Welcome to the JUNO Market Update.
In this video, Gordon Gomes from the Client Services team speaks to CEO + Founder Mike Taylor and Portfolio Manager Mark Devcich. Also joining us this time is Guy Thornewill, who is Head of Research for UK & Europe. He's based in London.
They answer questions sent in by investors and cover:
• Why have the JUNO funds fallen behind the market index? Should investors be concerned?
• What is JUNO's exposure to Russia and Ukraine, and what work has the team been doing in this area?
• What has the team been doing to reduce the impact of market volatility, in particular in the JUNO Growth Fund which has had some pretty big dips lately?
• Mike has been investing for close to 20 years. How is the current Russian crisis different to other events he has experienced?
We have also provided a transcript.
Thanks for watching.
JUNO Market Update March 2022 from JUNO Funds on Vimeo.
Gordon Gomes: Hi, everyone. Welcome to the latest JUNO market update. My name is Gordon Gomes from the client services team. And with me I have CEO Mike Taylor, Portfolio Manager Mark Devcich, and joining us all the way from London, Head of Research for the UK and Europe, Guy Thornewill. Welcome to you all.
We will start with you Mike. We have a question here from Li. He wants to know why the JUNO funds have fallen behind the market index, and if this is something he should be concerned about?
Mike Taylor: Yep, that's a really good question for an active fund manager and why do active fund managers sometimes fall behind the index? I've got two parts to answer this question. The first is that the index is made up of lots of different companies. And at different periods of time, different companies are performing well and some aren’t performing well. In an index, you've got financials, you've got consumer discretionary, industrials, manufacturing businesses, you've got tech companies, and you've also got energy companies. So at the moment, you can probably imagine that energy companies, defence businesses, companies like Exxon Mobil and BP, they’re doing really well. Whereas at JUNO we actually have a fossil fuel exclusion policy so we can’t invest in businesses like that. We also don't really invest in arms manufacturing and defence companies. So those sectors are out. Now what we do focus on is tech companies and growth companies, and they've been really underperforming for the last probably six to nine months, and we kind of call it a stealth bear market because there's a lot of those businesses in the tech space that are down 50, 60 maybe even 70 per cent in recent times. I'm sure if you invest for yourself, you'll know those names. You may even own them yourself.
The other thing I wanted to talk about in terms of active versus passive and can active managers beat the index, is that for us, it's like a running race. And don't think of it like a sprint, it's like an ultra marathon. Now, I've never run an ultra marathon, but I've invested over a long period of time, and what I do know is that you want to have a strategy, and you want to stick to that strategy, regardless of what's happening around you. So imagine you're in your race, you’ve kicked off, you’ve got 150 kilometers to go, you know it's a really, really long time. And people are sprinting ahead and they're ahead of you. If you try to change your strategy, and try to catch up to them, you know that that’s going to cause you a problem, maybe 50km into the race. So you just kind of have to not worry about what everyone else is doing. Just worry about what you're doing and what your strategy is, because you know that it's gonna be successful in the long term, and that's how you're going to finish the race. Because often in those races a lot of people don’t actually finish, and it's the same in the investing world, lots of people start investing and 20 years later, they're not there. So for us, we're about the long term and you will have seen periods as well when JUNO’s funds have outperformed the index by quite a big margin. I’m definitely confident those days will return.
GG: Thanks, that's really great Mike. Over to you Mark. We have a few questions from clients regarding exposure to Russia and Ukraine. The funds have a small investment in a real estate classifieds platform operating in Russia. Could you maybe give us an update on this?
Mark Devcich: Thanks, Gordon. Apart from the shocking humanitarian crisis, stock markets have also been impacted by this war. So we have a small position in Cian, which as you say, is the leading real estate property portal in Russia. It's actually listed on the NASDAQ in the US. So we only invested in Cian back in November, and it had its initial public offering then. We actually got zero allocation in that process because it was a heavily oversubscribed process.
We actually know the chairman as well, who's Australian and he's the former CEO of the highly successful business real estate.com.au. And after talking to him, and other real estate agents in Russia, we decided to take a position in this business given its dominant position, especially in Moscow. So property portals are generally really good businesses because they tend to be natural monopolies and the winner takes the dominant market share due to network effects. The Russian market also had a long runway ahead of it because they were much earlier in their move towards digital advertising. Unfortunately, we didn't foresee the invasion of Ukraine and the shares have actually been halted since the 24th of February. So my mistake here was not selling the investment earlier when there was a possibility of the war occurring. And in the meantime, we've decided to write down the value of this investment which was 0.3% of the [JUNO Growth] fund down to zero until the stock markets reopen, and we can decide what we want to do with that investment at that point.
GG: Thanks for the update Mark. Guy, you're based in London and are quite close to this crisis. Could you give us an update on the minimal exposure JUNO funds have to this region and any work you've been doing around this?
Guy Thornewill: Yeah, sure, Gordon. When the invasion happened, which almost no one expected as Mark just said, we immediately started going through the portfolios with a fine-tooth comb to try and identify any potential risks. We invest globally and so many of the portfolio companies have global operations because they're leaders in their fields. So we knew there would be some exposure to Russia and Ukraine in all the other stocks. Therefore, we went through company annual reports, we spoke to investment analysts on the sell side, and we contacted many of the companies themselves to get the detail. As we had expected, the exposure, if any, was very small for most of the companies that we hold, usually only 1% or 2% of sales and profit. There were a couple of exceptions to this, which was Visa and MasterCard, which have a sales exposure of around 45% each. But even in these cases, it probably won't drop to zero in terms of their revenue impact, because this includes some cross-border payments.
So this doesn't mean we’re complacent. There could well be further side effects in the future from supply chain or other disruptions still to come. But our company-specific risk here is now very low, and so this work we did was certainly reassuring.
GG: Thanks Guy. Back to Mark, as portfolio manager of the JUNO Growth Fund, could you tell investors what you've been doing to reduce volatility, especially in the JUNO Growth Fund that has seen a couple of dips recently?
MD: Yes, so I guess we're not so much worried about market volatility, we're more concerned about whether the fundamentals of the businesses we’re invested in are still intact. So more recently, we feel the environment for the consumer is becoming tougher and that's because there's higher inflation, we're hearing about higher fuel prices, higher food prices, nearly the price of everything is going up. And also mortgage payments, the interest rates around the world are going up - this is increasing mortgage payments for consumers. So this will likely impact companies that are leveraged to consumer discretionary spend, and where we feel the outlook for the businesses are deteriorating, we will reduce exposure and we've done that across certain stocks in our portfolio that are exposed to homebuilding and leisure products. On the other hand, if share prices have fallen for companies where we think the outlook has remained unchanged or has actually improved, the volatility gives us an opportunity to buy more of these companies at cheaper valuations.
The other thing we've also been doing is working on diversifying the portfolio by ensuring the funds are not overly exposed to any particular sector, such as technology. We have probably a large exposure to the technology sector but that's probably been reduced in recent times, and this should naturally reduce the volatility of the portfolio over time.
GG: Great insights, thanks Mark. Back to you, Mike. You've been investing for close to 20 years, which is a decent amount of experience. How would you say the current Russian crisis is different from other events you've seen in your career?
MT: Well, there's a saying in the investment world that every time we face an event, that this time is different. And I think the first kind of market event that I was involved with, I was working at a bank in Auckland, and it was 2001. So September 11 attacks [on the World Trade Center in New York], and if you're old enough, you will remember them. And it was a pretty shocking event at the time. I believe they actually ended up closing Wall Street for four or five days. So nobody really knew what to do, it was a very panicked environment, so much so that they closed the market.
And then, for a time thereafter, there was this threat around the world that we would have to live in an environment where there would be constant terrorist attacks. They were ones in Europe. I was actually living in London when the [July 2005 London] bombings occurred a few years later, so we had to live with that kind of environment, and eventually, markets and people, we kind of got used to that.
Other ones that I've lived through: 2008 the Global Financial Crisis. Hopefully I never have to go through one of those again. That was really devastating. That was when I first started investing other people's money. And that was extremely, extremely painful. Looking at today's crisis environment, you know, there are different factors driving this one. We have a proper war, not just a war of terror. We have a situation with commodity prices that are rising, we have inflation, and then we have interest rates which can affect your mortgage. So they're different factors. But ultimately, they kind of lead to the same result, which is that markets will be volatile, investors will be worried, and of course, share prices will go down. So even though each of these events are different, the effect on the market is the same effectively. As investors, we’ve sort of got a little bit of a playbook for as to how this will go, and that helps us in terms of what companies we want to own, what companies we want to sell, and how much cash for example, we want to have within the fund.
GG: Thank you for that Mike and thanks to you as well Mark and Guy. If you have any other questions you'd like the team to address for future videos, please email them through to [email protected]. We thank you for watching, and we’ll see you next time.
Information correct as at 22 March 2022. Pie Funds Management Limited is the issuer and manager of the JUNO KiwiSaver Scheme. Click here for our Product Disclosure Statement. Any advice is given by Pie Funds Management Limited, and is general only. It relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees if you act on any advice. As manager of the Scheme we receive monthly fees that are determined by your balance and whether you are 13 years or over. We will benefit financially if you invest in our products. We manage any conflicts of interest via an internal compliance framework designed to ensure we meet our duties to you. For information about the advice we can provide, our duties and complaint process and how disputes can be resolved, visit www.junofunds.co.nz. All content is correct at time of publication date, unless otherwise indicated. Past performance is not a reliable indicator of future returns. Returns can be negative as well as positive and returns over different periods may vary. Please let us know if you would like a hard copy of this disclosure information.