Healthy earnings growth gives Juno Continuation Fund a solid start

• The Juno Continuation Fund ends the first quarter of 2021 with a positive performance of 2.9%.
• The past quarter’s performance lags that of the MSCI Europe Mid Cap Index, but the fund has outperformed this benchmark since inception (13.3% versus 12.3%).
• The rotation into cyclical stocks , which was noticeable worldwide, weighed on the fund’s return. However, Juno believes the euphoria surrounding these stocks is not supported by the economic reality, making high valuations sensitive to rising interest rates and inflation.
• The valuations of the companies in the Juno Continuation Fund are based on more than healthy earnings growth: 14% in 2020. A similar increase is expected in 2021.

The Hague – April 22, 2021

The Juno Continuation Fund outperformed the index in 2020, but did not benefit from the enthusiasm in the global stock markets during the first quarter of 2021, which was mainly focused on cyclical stocks. This enthusiasm was mainly driven by industries that suffered greatly from the pandemic last year, but showed significant catching up in the first months. These are sectors such as energy, hotels and car manufacturers, sectors that are not represented in the fund’s portfolio because the predictability of long-term earnings is often not good enough.

The fund’s managers are concerned about the rose-tinted glasses that investors have put on as the markets seem to be anticipating a recovery that is not yet an economic reality. European earnings forecasts for 2021 are still well below 2019 earnings levels, particularly in sectors hard hit during the pandemic. But the market seems to expect the recovery to have set in now and to continue vigorously in the coming years.

The fund remains committed to its focus on quality companies with earnings growth for the next three to five years of between 10 and 15% per annum. The forecast for 2021 is at the higher end of that bandwidth, at 14%. Experience has shown that this long-term focus is a successful strategy, and the managers are not distracted by temporary overreactions in the stock market.

Earnings growth protects against market risks

The biggest risk for investors, according to the managers, is rising interest rates, especially in the US at the moment. Equity valuations have hardly responded to this and that will have to happen sometime. If interest rates rise, the current price / earnings ratios are too high because cash flows must be converted back to the present at a higher interest rate. Only actual earnings growth can  prevent stocks from falling in such a scenario.

Share prices have also risen in the fund’s portfolio, but these are justified by strong earnings growth from the underlying companies. The Swiss company Logitech is one of those companies, with a strong brand and solid business operations with a healthy balance sheet containing approximately US $ 1.5 billion in net cash. Logitech’s webcams and video conferencing products are in high demand as a result of the working-from-home trend. Peripherals such as mice, keyboards and gaming headsets are also generating significant sales increases.

Through its portfolio companies’ revenue composition, the Juno Continuation Fund has a relatively large exposure to the United States and Asia where economic growth is recovering faster and more strongly than in Europe. This has had a positive effect on the results of these companies.

Rob Deneke, manager of the Juno Continuation Fund: “The prices of European equities which have risen sharply in the first quarter largely come from segments and companies that are in dire straits. We see companies that are now climbing out of the valley but whose chances of survival in the long term are slim. High valuations and an uncertain outlook, coupled with high oil prices, rising inflation and upcoming tax increases for US companies, are reasons enough to be cautious rather than euphoric. More than ever, it is important to have companies in the portfolio that can take a beating. It is precisely those companies to which predictable profit growth is central, that come to the surface in our strategy. Price pressure can also arise if short-term investors switch from these quality stocks to more cyclical stocks that are now stealing the show. In fact, those passers-by offer us potential entry opportunities.” 

The quarterly report can be found here and the most recent fact sheet here.

About Juno Investment Partners

Juno Investment Partners was established in 2007 as a fully independent fund manager and has an AIFM license (as referred to in Section 2:65 of the Wft), issued by the Dutch regulator AFM. Juno specializes in the selection of exceptional listed (family owned) companies in Europe. Companies that are able to achieve predictable and stable earnings growth year after year are considered for investment. The selection process focuses on the return on invested capital, a low debt ratio and free cash flows of a highly predictable nature. The analysts/portfolio managers compile a highly concentrated portfolio of approximately fifteen companies that they identify, analyze and visit regularly. Selected companies remain in the portfolio for a longer time period (usually more than five years). All analysts/portfolio managers have themselves invested in the Juno funds.

Juno offers three products: The Juno Selection Fund, which focuses on the selection of smaller and medium-sized listed companies, the Juno Continuation Fund for medium-sized companies and individual asset management using the same investment style, for larger clients through managed segregated accounts.

– The Juno Selection Fund was launched in 2008. This mutual fund invests in distinctive European small and medium-sized companies with an initial market capitalization of €250 million to €4 billion. In recent years, this investment style has resulted in above average investment returns for participants in the Juno Selection Fund. This fund has been hard closed for further (follow on) subscriptions since 2018.

– The same investment strategy is applied in the Juno Continuation Fund, which was launched on February 1, 2020. This fund focuses on unique, medium-sized European companies with a market value between €4 billion and €20 billion at the time of initial purchase. As is the case with the Selection Fund, the Continuation Fund also has a strong preference for investments in businesses that are family owned, or companies in which a family or management itself is also a shareholder.