Juno Continuation Fund: Q2 2021
Juno fund for medium-sized European companies is well able to withstand rising inflation
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.
“Many experts argue that inflation is temporary, but inflation is also a self-fulfilling prophecy.”
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.”
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.