"When you leave this company behind, what will it look like?"
That's the most important question Eric Schoenstein asks executives when performing his due dilligence. The co-portfolio manager of the Jensen Quality Growth Fund and principal with Jensen Investment Management knows he'll get the standard answers to any questions he might ask. And as the saying goes, "it's not about what they say, but rather what they do." But it's this is one question that seems to get to the core of what he's looking for from the management teams at the companies he's scouting.
"We have a quality growth strategy begun by Val Jensen in 1988," he said Thursday at the 2012 Morningstar Investment Conference in Chicago. "Over the 24 years, the objective is really to mitigate both business risk and price risk."
He said to mitigate business risk they look for companies with "a durable, sustainable competitive advantage with a high level of cash flow that delivers returns above the cost of capital."
"In order to create value, we have to ensure the returns are above the cost of capital year after year," Schoenstein added. "In this way, the returns compound over the long term, which leads to our long track record of success."
As to mitigating the second factor, pricing risk, he simply said, "We make sure we don't overpay."
Sounds great in theory, but how does it translate to research and investing day-to-day?
