Juno Continuation Fund: Q1 2022
Rising inflation and the war in Ukraine weigh heavily on stock markets
Juno Continuation Fund lags the market but continues to differentiate on strong underlying earnings growth
- Juno Continuation Fund performance lags the market in Q1 2022
- The earnings of the quality companies in the portfolio, on the other hand, are rising sharply; +25% in 2021
- 2022 earnings expectations remain good, making these companies even more attractive in the current market climate
- Pricing power and low debt offer significant advantages in the face of rising interest rates and inflation.
The Hague – April 14, 2022 – The Juno Continuation Fund ended the first quarter of 2022 with a negative return of -15.4%. The fund lagged the MSCI Europe Mid Cap Index, which fell by -9.6% in the quarter. Rising inflation and the growing awareness that the price increases will be structural in nature, are weighing heavily on the equity markets.
The share prices of the quality companies in which the Juno Continuation Fund invests, fell relatively sharply in the first quarter of 2022. Rob Deneke, member of the fund’s portfolio management team: “Rising interest rates hurt us. After all, a company’s share price is made up of future expected earnings discounted at the interest rate. If rates rise, stocks with a high price-earnings ratio, such as our companies, will fall in particular. That is the main reason we are lagging behind. Not because we are in the wrong sectors or companies with disappointing earnings growth.”
Industry sectors Fossil fuels and financial institutions in particular performed well in the first quarter of 2022. By definition, the Juno Continuation Fund does not invest in these sectors. According to Deneke, this is simply because there are no companies in those sectors that meet Juno’s most important investment criterion: predictable earnings growth for the next five years of an average of between 10% and 15% per annum.
The focus on earnings growth and financial solvency has resulted in a Juno portfolio filled with attractive companies with low debt burdens, growing revenues and earnings and ample pricing power, which offers important protection against rising inflation. Deneke: “All of our companies have now published their results for 2021. Weighted earnings growth came in at 25%, significantly better than we expected at the start of 2021. The outlook remains good: we expect weighted earnings growth of more than 10% in 2022.”
“We are already cautiously adding to our portfolio and subsequently our cash position has now fallen to 15%, whereas it was more than 20% at the beginning of the year.”
Falling share prices, but rising earnings
Juno expects two variables to drive equity markets in the near future: interest rates and high stock valuations coupled with low to no earnings growth. Interest rates will continue to rise and this will create price pressure. “This offers opportunities because the quality companies we focus on have become a lot cheaper. And as long as the earnings of the companies in our portfolio increase – and they do – contrary to most other companies, they become more attractive as an investment. We are already cautiously adding to our portfolio and subsequently our cash position has now fallen to 15%, whereas it was more than 20% at the beginning of the year.”
Deneke is less positive about the markets as a whole. High inflation is causing a significant loss of consumer purchasing power and many companies will struggle to pass on rising costs. The growth euphoria after Covid has taken a serious blow, a recession or stagflation cannot be ruled out. Right now, the companies in the Juno Continuation Fund offer the certainty of a predictable cash flow, a very low debt burden and sufficient pricing power.
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.