Juno Selection Fund: Q2 2022
Juno Selection Fund Q2: optimistic, even if the share price performance was disappointing
- Growth and profitability of underlying companies in portfolio better than expected
- Fear of rising interest rates, inflation and stagnation in the economy scares investors
- Valuations of quality companies have become more attractive after strong correction
- Resumption of physical company visits results in new additions to portfolio
The Hague, July 25, 2022
In a nutshell
In the first half of 2022, we saw share prices drop sharply by almost 24 percent. That is in line with the rest of the market: investors are currently worried about rising interest rates, inflation and stagnation in the economy. Nevertheless, there is room for optimism, because ‘our’ companies performed better than expected operationally, both in terms of growth and profitability.
After such a strong price corrections, the valuations of quality companies, precisely the companies in which Juno invests, are also more attractive. We took advantage of this opportunity, resulting in a number of nice new additions to the portfolio.
What caused this correction?
‘The sharp price declines were mainly motivated by external macroeconomic and geopolitical uncertainties’, explains member of the portfolio management team Ernest van Tuyll. Rising interest rates play an important role in this, because it has an effect on the valuation of companies. In financial models, the present value of discounted future earnings decreases when interest rates rise. Frans Jurgens, member of the portfolio management team: ‘That was also the case for a short period at the end of 2018. Anything that represents growth is not popular for a while and that also applies to the high-quality, growing companies in which we invest.’
“Operationally, our companies were doing better than expected. A number of them have upgraded their expectations for the remainder of the year.”
How are ‘our’ companies doing?
‘Operationally, our companies were doing better than expected’, says Van Tuyll. ‘A number of them have upgraded their expectations for the remainder of the year. In our selection process, we have always paid close attention to ensuring that companies can easily pass on rising costs, so that higher inflation does not affect our criterion of growing earnings by 10 to 15 percent on average per year.’ That is why Jurgens is not pessimistic about the future: ‘If corporate profits of our portfolio companies continue to increase by the 10 to 15 percent we aim for in the coming years, their share prices will eventually follow.’
Low valuations offer distinct opportunities
When quality companies are valued so attractively, it is interesting to invest in them. Jurgens: ‘As long as the earnings growth of ‘our’ companies remains as we had expected, and valuations are 20 to 50 percent lower, this decoupling between earnings growth and valuation means that we can buy companies at attractive prices. We took advantage of that fire-sale in the stock market this year. ‘In the second quarter, we added a few new names. We also selectively bought more shares in existing companies where prices were severely punished.’
The quarterly report can be found here and the most recent factsheet here.
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.
