For Robert Zagunis, a co-manager of Jensen Quality Growth (JENSX), quality is synonymous with profitability. He and his five co-managers will invest only in businesses that have generated a return on equity (a measure of profitability) of 15% or more in each of the past 10 years. "These companies have been cranking it out regardless of the economic cycle," Zagunis says. And he wants to see that a company he's considering investing in generates sufficient cash to fund dividends and future growth.
Zagunis says that turmoil in Europe and economic slowdowns around the world will have little impact on the nuts and bolts of strong businesses such as his top two holdings, Pepsi and 3M (MMM), which makes everything from Scotch tape to orthodontic supplies. He says that criticisms of leadership at P&G, Jensen's third-largest holding, are overblown and that CEO Bob McDonald should get credit for the company's $10 billion cost-savings plan. And even though another big holding, Microsoft (MSFT), has been hugely disappointing over the past dozen years, Zagunis says that the company continues to grow in value and that investors will eventually acknowledge that. (Microsoft owns and publishes MSN Money.)
There are large companies, and then there are enormous companies. Bridgeway Blue Chip 35 Index (BRLIX) holds the latter -- the average market capitalization of the fund's holdings is $134 billion. The fund tracks a Bridgeway-designed index that equally weights the stocks of the 35 largest U.S. companies but modifies the list to avoid holding more than four firms from any one industry.
The fund is generally rebalanced quarterly and reconfigured every two to three years, says co-manager John Montgomery. But Bridgeway, striving for maximum tax efficiency, will stray from strict equal weighting if it means the fund can better offset its capital gains with capital losses. "In 15 years, we've never distributed a capital gain," Montgomery says. The fund has returned 6.2% annualized over the past 10 years. Its expense ratio is a compellingly low 0.15% a year.
Too many choices? Go for simplicity. SPDR Dow Jones Industrial Average (DIA) is an exchange-traded fund that, not surprisingly, tracks the Dow. By definition, it holds almost every blue chip in the book, including Exxon Mobil (XOM), IBM, Pfizer (PFE) and Wal-Mart Stores (WMT). Low 0.17% expenses, virtually no turnover of its holdings and a 2.5% dividend yield enhance its appeal. Over the past 10 years, the ETF returned 6.8% annualized, narrowly beating the S&P 500.
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