Juno Continuation Fund: Q3 2021
Medium-sized European companies in the portfolio distinguish themselves by healthy earnings growth
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.
“With continued earnings growth, time works in our favor and the headwinds are therefore temporary.”
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.
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.