logo)
SEMI-ANNUAL REPORT
November 30, 1998
LETTER FROM THE INVESTMENT ADVISER
JANUARY 5, 1999
Dear Fellow Shareholders:
Security markets were more volatile during the first half of The Jensen
Portfolio's fiscal year than in any other period of its six-year history. In
July, the stock market reached an all time high then promptly fell 20 percent in
the next six weeks. As it turned out, equities were only a precursor for the
currency and fixed income markets. The most dramatic example of the former was
the Japanese yen that fell from 147 to 112 to the dollar in a little more than a
month. This gave the Japanese economy a respite and currency speculators fits.
The bond market held center stage, however, as U.S. Treasuries soared in value.
Not knowing why the various markets were destructing caused a massive flight to
safety as entire countries and all but the soundest companies found credit
windows closed. The source of the disruption turned out to be a hedge fund
called Long-Term Capital Management (LTCM). Fortified by a few years of
success, this hedge fund was making gigantic bets on borrowed money. As its
luck turned increasingly sour, its creditors called for more collateral and LTCM
was forced to sell assets -- i.e. equity, fixed income and foreign currency
positions to meet the calls. Their situation was dire enough to capture the
attention of the Federal Reserve, who helped arrange a bailout by the fund's
creditors. The Fed also lowered interest rates twice within three weeks to ease
what was becoming an international crisis. To substantiate the claim that
markets have no memory, by November-end the crisis was forgotten.
There is a significant difference between the practices employed by hedge
funds and The Jensen Portfolio. The American Heritage Dictionary defines a
hedge fund as an investment company that uses high-risk techniques, such as
borrowing money and selling short, in an effort to make an extraordinary return.
The Jensen Portfolio is prohibited from the use of borrowed funds, selling short
or the use of derivatives. The Portfolio's investment strategy is described on
page three of its prospectus and is a very restrictive strategy, which we have
no desire to change. The restrictions require us to only invest in companies
that have reported greater than a 15 percent return on equity for 10 consecutive
years and are in a sound financial condition. The purpose of restricting the
strategy is to provide owners with the knowledge that they own, albeit
indirectly, only companies that meet high standards. If the companies were
selected unerringly - a situation to which we aspire - none of the Portfolio's
holdings would need to be sold. Similarly, it would dissuade investors from
selling Portfolio shares - another condition to which we aspire.
The use of the words "long term" in Long-Term Capital Management describes an
entirely different activity than our use of them in describing our investment
strategy. We are regularly looking for convincing arguments of the benefits for
holding any given stock as long as it is creating value (as opposed to market
timing). One argument involves companies that make a tradition of regularly
declaring dividends. Standard & Poor's Stock Guide lists four companies that
have not missed a dividend for over two hundred years; 59 companies that have
paid a dividend each year of this century; and an additional 144 firms that
initiated dividends before 1930 and continued every year since.
Citing dividend records may seem particularly old-fashioned today when
companies only nominally increase them in favor of using cash for the more tax-
efficient repurchasing of shares. Dividends, however, are more than symbolic if
only to emphasize that corporations have unlimited life. They have transcended
wars, changes of governments, competition and the vicissitudes of the
marketplace. Some, in Europe, have done so for 500 years. This brought Peter
Drucker to say that the first responsibility of management is to assure survival
of the enterprise.
The Portfolio's investment strategy's challenge is to determine if a
prospective investment can survive an unknowable future. The elements of
corporate survival include having needed products or services, an efficient
distribution chain, efficient suppliers, satisfied employees, and - of
particular importance - management. Of course, surviving is one thing,
increasing shareholder value another. Some 105 companies currently meet our
first test of returning 15 percent on equity for 10 consecutive years. (Most of
these select companies exceed both requirements.) Using consensus estimates, we
forecast each firm's intrinsic value for the forthcoming decade and charge that
usually rosy figure with a 10.5 percent cost of capital. The outcome is
beneficial in two ways. The first is that if the market value is below our
estimated intrinsic value, we believe we are buying a business at a favorable
price. The second is that the exercise provides a performance track that we can
test as annual and quarterly results are reported.
Clorox is one of the best examples of our investment strategy. Clorox has
provided its shareholders, and fortunately the Portfolio, all the benefits that
high returns can provide: the dividend has been increased both substantially and
annually; companies in ancillary businesses have been acquired; shares have been
repurchased; and a stream of new products and brand extensions have been brought
to market.
Its track record in the Portfolio is also superlative. 9,000 shares of Clorox
were first acquired at $28.82 in May, 1995, followed by an additional 3,000
shares the following September at $30.11 (both purchases adjusted for an ensuing
two-for-one split). On November 30, 1998, the $350,000 invested was valued at
$1,380,000. All that measures an average annual appreciation of 45 percent.
Clorox was the idea of six investors in 1913 who saw gold in the extensive
brine deposits in San Francisco Bay (Their reckoning was inspired; today Clorox
enjoys a 70 percent market share in liquid bleaches). In 1957, Clorox was
acquired by Proctor & Gamble ("P&G") who was promptly sued by the Federal Trade
Commission ("FTC") for restraint of trade in the liquid bleach market. The
Supreme Court ruled in favor of the FTC in 1969 when Clorox regained full
autonomy.
The lessons learned at P&G included the advantages of taking more than one
product to sell to your customer. After regaining independence, Clorox bought
Liquid Plumr; their first of many acquisitions of branded goods. The unlocking
of Clorox's undiscovered potential, however, can be credited to Craig Sullivan,
a long-time employee elevated to President in 1993. With Mr. Sullivan's stamp
upon it, Clorox adopted the Clorox Value Measure (CVM) which charged each
operating unit with a cost of capital - quite like The Jensen Portfolio's
augmented strategy. In order to put teeth into CVM, employee compensation is
based upon Clorox's results, by division, after the capital charge. Also,
capital spending is allocated to each division based on their CVM results.
Of course, results are the test of the pudding. Clorox's dividend has risen
from 86 cents a share in 1993 to a current annual rate of $1.44 per share.
During the same period of time, it has repurchased over 5,000,000 shares in the
open market; Clorox has acquired Armor All and First Brands; and last year
alone, Clorox introduced 41 new products and made six acquisitions. We believe
Clorox has a good start on becoming one of those 200-year, dividend-paying
companies.
Investing, however, is not about past accomplishments. Looking forward, each
company must continually prove its worth in the marketplace. As investment
managers, our responsibility is to recognize companies that have the ability to
convert their business opportunities into increased value for their shareholders
- - just as Clorox has done.
Sincerely,
/s/ Val Jensen
Val Jensen
President, Jensen Investment Management
STATEMENT OF ASSETS & LIABILITIES
NOVEMBER 30, 1998 (UNAUDITED)
ASSETS:
Investments, at value (cost $14,021,276) $22,855,007
Income receivable 13,177
Prepaid expenses 696
--------------------------------------------------
TOTAL ASSETS 22,868,880
-----------
LIABILITIES:
Payable to investment adviser 9,225
Payable to directors 9,472
Accrued expenses 21,527
--------------------------------------------------
TOTAL LIABILITIES 40,224
-----------
NET ASSETS $22,828,656
-----------
-----------
NET ASSETS CONSIST OF:
Capital stock $14,113,850
Unrealized appreciation on
investments 8,833,731
Undistributed net investment income 833
Undistributed net realized loss (119,758)
--------------------------------------------------
TOTAL NET ASSETS $22,828,656
-----------
-----------
NET ASSET VALUE PER SHARE, 1,231,851
SHARES OUTSTANDING (100,000,000 SHARES
AUTHORIZED, $.001 PAR VALUE) $18.53
------
------
See notes to financial statements.
SCHEDULE OF INVESTMENTS
NOVEMBER 30, 1998 (UNAUDITED)
NUMBER OF SHARES MARKET VALUE
- ---------------- ------------
COMMON STOCK 98.42%
ADVERTISING 3.28%
14,000 Omnicom Group Inc. $ 748,125
-----------
BANKS 4.81%
16,000 State Street Corporation 1,098,000
-----------
BEVERAGES 3.07%
10,000 The Coca-Cola Company 700,625
-----------
CHEMICAL SPECIALTY 6.72%
12,500 Nalco Chemical Company 417,969
36,000 WD-40 Company 1,116,000
-----------
1,533,969
-----------
COMPUTER SOFTWARE SERVICES 10.05%
22,000 Adobe Systems Incorporated 984,500
17,000 Automatic Data Processing, Inc. 1,309,000
-----------
2,293,500
-----------
DRUGS 5.22%
7,700 Merck & Company, Inc. 1,192,537
-----------
ELECTRICAL EQUIPMENT 5.15%
13,000 General Electric Company 1,176,500
-----------
FOOD PROCESSING 5.11%
20,000 Sara Lee Corporation 1,167,500
-----------
HOUSEHOLD PRODUCTS 5.84%
12,000 Clorox Company 1,332,750
-----------
INDUSTRIAL SERVICES 9.09%
50,000 Equifax Inc. 2,075,000
-----------
MACHINERY 3.24%
15,500 Nordson Corporation 740,125
-----------
MEDICAL SUPPLIES 14.69%
36,000 Abbott Laboratories 1,728,000
24,000 Medtronic, Inc. 1,624,500
-----------
3,352,500
-----------
NEWSPAPERS 4.24%
15,000 Gannett Company, Inc. 968,438
-----------
PRECISION INSTRUMENTS 5.43%
40,000 Dionex Corporation #<F1> 1,240,000
-----------
RECREATION 3.79%
25,000 Mattel, Inc. 864,062
-----------
SEMICONDUCTORS 5.19%
11,000 Intel Corporation 1,183,875
-----------
SHOE INDUSTRY 3.50%
20,000 Nike, Inc. - Class B 800,000
-----------
Total Common Stock
(Cost $13,633,775) 22,467,506
-----------
PRINCIPAL AMOUNT
- ----------------
SHORT-TERM INVESTMENTS 1.70%
VARIABLE RATE DEMAND NOTES *<F2> 1.70%
$ 259,704 Pitney Bowes, Inc., 4.6448% 259,704
127,797 Wisconsin Corporate Central Credit Union,
4.7098% 127,797
-----------
Total Short-Term Investments
(Cost $387,501) 387,501
-----------
Total Investments 100.12%
(Cost $14,021,276) 22,855,007
-----------
Liabilities, Less Other Assets (0.12%) (26,351)
-----------
NET ASSETS 100.00% $22,828,656
-----------
-----------
#<F1> Non income producing security.
*<F2> Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rate changes periodically on specified dates.
The rate is as of November 30, 1998.
See notes to financial statements.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED NOVEMBER 30, 1998 (UNAUDITED)
INVESTMENT INCOME:
Dividends (net of foreign taxes withheld of $931) $ 122,867
Interest 13,937
----------
136,804
----------
EXPENSES:
Investment advisory fees 51,736
Shareholder servicing and accounting 16,470
Professional fees 8,418
Directors' fees and expenses 8,601
Administration fees 10,065
Reports to shareholders 2,562
Federal and state registration fees 2,562
Custody fees 2,196
Other 549
----------
Total expenses 103,159
----------
NET INVESTMENT INCOME 33,645
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investment transactions (16,593)
Change in unrealized appreciation on investments 2,058,042
----------
Net gain on investments 2,041,449
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,075,094
----------
----------
See notes to financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR ENDED
NOV. 30, '98 MAY 31, '98
------------- ------------
(UNAUDITED)
OPERATIONS:
Net investment income $ 33,645 $ 251,237
Net realized gain (loss) on
investment transactions (16,593) 592,609
Change in unrealized appreciation
on investments 2,058,042 1,930,938
----------- -----------
Net increase in net
assets resulting from
operations 2,075,094 2,774,784
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Shares sold 1,422,060 4,033,672
Shares issued to holders
in reinvestment of
dividends 28,818 482,999
Shares redeemed (552,392) (1,247,161)
----------- -----------
Net increase 898,486 3,269,510
----------- -----------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income (45,297) (250,304)
Net realized gains -- (404,704)
----------- -----------
Total dividends and
distributions (45,297) (655,008)
----------- -----------
INCREASE
IN NET ASSETS 2,928,283 5,389,286
NET ASSETS:
Beginning of year 19,900,373 14,511,087
----------- -----------
End of year (including
undistributed net investment
income of $833 and
$12,485, respectively) $22,828,656 $19,900,373
----------- -----------
----------- -----------
See notes to financial statements.
FINANCIAL HIGHLIGHTS
<TABLE>
SIX MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
NOV. 30, '98 MAY 31, '98 MAY 31, '97 MAY 31, '96 MAY 31, '95 MAY 31, '94
------------- ------------- ------------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Per Share Data:
Net asset value,
beginning of period $16.87 $14.78 $12.16 $9.94 $8.80 $9.36
Income from investment
operations:
Net investment income 0.03 0.23 0.10 0.15 0.14 0.13
Net realized and
unrealized gains (losses)
on investments 1.67 2.46 2.63 2.23 1.15 (0.56)
------- ------- ------- ------- ------- -------
Total from investment
operations 1.70 2.69 2.73 2.38 1.29 (0.43)
------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net
investment income (0.04) (0.23) (0.10) (0.15) (0.15) (0.13)
Distribution in excess of net
investment income -- -- (0.01) (0.01) -- --
From net realized gains -- (0.37) -- -- -- --
------- ------- ------- ------- ------- -------
(0.04) (0.60) (0.11) (0.16) (0.15) (0.13)
------- ------- ------- ------- ------- -------
Net asset value,
end of period $18.53 $16.87 $14.78 $12.16 $9.94 $8.80
------- ------- ------- ------- ------- -------
Total return(1)<F3> 10.09% 18.28% 22.56% 24.14% 14.84% (4.64)%
Supplemental data and ratios:
Net assets,
end of period $22,828,656 $19,900,373 $14,511,087 $11,257,030 $9,859,630 $8,808,717
Ratio of expenses to
average net assets(2)<F4> 1.00% 1.02% 1.32% 1.20% 1.20% 1.13%
Ratio of net investment
income to average
net assets(2)<F4> 0.32% 1.44% 0.61% 1.23% 1.48% 1.36%
Portfolio turnover rate 11.42% 20.80% 24.50% 47.93% 11.27% 5.26%
</TABLE>
(1)<F3> Not annualized for the six months ended November 30, 1998.
(2)<F4> Annualized for the six months ended November 30, 1998. Without expense
waivers or voluntary reimbursements of $4,043 for the year ended May
31, 1997, $30,602 for the year ended May 31, 1996, $50,889 for the year
ended May 31, 1995, and $54,481 for the year ended May 31, 1994, the
ratio of expenses to average net assets would have been 1.35%, 1.49%,
1.75% and 1.72%, respectively, and the ratio of net income to average
net assets would have been 0.58%, 0.94%, 0.93% and 0.77%, respectively.
For the six months ended November 30, 1998 and the year ended May 31,
1998 the ratio of expenses to average net assets was less than the
annual expense limit.
See notes to financial statements.
NOTES TO THE FINANCIAL STATEMENTS
NOVEMBER 30, 1998 (UNAUDITED)
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.
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. There were no securities valued by the Board of Directors
for the six months ending November 30, 1998. 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 and paid at least annually. Income and capital
gain distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. 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 on 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:
SIX MONTHS
ENDED YEAR ENDED
NOV. 30, '98 MAY 31, '98
------------ ------------
Shares sold 83,524 245,342
Shares issued to holders in
reinvestment of dividends 1,744 29,293
Shares redeemed (32,858) (77,187)
-------- --------
Net increase 52,410 197,448
-------- --------
-------- --------
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of securities, excluding short-term
investments, by the Fund for the six months ended November 30, 1998, were
$3,302,285 and $2,289,069, respectively.
At November 30, 1998, gross unrealized appreciation and depreciation of
investments were as follows:
Appreciation $9,413,595
(Depreciation) (579,864)
----------
Net appreciation on
investments $8,833,731
----------
----------
At November 30, 1998, the cost of investments for federal income tax purposes
was $14,021,276.
At May 31, 1998, the Fund had an accumulated net realized capital loss carryover
of $103,165 expiring in 2003. To the extent the Fund realizes future net capital
gains, taxable distributions 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 Bank Milwaukee, N.A. serves as custodian for the Fund. Firstar Mutual
Fund Services, LLC serves as 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%
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.
6. DISTRIBUTIONS
On December 23, 1998 an ordinary income dividend of $0.00743405 per share
aggregating $9,142 was declared. The distribution was paid on December 23, 1998
to shareholders of record on December 22, 1998.
END OF NOTES TO THE FINANCIAL STATEMENTS
Effective December 13, 1995, Deloitte & Touche, L.L.P. ("Deloitte") resigned as
the Fund's independent accountants. 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 (effective July 1, 1998
PricewaterhouseCoopers LLP) 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).
430 Pioneer Tower
888 SW Fifth Avenue
Portland, OR 97204-2018
503-274-2044
800-221-4384
Fax 503-274-2031
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