Juno Selection Fund: Q4 2021
Higher than expected earnings growth of more than 15% for underlying companies
Disconnection between earnings growth and share price development
- Underlying companies in the portfolio once again show strong earnings growth in 2021
- Concern about the potential impact of inflation and the continued accomodative Central Bank policies
- ‘Pricing power’ remains an important selecrion criterion for Juno
The Hague – January 31, 2022 – Juno looks back with satisfaction on the performance of the companies in the Juno portfolio over the past year. The companies in which Juno invests have seen their earnings increase on average by more than 15% in 2021. Earnings expectations for 2022 mean that the managers look ahead to this year and the longer term with confidence. In contrast to these strongly increased earnings levels at the portfolio companies, a relatively moderate share price appreciation of 9.3% was achieved last year. With this performance, the fund not only lagged behind the continued strong earnings growth of its portfolio companies, but significantly lagged the European small and mid-cap index EMIX, which increased by 23% in 2021.
According to Frans Jurgens, member of the Juno Selection Fund portfolio management team, the valuations of equities in the market as a whole are on the high side: “The liberal policies of the Central Banks have created an addiction to cheap money and that affects the market. Companies that you would not classify as quality companies are treated like gold; stuffed with cheap loans. These companies have soaring stock prices thanks to investors’ willingness to take a gamble.”
“We will stick to our selection criteria: (family-owned) businesses with a solid market share, high margins and return on capital, little debt and with a consistent annual earnings and turnover growth of 10% to 15%. Companies that provide products and services that are ‘need to have’ and not just ‘nice to have’. This brings pricing power, which means that increased costs can be passed on and margins do not suffer unnecessary pressure.”
“You cannot keep a spring pressed down further permanently. Ultimately, the pressure becomes too great and the price follows the steadily increasing earnings.”
At the top of the bandwidth
The gap between the fund’s performance in 2021 and that of the index is not pleasant for the manager to look back on. But in the end of the day, it is the firm belief at Juno that share prices will follow earnings development over time. With an expected earnings growth of more than 15% in 2021, the Juno companies are above the desired bandwidth that the fund uses for investment candidates. This consistent approach has paid off over the past 14 years, with the Juno Selection Fund delivering an average annual return of 12.9%, compared to 7.6% for the index.
“We know that usually we do well, relatively speaking, in markets that quietly move sideways or move lower. But if all market prices rocket, as they did in 2021, we often lag behind,” said co-founder Lennart Smits. “Ultimately, this is a temporary thing. If the share price does not move during a period, but the earnings increase, the company becomes cheaper. You cannot keep a spring pressed down further permanently. Ultimately, the pressure becomes too great and the price follows the steadily increasing earnings.”
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.