Juno Continuation Fund: Q2 2022
Juno Continuation Fund Q2: robustness and outlook send positive signal
- Portfolio consists for the most part of manufacturers of ‘need to have’ products
- Some companies have raised profit expectations and are not affected by inflation
- Portfolio earnings growth continues to improve: companies are only becoming more attractive
- Interest rate increase has little impact on business operations; debt aversion in portfolio companies
- Cash position significantly reduced and share price decline used to add new positions
The Hague, 25 July 2022
In a nutshell
In the first half of 2022, we saw a negative performance of 24 percent. Still, there is reason for optimism. The earnings growth of the portfolio is still good and some of ‘our’ companies have even raised their profit expectations. The companies, mostly producers of essential products, are little affected by inflation. Due to the debt aversion of the (predominantly family owned) companies in which we invest, the interest rate increase also has little impact on business operations. Furthermore, the fund’s cash position has been significantly reduced and the share price decreases have been used to buy two new companies in the portfolio.
Why we are positive despite the market correction?
We invest in companies that can pass on inflation and thus continue to deliver on the expected annual earnings growth of 10 to 15 percent on average. Member of the portfolio management team Duncan Siewe: ‘In the long term, these companies must at least be able to pass on the impact of their own cost increases to their customers. That is why we prefer to invest in companies that supply other companies and make products that are more or less indispensable. They will be able to raise their prices without much trouble. That’s what we have seen happen in recent months.’
“You always ask yourself: is there something that people know that we don’t yet know?”
What impact will the interest rate hike have?
Because our companies have little or no debt, rising interest rates have little impact on the company’s performance. But it is an important reason for the share price weakness we have seen these recent months, Siewe explains. ‘If interest rates rise, this will affect the calculation of value that investors use. They not only take into account the expected future profits, but also the interest rate.’
What happens if interest rates rise even further? Siewe: ‘In any case, companies with a lot of debt will get into trouble.’ In addition to companies with little debt capital, Juno selects specifically for non-cyclical companies. If they continue to perform well, this will eventually be reflected in their share prices. ‘You will then see the so-called ‘flight to safety‘, if other companies, for example, have problems with their financing, and we as Juno are on the right side. We hope to be able to show that again, just like we did in the past.’
Do the lower share prices affect the strategy?
Thanks to sharply lower valuations, we were able to newly include two companies in the portfolio, which had been on our wish list for some time. Rob Deneke, member of the portfolio management team is happy that meetings with the managements of our portfolio companies were finally taking place again. ‘One really needs a long time to get to know a company and its management. Only when you have met them several times will you be able to understand the company, but also to interpret the difference in intonation and choice of words of management properly.’ Declining share prices really only cause distraction from Juno’s long-term strategy, says Deneke: ‘You always ask yourself: is there something that people know that we don’t yet know? In this sense, too much focus on the share price can only sidetrack you from concentrating on the progress of the business. In the end, the share price always follows the increase in earnings and turnover and that gives us confidence. Although that correlation can sometimes take a while to come though.’
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.