One of our favorite focused funds is Jensen J (JENSX), led by Robert Millen. The fund takes a growth-at-a-reasonable price (GARP) approach, though the Jensen team might argue with that label.

Every company under consideration has to produce a 15 percent return on equity (ROE) or better for 10 consecutive years and have a market capitalization over $1 billion, restricting the fund to a universe of 150 names. The team further whittles this list down, selecting the 50 to 60 companies that have the best growth potential over the next few years. After additional deliberation, the portfolio is narrowed down to 20 to 30 names.

That focus on ROE is important. According to research conducted at Harvard University over 40 years ago, companies that produce 15 percent ROE over ten consecutive years create value for shareholders and tend to have sustainable competitive advantages.

“We look at companies as if we’re buying the business, as opposed to the stock,” says Millen. “We focus on business fundamentals like sustainable competitive advantages, strong balance sheets, steady earnings growth, rich cash generation and redeployment of that cash back into the business.”

According to Millen, Colgate-Palmolive Company (NYSE: CL) is an excellent example of the sort of company he and his colleagues target.

“The firm generates about 70 percent of their sales outside the US, so it’s a multinational business,” notes Millen. “Colgate has the opportunity to continue growing outside the US, which we think is going to be a slow growth market with less leverage and lending. The company is No. 1 in toothpaste sales in the US and Latin America, and it’s a leading toothpaste company in China. A strong brand affords a degree of pricing and staying power. And the firm continues to come up with new products and new ways to market them.”

On the flipside, the fund adheres to a strict sell discipline. “We’ll trim a position when it gets up higher in price-to-value ratio,” Millen says, “but we’ll sell the entire position when it exceeds price to value.” “We also sell the entire position when the 15 percent ROE standard is breached, which doesn’t happen often. This usually indicates a loss of competitive advantage.”

According to the fund’s methodology, once a holding is sold for breaching the ROE requirement, even if it’s just for a single quarter, it can’t be considered again until it posts another ten consecutive years of ROE above 15 percent.

That focus on quality limits exposure to speculative and overheated names; the fund tends to lag the markets when the bulls take control but performs extremely well in bear markets. Although the fund gave up 29 percent last year, it ranked in the top 2 percent of large growth funds, outperforming its average peer by better than 11 percent. This year the fund is up 12.8 percent, lagging the S&P 500.

But the fund shines over the long haul. Over the past decade, it’s outperformed the S&P 500 by more than 20 percent and exhibits much less volatility than the broader market. Management’s attention to quality is a big part of that outperformance.

As long as Millen and the Jensen team continue to believe in the idea that led them to buy into a company and it continues to meet their qualitative criteria, they’ll stick with the stock regardless of the market’s ups and downs.

Another striking feature of the fund is its extremely low turnover rate. As Millen explains, “If you have a company that’s a consistent value creating company that doesn’t get overpriced, why wouldn’t you want to own it forever?”

And management eats its own cooking. Only one of the fund’s managers, who also happens to be the newest addition to the team, has less than $50,000 invested in the fund. Lead manager Robert Millen has more than $1 million invested, while the remaining three managers hold stakes between $100,000 and $500,000.

Jensen J offers everything we look for in a mutual fund: Experienced management that buys into the fund and a well-defined strategy that has a proven track record of success. Although the fund is unlikely to make you rich when the make rallies, it won’t send you to the poorhouse during bear markets.