The Juno Continuation Fund gains 2.8% in the second quarter

• The Juno Continuation Fund ended the second quarter of 2021 with a 2.8% gain.
• The quarterly return lags behind the return of the benchmark for medium-sized European companies, the Europe Mid Cap Index (6.7%).
• The fund's portfolio companies once again show a healthy earnings development.
• Inflation and associated interest rates are a hot topic.

The Hague – July 26, 2021 – The Juno Continuation Fund achieved a 2.8% gain in the second quarter of 2021, bringing the return over the first six months of this year to 5.8%. This result is lagging that of the broader market, where the relief over the end of the Covid-19 pandemic has translated into sharply higher share prices. Low interest rates and the expectation of a further pick-up in the economic recovery are now mainly benefiting cyclical and previously lagging stocks.

The solid quality companies in which the fund invests are currently benefiting less from this relief rally. This is the reason that performance in the past quarter has lagged behind the market. However, this is a consequence of Juno’s long-term vision, which focuses on predictable corporate earnings growth. In the long term, this provides a solid return with an acceptable risk. Juno remains true to that strategy and will, where possible, capitalize on the current underperformance of quality stocks by strengthening positions or adding new companies to the portfolio. The main selection criterion is that earnings growth is predictable and has a range of 10% to 15% per annum for the next three to five years.

Rising inflation as a risk

There is sizable debt in the markets. Many companies want to avoid earnings dilution and do not issue new shares when they need money, but rather borrow capital. This is also made possible by the low interest rates. The Juno Continuation Fund portfolio managers believe that if interest rates were to pick up in the wake of rising inflation, heavily indebted companies could face a tough time. The fact that these companies are now in the spotlight and that their share prices are rising strongly despite their less than rosy balance sheet is therefore a worrying development, according to the portfolio managers.

“To what extent current inflation is temporary remains a matter of debate. The duration and strength of the economic recovery is also unclear. Investors are now anticipating economic growth to remain robust in the coming years, but with inflation falling back to pre-pandemic levels.

Coupled with the assumption that interest rates will remain very low, this leads to rising valuations, especially of the more cyclical companies. However, it is a big question mark for us whether this positive scenario will actually unfold,” the managers said.

Most of the companies in the Juno Continuation Fund’s portfolio have a net cash position or very low debt. This makes them more resilient to rising interest rates, but also gives them the opportunity to invest extra or to pursue an acquisition. For example, Soitec, a producer of materials for semiconductors, recently announced that it would significantly increase its investment plans for the coming years, in response to the continued strong demand for its products. Digital services provider Teleperformance completed the purchase of Health Advocates in the US and, thanks to its very solid financial position, was able to place a six-year bond with a coupon of merely 0.25%.

Rob Deneke, portfolio manager of the Juno Continuation Fund: “The key question for investors is how long inflation will continue to rise and to what extent interest rates will rise with it. Many experts argue that inflation is temporary, but inflation is also a self-fulfilling prophecy: companies and consumers will spend more, based on their expectation that prices will rise, which in turn leads to more inflation. At some point, economic growth will also have to be accompanied by rising inflation.

For companies it is important to what extent they can pass on increased prices to their customers, or in other words, it is important that they have pricing power. Fortunately, our portfolio companies’ revenue models are very solid, they can cope with headwinds.”

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

About Juno Investment Partners

Juno Investment Partners is an independent asset manager based in The Hague. Juno invests in concentrated portfolios of high-quality European listed companies, often family-owned businesses or companies in which founders and directors are shareholders. The selection process emphasises predictable earnings growth, a high return on invested capital, low debt levels, strong margins and free cash flow, and a sustainable competitive advantage.

Launched in January 2008, the Juno Selection Fund focuses on small- and mid-cap European companies. The portfolio typically consists of around fifteen companies. Each is analysed intensively, and regular contact is maintained with management. The investment horizon is long, generally well over five years. Juno’s analysts, portfolio managers and employees also invest their personal capital in the JSF.

In addition to the JSF, Juno offers individually managed accounts through separate mandates, using the same investment approach. Juno holds an AIFM licence issued by the Dutch Authority for the Financial Markets (AFM).