Juno Selection Fund: Q1 2022
Selection of quality companies with predictable high earnings growth remains the cornerstone of the portfolio
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.
“If the share price falls and earnings continue to rise, the company will only get cheaper.”
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.
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.