Juno Continuation Fund does not benefit from stock market euphoria

• The Juno Continuation Fund completed the third quarter of 2021 with a negative performance of -4.1%, due to a euphoric risk-on sentiment among investors; benefitting cyclical stocks in particular.
• Juno sticks to its proven strategy; solely quality companies in the portfolio, but not at any price.
• The fund remains well-positioned with a portfolio of solid companies showing healthy underlying earnings growth.

The Hague – October 22, 2021– The Juno Continuation Fund returned -4.1% in the third quarter of 2021, bringing the fund to +1.5% after the first nine months of this year. The quality companies in which the fund invests lagged relative to the rally of more cyclical stocks. Investors are now no longer deterred by high price-earnings ratios that, according to the manager, have reached extreme levels in some instances.

The fund’s disappointing quarterly performance is the result of the euphoric mood in the market for riskier stocks, in contrast to the fund’s strategy of investing only in financially sound companies with predictable earnings growth. These companies are now out of favor with investors. Moreover, these stocks lack a temporary ‘recovery effect’, whereby those companies that recorded poor results in 2020 now show strong share price increases on the back of business recovery. In contrast, the companies in the Juno portfolio performed well in terms of earnings growth in 2019, 2020 and – according to initial reports – again in 2021. This consistent earnings growth is what the fund’s investment team selects the companies on.

In addition, very high price earnings ratios are currently being paid for some quality stocks. Adding such shares to the portfolio or expanding our positions in them does not fit within the prudent investment policy. In the past quarter, the manager even partially scaled down portfolio positions in such high-priced positions, despite their close fit with the Juno philosophy.

Rob Deneke, Juno Continuation Fund portfolio manager: “Many of our companies are not appreciated by the market this year or have even seen their share prices drop, although there are also a few positive outliers that showed well-above average share price gains. However, we are selecting for continued earnings growth and that will eventually translate into positive share price development. With continued earnings growth, time works in our favor and the headwinds are therefore temporary. Many of the current high price-earnings ratios are unsustainable. Market demand is pushing the prices of scarce products to unprecedented heights, causing inflation to peak and rapid interest rate rises cannot be ruled out. In addition, economic growth is under pressure from challenges in the logistics and production processes. With around 20% of the fund’s assets in cash, we have all the flexibility we need to add to our portfolio positions at attractive prices when sentiments change.”

Central banks showered the economy and financial markets with unprecedented monetary stimuli (including bond buy-back programmes) that have led to low interest rates and soaring stock markets worldwide. Rising inflation, too rapid interest rate rises or disappointing economic growth could quickly put an end to the popularity of riskier investments. When that happens, Juno’s solid growth companies will quickly become of interest to investors, according to the manager. Most of the companies in the Juno portfolio also have a good cash position or low debt levels, which makes them very resistant to rising interest rates.

Excellent underlying earnings growth

Juno does not select companies based on macro conditions or expectations, but based on predictable annual earnings growth of 10% to 15% over at least the next five years. The earnings development in the fund portfolio is expected to be at the upper end of that bandwidth this year. This approach leads to attractive returns in the long term at an acceptable risk. Even in the current market conditions, the investment team adheres to the principles of this strategy. Inferior companies showing a temporary upswing are not eligible for selection.

An example of a portfolio company is Teleperformance, which focuses on all aspects of customer experience. Consumers increasingly want better customer service through various channels, including telephone, email and apps. The company is responding to this request. After a good 2020, 2021 looks to be even better: the market leader continues to consistently gain market share thanks to technological innovation. The lead over the competition appears to be growing at an accelerated pace.

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

About Juno Investment Partners

Since 2007, Juno Investment Partners has been investing in a highly concentrated portfolio of European listed companies with predictable and stable earnings growth, often family-owned businesses.

We focus on companies with a high return on invested capital, strong margins, and highly predictable (free) cash flows. These are typically companies with a strong competitive position and clear added value for their clients, enabling them to continue creating value over the long term.

Based on these characteristics, we select a limited number of companies that we want to understand thoroughly. The portfolio consists of approximately fifteen companies. These are analyzed intensively, visited regularly, and monitored over several years. The investment horizon is long, typically well over five years. Our analysts and portfolio managers also invest in the funds themselves.

Juno offers three products. The Juno Selection Fund focuses on small and medium-sized companies. The Juno Continuation Fund focuses on medium-sized companies. In addition, Juno offers individual asset management via managed accounts, using the same investment approach. The Juno Selection Fund was launched in 2008 and invests in European companies with an initial market capitalization between €250 million and €4 billion. The fund was closed to new investments for a long time and has been accessible to existing participants again since April 2023.

The Juno Continuation Fund was launched on February 1, 2020, and invests in medium-sized companies with a market capitalization between €4 and €20 billion. Here, too, the emphasis is on companies that often have family or management as co-shareholders.

Juno holds an AIFM license from the AFM.