Juno Selection Fund: Disappointing return in Q1 2022, but underlying earnings growth remains rock solid

• Performance of the Juno Selection Fund lags the market in the first quarter of 2022, but the portfolio companies’ earnings growth remains very strong
• Rising interest rates are putting share prices under pressure
• Pricing power and low debt levels protect the quality companies in Juno’s portfolio against inflation, rising interest rates and economic headwinds

The Hague, April 14, 2022 – Stock markets fell across the board this year as a result of sharply rising inflation and investors’ expectation that interest rates will increase further. Under these circumstances, the Juno Selection Fund delivered a disappointing return of -15.6% in the first quarter. The EMIX Smaller European Companies Index fell by -10.5%.

The share prices of quality companies in which the fund invests were punished more harshly in the first quarter of this year. Their high valuation and dependence on future growth made their share prices more susceptible to rising interest rates. Also, the market assumes that many companies will not be able to pass on significantly increased costs to their customers. However, we feel that this does not apply to the business models of the Juno companies. The Juno portfolio managers expect that their portfolio companies, with very low debt levels, will hardly notice the rising interest costs that equity markets are now gearing towards. In addition, it is expected that they will prove very well able to pass on the strong cost increases to their customers, without this leading to significant margin pressure. Frans Jurgens, founder and Juno Selection Fund portfolio manager:“Operationally, there is nothing wrong with our companies, on the contrary. During and after the pandemic, they have achieved impressive cumulative earnings growth of over 30% in two years. This corresponds almost exactly to the performance of the Selection Fund over this period. So far, returns are lagging behind the market this year, but we expect earnings growth to remain within our desired range of 10% to 15%.”

In the long run, share price returns follow earnings growth, according to the old investment rule. According to Jurgens, that is precisely why the successful Juno strategy focuses on selecting companies with predictable earnings growth over the next five years. “We really only invest in companies whose earnings we can properly estimate, such as suppliers of software packages and companies in the medical sector. The companies we choose have little debt and the pricing power to pass on rising costs and they provide products and services that meet a steadily rising demand, even in the face of economic headwinds.”  

Higher interest rates and lower share prices make Juno companies even more attractive
Companies’ employees are traveling again, costs in the supply chains are rising and wages are also increasing. This will weigh heavily on the profitability of many companies. In addition, companies that have to refinance their existing debt are faced with significantly higher interest costs. Juno expects significant pressure on profitability for the market as a whole.   

Due to falling share prices, the Juno team sees increasingly attractive opportunities to add to existing positions or add new companies to the portfolio that were previously deemed too expensive. Lennart Smits, founder and Juno Selection Fund portfolio manager:“The combination of continued strong earnings growth within the usual 10-15% range, with more attractive share prices we have to pay for that earnings stream, makes us cautiously positive about the rest of the year.If the share price falls and earnings continue to rise, the company will only get cheaper.” 

With the lifting of the travel restrictions, frequent visits to (potential) portfolio companies are again taking place. 

The quarterly report can be found here and the most recent factsheet 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).