Welcome to the JUNO Market Update.
In this video, Gordon Gomes from the Client Services team speaks to CEO + Founder Mike Taylor, and Toby Woods, Senior Investment Analyst for Global Equities.
They answer questions sent in by investors and cover:
• JUNO’s funds, especially the growth fund, have had a tough 12 months. Is JUNO still committed to being a growth investor, and will the negative returns continue?
• What global sectors do we think will benefit from inflation, and what sectors do we think will suffer?
• What emerging themes are the team feeling excited about?
• What research does the investment team do before deciding to invest in companies?
We have also provided a transcript.
Thanks for watching.
JUNO Market Update May 2022 from JUNO Funds on Vimeo.
Gordon Gomes: Welcome to the JUNO monthly update. My name is Gordon Gomes and I'm from the client services team. With me today is Founder and CEO Mike Taylor and also joining us from our London office is Toby Woods, who is a Senior Investment Analyst for Global Equities. Welcome to you both and hello to everyone watching.
Let's jump right into it with you, Mike. JUNO’s funds, especially the growth fund, have had a rough 12 months. Sarah has contacted us and asked is JUNO still committed to being a growth investor? And will the negative returns continue?
Mike Taylor: Some good questions there from Sarah. Thank you. Yeah, it's been a really tough 12-month period for investors. And actually just as we're filming this today [19 May] I see the markets are down another 4% or 5% overnight in the States. So it's a challenging environment to be a growth investor. But you know, that's who we are at JUNO, that's what we're committed to. And markets have periods where it's good for growth investments and that's kind of most of the time really. I know that markets are going down, but generally, like 70% or 80% of the time*, markets are going up, and when they're going up, you ideally want to be in growth investments. So we're not just going to change our style because of the fact that we are in a period of downturn. We are committed to being growth investors. And we still find companies out there at the moment that are growing businesses, that aren't being subjected to the inflationary pressures and are still growing profits. So we still look to find those businesses. And in terms of tech. Tech has been a great place to be for the last decade. They've been really high growth businesses. And we don't believe that sort of innovation is going away. In fact, normally it's time in recessions where, actually people become more innovative. So, innovation and tech will find its time again to shine, and we will be there for when the recovery commences.
GG: Thanks, Mike. Now over to you, Toby. So we know that inflation can impact stocks. One of our investors has asked what global sectors do you think will benefit from inflation, and what sectors do you think will suffer?
Toby Woods: Thanks, good question. The first thing to note is that normal inflation, say 1%, 2% or maybe kind of 3%, is good for stocks. It means that economic activity is rising, and we like that so stocks will almost always beat inflation returns when that is the case. However, it is a different story for now, as inflation has run above trend, and that's denting consumer and business confidence. Simply put, people worry that their dollar, or pound in my case, will not go as far, so they're cutting back on spending. At the same time, cost of inputs rise and that hurts companies’ margins and returns. Nevertheless, some companies can do well, especially those that can pass on the higher prices to end consumers. So oil companies, for instance, benefit from the rising global oil price, but for environmental reasons, we don't participate in these. However, other energy businesses also benefit as all energy prices generally rise in line with oil. We have a preference to holding renewable energy companies, which is why there are some in the funds. Another example is consumer staples stocks, i.e. those businesses that sell everyday items that we need. Demand, on the whole, does not change for these types of companies so they should be able to push through the prices. After all, you know, that's generally what the inflation is. Those that suffer in inflation are sectors like consumer discretionary, i.e. the non-critical purchases, and technology. I mean, many technology companies have high growth potential but low current earnings and cash flow. So when those cash flows that might be generated in the distant future get discounted back to the present value at higher discount rates because of higher inflation, it leads to lower values of stocks. But as Mike just alluded to, JUNO has historically had a bias towards technology. And although we proactively sold some businesses where valuations were just too high for this environment, we do remain invested in some of the world's best tech stocks that will dominate their markets for many years to come. So like Microsoft, which in all likelihood, will come into favour once again, once the dust settles.
GG: Thanks, Toby. In addition to that, are there any other emerging themes you and the team are feeling excited about?
TW: As touched on briefly, we are excited by renewable energy. We feel that wind and solar is an obvious beneficiary from the current energy crisis. Furthermore, the political backdrop is favorable with things like the EU Green Deal, which was launched actually before the Ukraine war, in fact, even before Covid, which is an ambitious project to make Europe climate neutral by 2050. Consumer attitudes are also moving more strongly towards green energy as people care about climate change. So we've done a lot of work on different companies and business models within this space. We've looked at the manufacturers of turbines and panels. We’ve looked at the companies that develop parks, we’ve looked at the owners of parks, etc. And currently JUNO holds two different stocks, US-based NextEra Energy Partners, and Portuguese EDPR. Both of which are owners of parks. So they generate the renewable electricity and sell it either directly to corporate customers who want to have a greener footprint or to utility companies who supply into the grid. It's not all plain sailing. I mean, recently, these businesses have had a few supplier related challenges as they expand. Literally just getting hold of the solar panels has been really tough. But the underlying businesses are in good health, especially as electricity prices continue to rise, and so we've added to our positions on weakness.
GG: Great, thanks for the insights Toby. Back to you, Mike. Matt has emailed in and asked about JUNO's active management strategy. He wants to know what sort of research do you and the investment team carry out before deciding to invest in companies?
MT: Typically before we invest in a company, we will run what we call a screen to see what the valuation is like relative to other players in the marketplace. Then once we’ve conducted that, we might say, we think this company is undervalued relative to its future potential. Once we've done that, we will have a look at the industry that the company is operating in to see what the growth dynamics are, to see what the total addressable market is for this particular business, and what we like is to find a business with a large total addressable market relative to the size of the company. Once we've done that, we may do a call with an industry expert, someone who has a lot of knowledge on the industry the business operates in. We will then, if appropriate, have a call with the management team, or the investor relations team of a company. And sometimes, we haven't been able to do that much because of Covid, but if we can, we will try to meet face to face with the management team. We've got a team based in Sydney and Auckland, and in London, so if it's in reasonably close vicinity to that then we will try to meet with management teams. After we've met with the management team or spoken to them, we will then try to form a view as to what we think this company can do in the future. And then we will look at how our view is perhaps divergent from what the market’s view is. So we might say okay, well, the market’s valuing this company at $1, but we actually think it could be worth $2. And if that's the case, then it becomes a buy and we will complete our analysis and purchase the stock. Anything to add on that Toby?
TW: I think that's exactly how we go about it. It's a very thorough process.
GG: Thanks, Mike. And finally, we know the investing climate is pretty rough right now. Being a seasoned investor yourself, you've probably seen times like this before. Do you have any positive words to share with investors to remind everyone that things will eventually improve?
MT: Yeah, I thought about this and I think the best way that I can try and describe it is to give an analogy with property. So imagine that it's the end of 2021 and you really want to buy a house, your first house, and the house you're looking at is $1 million. And you decide, maybe I buy it, maybe I won’t, but when you think about it, intuitively, you know that probably in 20 years time or 25 years time, that house won't be worth $1 million, it'll be worth $2 million. So you feel quite comfortable buying it at $1 million. However, a change in circumstances, you don't end up buying it.
Fast forward to May 2022. Suddenly, the same house is for sale for $800,000. And you go, ‘It's gone down, there must be something wrong with it. Maybe I shouldn't buy in that suburb or that area? Maybe it's gonna get cheaper, what should I do?’ But then you think, oh, in 20 to 25 years it's still gonna be worth 2 million. So actually, all that's happened is that you can actually buy this house for cheaper and have a smaller mortgage. The end value, in the distant future, is still the same, but you're actually able to generate a better return because you've got a better entry price. Now maybe you might go well, I'm not going to buy now because perhaps if I wait another six months, it might be $700,000. Maybe it will, maybe it won't. But the thing I'm trying to get across is that the end future value is still going to be the same because that’s kind of what happens with economies and stock prices is that in the long term, things go up. So the positive about today is actually you are able to enter the market or put more of your savings into your KiwiSaver account at much better prices than you were able to six months ago. And if markets do continue to go down, that's not necessarily a negative because it means that all your monthly wages are going in and you can buy more Microsoft than you could six months ago. So that's how I see it as a positive.
GG: Nice one. Yeah, I like that analogy and I'm sure it'll resonate with a lot of our investors. Hey, thanks, Mike and thank you Toby for joining us. If you have any questions you'd like the team to address in future videos, please send them through to [email protected] Thank you for watching and we'll see you next time.
Information correct as at 19 May 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.
*The reference by Mike Taylor to markets going up generally 70-80% of the time has been made based on the S&P 500 annual changes since 1926.