Strategic focus on European companies with predictable earnings growth protects against potential headwinds of euphoric markets
Juno Selection Fund remains on track in 2021
- After a very successful 2020 (+20.6%), the Juno Selection Fund had to take a step back in the first quarter of 2021 and showed a slightly negative return of 3.3%.
- The quarterly performance lags the market, but this is a logical consequence of the long-term focus on quality companies: this segment shined in 2020 but investors now turned to riskier, cyclical stocks in the first quarter.
- During the past quarter, Juno reduced some positions in quality companies because their valuations had risen too high.
- The fund currently has sufficient cash to reinforce or initiate holdings in companies at more attractive valuations following a possible market correction.
The Hague – April 22, 2021 – Over the past 13 years, the Juno Selection Fund has provided investors with a compound annual return of 12.3%. In the first quarter of 2021, the performance was slightly disappointing, with a negative result of 3.3%. Over the last five months, the prices of cyclical shares in particular soared. Quality companies, the kind Juno focuses on and which did very well last year, have now lagged somewhat, although their earnings development was no cause for discontent. The fund managers have made a conscious decision not to include cyclical stocks in the portfolio, but to stick to the successful strategy of buying future earnings growth at attractive valuations. As before, the Juno Selection Fund aims for its companies’ earnings growth to fall within a bandwidth of 10 and 15% per annum over the next five years, and expects this earnings growth to translate into an attractive share price appreciation over time.
Portfolio companies’ earnings growth sustains
A number of portfolio companies performed extremely well during the pandemic. The managers are positively surprised that despite the challenging economic situation, the average earnings growth of the portfolio remained in line with earlier expectations. New customers who switched to these companies during the pandemic, now appear to have turned into permanent customers. COVID has accelerated many existing trends (such as the focus on online and health). An example is the biopharmaceutical supplier Sartorius, which supplies advanced production equipment and builds production lines for the manufacture of vaccines, among other pharmaceutical products.
When selecting companies, the managers of the Juno Selection Fund mainly rely on those with a defendable market position and high earnings predictability at attractive valuations. It is clear that the sharply increased valuations make the equity markets more vulnerable at the moment, especially in light of the economic uncertainties. This is the reason why the fund managers remain somewhat cautious at the moment. The portfolio companies’ earnings growth, on the other hand, is consistently positive: for the portfolio as a whole, Juno expects a 10 to 15% earnings growth again in 2021. The prospect for subsequent years is also satisfactory. In our experience, earnings growth will ultimately translate into investment returns.
Frans Jurgens, manager of the Juno Selection Fund: “Stock market valuations have risen rapidly based on very optimistic investor expectations. While companies in our portfolio are showing solid earnings growth, we will have to wait and see what it will be for the market as a whole. If inflation and interest continue to rise, this stock market party could end badly. We therefore remain cautious and have added little to our portfolio. We have a list of good companies that we would like to own, but not necessarily at these price levels. We have parted with some positions or reduced them; quality companies where valuations were simply getting too high. If prices fall again, they may offer interesting entry points for us. We have sufficient cash to take advantage of such opportunities.”
Lennart Smits, manager of the Juno Selection Fund: “When compared to the benchmark, we are doing slightly less well this quarter, but as investors we do not focus too much on that benchmark. Moreover, we have performed much better in the longer term. For example, over the past 15 months, the fund has returned 17%, in line with the earnings growth of the underlying companies in our portfolio. The meager quarterly result is anything but a result of disappointing corporate earnings. On the contrary, those earnings are as we had expected and that is what our strategy is all about. We are well on track for the long term. As a marathon runner you are sometimes overtaken by sprinters, but in the end it’s all about who gets to the finish line first.’’
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.
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