(THE JENSEN PORTFOLIO LOGO)
ANNUAL REPORT
MAY 31, 2000
LETTER FROM THE INVESTMENT ADVISER
To the Shareholders:
The Jensen Portfolio's fiscal year ended on May 31st, a period of
extraordinary volume and extraordinary volatility; in other words, a year during
which the market had more bouts with its age-old problem of schizophrenia than
usual. The year brought some new language as well, with terms such as "New
Economy" and "Old Economy." The former included a group of high-tech, biotech,
dot.com, e-tailers, and B2B companies. The latter consisted of firms whose
management was left trying to convince analysts that being profitable and
growing at manageable rates were desirable attributes.
The real battle being waged in both "Economies" was the fight for competitive
advantage. Simply stated, possessing a competitive advantage permits a firm to
earn premium rates of return. Management that can maintain an advantage is able
to sustain that premium. Microsoft stands to be broken in half because of its
alleged heavy-handed use of its competitive advantage; analysts believe that the
number of hits a dot.com company receives on its web-site determines its
competitive position; and companies in the Portfolio such as State Street, Adobe
Systems and American Power Conversion soared because investors recognized they
were winning the competitive battle.
The tools of competitive advantage are intangible assets: brands, trademarks
and patents. Amazon.com, Yahoo!, Coca-Cola and Pampers are all icons that allow
firms to distinguish themselves from their rivals. The large number of issues
and dollars invested in New Economy companies brought out the problem of valuing
intangible assets, since those firms have little in the way of hard assets, such
as real estate and equipment. While Generally Accepted Accounting Principles can
be complicated enough for tangible assets (depreciation schedules, capital
expenditures and equipment expenses), GAAP largely avoided dealing with the
matter of intangible assets. For example, Baruch Lev, Professor of Accounting
and Finance at NYU, estimated in CFO magazine that Merck's patented medicines
plus new drugs in its pipeline were worth $48 billion in 1998 versus its GAAP-
calculated book value of $12.6 billion.
Although some analysts have estimated the value of companies that have
prospects for rapid growth but no immediate prospect of profitability (i.e. New
Economy issues), their work has highlighted the importance of the value of
intangible assets. Their argument is simply that a competitive advantage in any
viable enterprise may be worth a great deal more than real estate and equipment.
Of course, this is as applicable to companies in the Old Economy as well as the
New.
The point is belabored because it applies to the investment strategy employed
in the Portfolio. From the beginning, our strategy was to acquire shares in
companies that had both a positive outlook and had exhibited a sustained
advantage over their rivals. We believed that not only do branded, trademarked
or patented products provide a more consistent flow of cash than their
competition, a company's management could be judged by its ability to defend its
current market position as well as "grow" its products by brand extension
(adding "Ivory Liquid" to the Ivory Soap product line) or by entering new
geographic markets. In May 1995, after a long period of testing, the strategy
was augmented--and refined--by our forecasting the cash earnings each company
would generate from its tangible and intangible assets. Given that forecast, a
company's present business value (its real value as opposed to its market value)
can be derived mathematically. This enabled us to compare our calculation of
"real" value to market value, and therefore the ability to acquire companies
that the market was pricing at a significant discount to our calculated value.
If, as investment managers, we are satisfied with our estimate of the true
value of a company as an ongoing business, then we must look for opportunities
to acquire them in the market at a reasonable price. This discount to real value
serves as either an opportunity to catch up or as a shield at times when either
the market changes or something goes awry in the business.
------------------------------
The Portfolio experienced its most successful single year, up some 27.65%, a
condition we would hope that could be repeated but do not expect it to. When we
commit to a company, we are committing to a condition that might exist five
years down the road. We do not expect a stock to rise (a) because we bought it,
(b) because it is down from recent highs, or (c) up from recent lows. We do not
expect that because we acquired it at 67 cents on the dollar that it will sell
for a dollar within the year (although some issues in the Portfolio have had
that unusual experience); we do expect that as long as the company has the
capability to consistently generate excess cash, that its shareholders will be
rewarded at rates equal to that growth over time.
So, as pleased as we are to report its single year performance (as well as
its five-star rating in Mutual Fund Magazine), its purpose remains unchanged: to
satisfy the needs of investors over the long-term.
Sincerely,
/s/ Val Jensen
Val Jensen
Chairman, Jensen Investment Management
THE JENSEN PORTFOLIO
TOTAL RETURNS VS. THE S&P 500
DATE THE JENSEN PORTFOLIO S&P 500 STOCK INDEX
AUG. 3, '92 $10,000 $10,000
NOV. 30, '92 $10,360 $10,283
MAY 31, '93 $9,428 $10,885
NOV. 30, '93 $9,233 $11,321
MAY 31, '94 $8,991 $11,348
NOV. 30, '94 $9,115 $11,440
MAY 31, '95 $10,325 $13,640
NOV. 30, '95 $11,643 $15,671
MAY 31, '96 $12,818 $17,519
NOV. 30, '96 $14,611 $20,037
MAY 31, '97 $15,709 $22,672
NOV. 30, '97 $17,340 $25,751
MAY 31, '98 $18,581 $29,629
NOV. 30, '98 $20,456 $31,843
MAY 31, '99 $21,464 $35,859
NOV. 30, '99 $23,296 $38,498
MAY 31, '00 $27,398 $39,618
FOR THE PERIOD ENDING MAY 31, 2000
AVERAGE ANNUAL
--------------------------------------------
ONE YEAR THREE YEAR FIVE YEAR SINCE INCEPTION
-------- ---------- --------- ---------------
THE JENSEN
PORTFOLIO: 27.65% 20.35% 21.53% 13.73%
S&P500
STOCK INDEX: 10.48% 20.43% 23.74% 19.21%
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 PREDICATIVE 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.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Jensen Portfolio, Inc. (the
"Fund") at May 31, 2000, the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period then ended
and the financial highlights for each of the five years in the period then
ended, in conformity with accounting principles generally accepted in the United
States. These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Fund's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at May 31, 2000 by correspondence with the custodian
and brokers, provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS, LLP
Portland, Oregon
June 27, 2000
STATEMENT OF ASSETS & LIABILITIES
MAY 31, 2000
ASSETS:
Investments, at value (cost $18,187,451) $30,565,106
Cash 50,000
Income receivable 28,049
Other assets 899
-----------
TOTAL ASSETS 30,644,054
-----------
LIABILITIES:
Payable to Investment Advisor 12,648
Payable to directors 15,796
Payable for securities purchased 61,980
Accrued expenses 28,563
-----------
TOTAL LIABILITIES 118,987
-----------
NET ASSETS $30,525,067
-----------
-----------
NET ASSETS CONSIST OF:
Capital stock $17,259,505
Unrealized appreciation on investments 12,377,655
Accumulated undistributed net investment income 38,191
Accumulated undistributed net realized gain 849,716
-----------
TOTAL NET ASSETS $30,525,067
-----------
-----------
NET ASSET VALUE PER SHARE, 1,371,717
SHARES OUTSTANDING (100,000,000 SHARES
AUTHORIZED, $.001 PAR VALUE) $22.25
------
------
See notes to financial statements.
SCHEDULE OF INVESTMENTS
MAY 31, 2000
Number of Shares Market Value
---------------- ------------
COMMON STOCK 94.27%
ADVERTISING 4.40%
16,000 Omnicom Group Inc. $ 1,343,000
-----------
BANKS 6.03%
16,500 State Street Corporation 1,839,750
-----------
BEVERAGES 3.32%
19,000 The Coca-Cola Company 1,014,125
-----------
CHEMICAL SPECIALTY 1.59%
25,000 WD-40 Company 485,937
-----------
COMPUTER & PERIPHERALS 6.49%
47,000 American Power Conversion
Corporation #<F1> 1,665,563
10,000 MICROS Systems, Inc. #<F1> 316,250
-----------
1,981,813
-----------
COMPUTER SOFTWARE SERVICES 13.62%
11,000 Adobe Systems
Incorporated 1,238,187
34,000 Automatic Data
Processing, Inc. 1,867,875
30,000 Paychex, Inc. 1,050,000
-----------
4,156,062
-----------
DRUGS 3.76%
15,400 Merck & Co., Inc. 1,149,225
-----------
ELECTRICAL EQUIPMENT 2.07%
12,000 General Electric Company 631,500
-----------
FOOD PROCESSING 2.36%
40,000 Sara Lee Corporation 720,000
-----------
HOUSEHOLD PRODUCTS 9.11%
45,000 The Clorox Company 1,783,125
15,000 The Procter & Gamble
Company 997,500
-----------
2,780,625
-----------
INDUSTRIAL SERVICES 5.44%
60,000 Equifax Inc. 1,661,250
-----------
MEDICAL SUPPLIES 16.16%
43,000 Abbott Laboratories 1,749,563
36,000 Medtronic, Inc. 1,858,500
35,000 Stryker Corporation 1,323,438
-----------
4,931,501
-----------
NEWSPAPERS 4.24%
20,000 Gannett Co., Inc. 1,295,000
-----------
PRECISION INSTRUMENTS 5.18%
45,000 Dionex Corporation #<F1> 1,580,625
-----------
SEMICONDUCTORS 6.13%
15,000 Intel Corporation 1,870,312
-----------
THRIFT INDUSTRY 4.37%
30,000 Freddie Mac 1,335,000
-----------
Total Common Stock
(Cost $16,398,070) 28,775,725
-----------
SHORT-TERM INVESTMENTS 5.86%
VARIABLE RATE DEMAND NOTES*<F2> 5.86%
$741,067 American Family Financial
Services, Inc., 6.2252% 741,067
799,414 Firstar Bank, N.A.,
6.3913% 799,414
248,900 Sara Lee Corporation,
6.2413% 248,900
-----------
Total Short-Term Investments
(Cost $1,789,381) 1,789,381
-----------
Total Investments 100.13%
(Cost $18,187,451) 30,565,106
-----------
Liabilities, Less
Other Assets (0.13)% (40,039)
-----------
NET ASSETS 100.00% $30,525,067
-----------
-----------
#<F1> Non income producing security.
*<F2> Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified
dates. The rates are as of May 31, 2000.
See notes to financial statements.
STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 2000
INVESTMENT INCOME:
Dividend income $ 259,752
Interest income 68,926
----------
328,678
----------
EXPENSES:
Investment advisory fees 131,261
Administration fees 25,254
Shareholder servicing and accounting 38,064
Custody fees 5,082
Federal and state registration fees 1,312
Professional fees 25,218
Reports to shareholders 4,392
Directors' fees and expenses 16,452
Other 634
----------
Total expenses 247,669
----------
NET INVESTMENT INCOME 81,009
----------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on investment
transactions 4,292,483
Change in unrealized appreciation
on investments 2,201,549
----------
Net gain on investments 6,494,032
----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $6,575,041
----------
----------
See notes to financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
MAY 31, '00 MAY 31, '99
----------- -----------
OPERATIONS:
Net investment income $ 81,009 $ 59,962
Net realized gain (loss) on
investment transactions 4,292,483 (281,552)
Change in unrealized
appreciation on
investments 2,201,549 3,400,417
----------- -----------
Net increase in net assets
resulting from operations 6,575,041 3,178,827
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Shares sold 3,319,403 2,502,390
Shares issued to holders in
reinvestment of dividends 1,634,263 45,090
Shares redeemed (2,445,615) (1,011,162)
----------- -----------
Net increase 2,508,051 1,536,318
----------- -----------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS:
Net investment income (42,818) (59,962)
In excess of net investment
income #<F3> -- (12,712)
From net realized gains (3,058,051) --
----------- -----------
Total dividends and
distributions (3,100,869) (72,674)
----------- -----------
INCREASE
IN NET ASSETS 5,982,223 4,642,471
NET ASSETS:
Beginning of period 24,542,844 19,900,373
----------- -----------
End of period (including
undistributed net investment
income of $38,191 and
$0, respectively) $30,525,067 $24,542,844
----------- -----------
----------- -----------
#<F3> On a tax basis, this is not a return of capital.
See notes to financial statements.
FINANCIAL HIGHLIGHTS
<TABLE>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
Per Share Data: MAY 31, '00 MAY 31, '99 MAY 31, '98 MAY 31, '97 MAY 31, '96
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $19.42 $16.87 $14.78 $12.16 $9.94
Income from investment
operations:
Net investment income 0.06 0.05 0.23 0.10 0.15
Net realized and unrealized
gains on investments 5.30 2.56 2.46 2.63 2.23
------ ------ ------ ------ ------
Total from investment
operations 5.36 2.61 2.69 2.73 2.38
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment
income (0.03) (0.05) (0.23) (0.10) (0.15)
Distribution in excess of net
investment income -- (0.01) -- (0.01) (0.01)
From net realized gains (2.50) -- (0.37) -- --
------ ------ ------ ------ ------
(2.53) (0.06) (0.60) (0.11) (0.16)
------ ------ ------ ------ ------
Net asset value,
end of period $22.25 $19.42 $16.87 $14.78 $12.16
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total return 27.65% 15.51% 18.28% 22.56% 24.14%
Supplemental data and ratios:
Net assets,
end of period $30,525,067 $24,542,844 $19,900,373 $14,511,087 $11,257,030
Ratio of expenses to
average net assets(1)<F4> 0.94% 0.96% 1.02% 1.32% 1.20%
Ratio of net investment income to
average net assets(1)<F4> 0.31% 0.27% 1.44% 0.61% 1.23%
Portfolio turnover rate 32.35% 13.87% 20.80% 24.50% 47.93%
</TABLE>
(1)<F1> Without expense waivers or voluntary reimbursements of $4,043 for the
year ended May 31, 1997 and $30,602 for the year ended May 31, 1996,
the ratio of expenses to average net assets would have been 1.35% and
1.49%, respectively, and the ratio of net income to average net assets
would have been 0.58% and 0.94%, respectively. For the years ended
May 31, 2000, May 31, 1999 and 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
MAY 31, 2000
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 year ended May 31, 2000. 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 to shareholders are recorded on
ex-dividend date. 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:
YEAR ENDED YEAR ENDED
MAY 31, '00 MAY 31, '99
----------- -----------
Shares sold 152,314 138,587
Shares issued to holders in
reinvestment of dividends 73,465 2,605
Shares redeemed (117,824) (56,871)
--------- ---------
Net increase 107,955 84,321
Shares outstanding:
Beginning of period 1,263,762 1,179,441
--------- ---------
End of period 1,371,717 1,263,762
--------- ---------
--------- ---------
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of securities, excluding short-term
investments, by the Fund for the year ended May 31, 2000, were $8,129,892 and
$9,930,730, respectively.
At May 31, 2000, gross unrealized appreciation and depreciation of investments
were as follows:
Appreciation $12,725,802
(Depreciation) (348,147)
-----------
Net appreciation on
investments $12,377,655
-----------
-----------
At May 31, 2000, the cost of investments for federal income tax purposes was
$18,187,451.
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.
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 June 23, 2000 an ordinary income dividend of $0.03260544 per share
aggregating $45,109 was declared. The distribution was paid on June 23, 2000 to
shareholders of record on June 22, 2000.
JENSEN INVESTMENT MANAGEMENT
2130 Pacwest Center
1211 SW Fifth Avenue
Portland, OR 97204-3721
503-274-2044
800-221-4384
Fax 503-274-2031
