Third Quarter 2016 Report. English Translation

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Todd Cameron
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1 Third Quarter 2016 Report English Translation

Third Quarter 2016 Report Juno Selection Fund Return The third quarter, which ended on September 30, finished with a net asset value of 309.56 per share. The increase during the third quarter was 10.

2 Third Quarter 2016 Report Juno Selection Fund Return The third quarter, which ended on September 30, finished with a net asset value of per share. The increase during the third quarter was 10.6%. This allowed us to compensate for the weak start of the year. For the full year 2016, Juno has generated a positive return of 2.8%. Just as in the second quarter, we were once again able to clearly outperform the market over the past three months. The increase of the Euromoney Smaller Companies Index (net) amounted to 8.5% in the third quarter. This index now stands at a -1.9% loss for the year. The Dutch AEX index (reinvested) increased by 4.7% during the quarter and shows a positive return of 5.5% after the first nine months of this year. Main developments in the portfolio We often argue the fact that our family-owned companies have a true long term focus. They are willing to invest in future growth, even if that may depress the results in the short term. When we look at the German company Cewe, which we first took up in the portfolio late 2009, we now see the convincing result of past investments. Back in 2003, Cewe was already European market leader in developing (analog) rolls of film. The switch to printing digital photos, mostly bundled in photobooks, required an enormous effort which also put a heavy strain on Cewe s financial results. In 2009, when this transition was nearly completed, Juno made its first investment in the company. From that time onwards, Cewe once again grew to become the absolute market leader in Europe, this time in printing photobooks and other digital photo products such as posters, calendars, and gifts. Cewe saw its underlying profits increase each year since 2009, from 7 to 23 million Euro. The number of photobooks that Cewe produces every year, has nearly doubled since Over 6 million copies are now being printed. However, the significant sales growth for this profitable product is slowly decreasing. Management started anticipating this in It began to expand its existing online print activities for the Business to Business ( B2B ) market by acquiring Saxoprint. This printer can only be found on the internet and prints higher volumes of printed materials for the B2B market using the newest modern Heidelberg offset printers located in Dresden. Substantial investments were needed to stimulate Saxo s brand awareness in ten European countries. In some countries, Saxo was even rebranded as Cewe-Print. Because of these investments, this acquisition led to growing sales, but could not contribute to group profits over these past years. 1 2

3 However, as from 2016, Cewe will most likely be able to report a small first time profit for its online print division, which contributes to group sales by over 80 million Euro. Even considering the goodwill which was paid for Saxo and the sizable investments of the past years, it is remarkable that Cewe has managed to bring its 2015 return on capital above 17%. For 2016, we expect it to further increase as online print will positively contribute to earnings whereas there will not have been a meaningful increase in the capital invested. Moreover, the company has recently announced a tax advantage which will give 2016 profits a (one-time) boost. By turning around loss-making sales within online print to a contribution to profits, combined with a continuously strong margin improvement in photo finishing, 2016 will be the year that the company starts reaping the benefits from this carefully planned growth strategy. This year, Cewe s share price has risen strongly. On the one hand, this is due to the fact that investors realize that 2016 will be the financial turning point for online print. On the other hand, strong free cash flows and the resultant dividend policy have also made the company attractive for dividend investors. We expect a heathy profit development for the coming years. However, we do remain vigilant for signs of price competition within online print activities and are fully aware of the fact that margins cannot increase indefinitely within the traditional photo-finishing activities. Realizing a recurring annual profit growth of 10-15% is no easy task. This is proven by our Swedish portfolio company Biogaia. The company owns the rights to a special patented probiotic strain, called lactobacillus reuteri. Biogaia has performed 155 clinical trials which show without a doubt that these good bacteria strongly reduce infantile colic. When we visited the company for the first time in the summer of 2014, the emphasis of the small organization of circa 80 employees, was primarily on research: On the one hand to further prove that its probiotic strain can effectively be used for infantile colic. On the other hand, to discover new applications such as in dentistry or animal welfare where incidence of antibiotic resistance in cows, has led cattle breeders to search for effective, natural alternative solutions. Biogaia sells its products through a network of 40 external distribution partners, which are active in 90 countries. They make sure that pediatricians are familiar with Biogaia s products and that the doctors can recommend them to parents. In 2015, large successes were made in Brazil, a country which had quickly become one of Biogaia s most important markets since the product launch late Distribution partner Aché ordered more products each quarter. However, much to the surprise of Biogaia s management, the orders abruptly stopped in the fourth quarter of In hindsight, it became clear that after initial success, Aché had been overconfident in ordering and had built up large inventories. We also suspect that they had speculated on the weakness of the Brazilian currency following instability within Brazil s government. It now appears that Aché will carefully resume its orders again this quarter as sales to end customers have remained robust during this past period and Aché s stock must therefore have diminished significantly. The incident in Brazil has made it clear to Biogaia s management that the company needs to have a stronger and closer collaboration with its distribution partners in the future. Biogaia is now hiring several people who will offer product support, research and sales support to its most important partners. This way, the people in the Swedish head office will have more information about what happens locally and partners will be better served, which should further stimulate sales. As founder Peter Rothschild has indicated that he wishes to continue focusing on research, Axel Sjöblad was hired as new CEO. We met with Axel early this year and we believe that his appointment was a good move. It is his job to establish this supporting organization and to keep the Biogaia on the impressive growth path that it has been on for years. Past September, our Danish portfolio company SimCorp announced a very important contract: the US asset manager Franklin Templeton has also chosen the Dimension software package. With 739 billion dollars 3 4

4 under management, Franklin Templeton is one of the largest investment managers in the world. To us, this is an additional sign that SimCorp has its affairs back in order in its most important growth market, the USA. It was in fact the fourth new US client this year. SimCorp had started the year with a somewhat disappointing share price development. This was mainly caused by the transition to a new subscription method. It is becoming more and more common to use a subscription-based model instead of a perpetual model in the software industry. The main difference being that a client pays the same fee each year when using the subscription-based model, whereas in the case of a perpetual model, the client pays a one-off (high) license fee at first implementation, and an annual maintenance fee thereafter, which is lower than in the subscription model. The consequence of this change is that sales, and profit development will be initially lower in the next two years. For short term investors, this was a reason to sell their investment in SimCorp. For long term investors, such as Juno, this was a reason to increase their investment. After all, the income per client increases over the course of time and consequently so does the profit that SimCorp will make over the long term. In September we spoke with SimCorp s Supervisory Board about a new top management remuneration policy. From now on, the discretionary part of bonuses will be paid in shares; the employees will no longer receive options. We have also insisted that the part of the bonus which is based on an improved profit margin, should take into account the level of R&D expenses. In our opinion, it is the continuation of large annual investments in R&D that leads clients such as Franklin Templeton to choose SimCorp. Outlook The moment that central banks start incrementally increasing official interest rates is drawing near. However, in order to rapidly lift interest rates, it is necessary to have strong economic (real) growth, preferably combined with strong inflation. Economic growth is slowly picking up, but there is as yet very little trace of inflation. Therefore we expect US and European interest rate levels to remain very low for a long time. Such a scenario offers fewer and fewer choices for long term investors. Bonds are returning next to nothing and will suffer more in the near future from waning demand as a result of Central Banks pulling out of the market and consequently slightly increasing interest rates. The historic link between fixed income securities and lower risk is no longer valid. Bonds have in fact become high risk securities. Especially if we consider the fact that in their quest for return, investors seem to be forced to more often choose higher risk loans from lower grade companies. When comparing the risk free alternative of bonds, to the high quality businesses that we have selected for you in the Fund, we are convinced that our selection offers a much better alternative. Almost no debt, high profit margins, significant free cash flows and 10-15% profit growth year after year: those are the ingredients that give us confidence that the Juno Selection Fund s net asset value will continue to increase for the rest of 2016, and especially in the longer term. On behalf of the manager of the Juno Selection Fund, Frans Jurgens Lennart Smits 5 6

5 Juno Selection Fund: Historical Returns Juno Selection Fund Euro money Smaller Europe Index (net) AEX Index (reinvested) Barcap PanEuro Index 2008 * -33% -49% -47% +1% % +63% +42% +8% % +17% +9% +4% % -23% -9% +6% % +27% +13% +11% % +33% +20% +1% % +5% +8% +12% % +21% +7% +2% Q % -6% +0% +2% Q % -4% +1% +2% Q % +9% +5% +1% % -2% +6% +4% Since inception * +210% +57% +24% +59% *) Inception of the fund: January 11, 2008 NB: In September, data became available which enables us to present the Euromoney Index taking into account reinvested dividends. The table above has therefore been adjusted accordingly. Top 5 Positions Name SimCorp Dialog Semi Grenke u-blox Sartorius Country Denmark United Kingdom Germany Switzerland Germany 7

Fourth Quarter Report

Fourth Quarter Report Fourth Quarter 2014 Report Juno Selection Fund Performance At the end of the fourth quarter on December 31, we closed the year with a value of 226.50 per participation. During the