Quality growth stocks lag behind the market this quarter
Juno Selection Fund remains on course in third quarter
- The Juno Selection Fund shows a flat performance over the third quarter.
- Juno opts for a prudent investment policy and wants to maintain a margin of safety when acquiring quality growth stocks.
- The fund consistently applies its long-term strategy focused on listed family-owned businesses with predictable annual earnings growth of 10% to 15%.
The Hague – October 22, 2021 – The Juno Selection Fund showed a 0% return in the third quarter , bringing the performance after the first nine months of this year to a small positive of 0.9%. The rotation to value and cyclical companies, which have been rising for almost a year on the equity markets, is pulling money away from defensive and quality stocks. The manager remains confident that, once the economy slows down, the tide for the fund may turn quickly.
For the time being, the shareprice appreciation of the companies in the Juno portfolio on average is lagging the market, even though the fund has had several very positive outliers that have risen by tens of percentages. Juno takes the long-term earnings growth of companies into account in its valuation methodology. This means that companies whose valuation have risen too high, offer too little compensation for the inherent future risks we take when becoming (part) owner of the company. That is why some of the Juno Selection Fund’s portfolio companies have been selectively reduced this year and the fund currently maintains a relatively high cash balance.
Frans Jurgens, portfolio manager Juno Selection Fund: “Since the end of 2020, cyclical stocks have been doing very well, as a result of which the share price development of our companies, on average, has lagged and our performance has been largely flat this year. There is a clear division in our portfolio with on the one hand companies that have seen their share prices rise sharply, and are reaching levels that we can no longer justify, and on the other hand companies that are now being shunned or sold by investors after several years of share price appreciation, despite their continued healthy earnings growth. The latter category is becoming more and more interesting now; if prices remain flat, but earnings continue to grow, they are getting relatively cheaper. Combined with the volatility in the markets, this provides opportunities to repurchase equities at attractive price levels and put our cash reserves back to work.”
Stock exchanges appear vulnerable
Rising levels of structural inflation may prompt central banks to raise interest rates in large steps. The economic recovery is also under pressure: container transport costs have risen exponentially, gas prices increased sixfold, semiconductors are in continued high demand and its shortages are causing temporary shutdowns of factories. These problems may dampen the economic recovery. Equity markets, on the other hand, are all set for a strong economic rebound, so in the event of a disappointing development, that disillusionment could have an undesirable effect on share prices.
Lennart Smits, portfolio manager Juno Selection Fund: “The rotation from growth to value is still ongoing and could well continue for some time. But keep in mind that this is a snapshot in time. Some of the quality companies we invest in are currently not getting the appreciation they deserve, but our firm belief is that prices will eventually follow underlying earnings growth. We are still on track with an average earnings growth of 10% to 15% for our portfolio companies. The predictability of those earnings is and remains the core of Juno’s investment strategy. This gives us confidence for the future and makes that we can largely ignore the developments in the market as a whole.”
Juno invests in small and medium-sized European companies that offer an average earnings growth of between 10% and 15% regardless of the economic climate. That earnings growth should have a large element of predictability over the next five years. An example from the portfolio is the Danish company SimCorp, which has been a permanent fixture in the fund for almost 14 years now. SimCorp is an independent software provider for large asset managers and pension funds. The company’s software is often purchased on a subscription basis, which offers greater certainty for the longer term. In addition, the software is mission critical for their clients’ business operations, which ensures a stable client base.
The Belgian listed family-owned company Melexis was first included in the Juno Selection Fund portfolio in 2018. The company designs computer chips, mainly for the automotive industry. In the short term, the stock proved sensitive to the volatile car market, but Melexis is benefiting from the long-term trend of increasing use of chips and technology in cars. Moreover, with the current strong market demand, it has already sold its entire production capacity. Melexis now supplies eleven chips per new car worldwide compared to seven chips in 2015. The company expects to sell twenty chips per car by 2025.
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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