Ensemble Fund Investor Letter – Fourth Quarter 2019

21 January 2020 | by Ensemble Capital

Below is the Q4 2019 quarterly letter for the ENSEMBLE FUND (ENSBX)This quarter’s Company Focus is on Paychex, Inc (PAYX) and Broadridge Financial Solutions, Inc (BR). You can find historical Investor Communications HERE and information on how to invest HEREEnjoy!

2019 began with recession fears stalking investors. It ended with the strongest annual return for the US stock market since 1997. These two facts are not unrelated. Investors were not “wrong” to worry about a recession a year ago. It seems clear that the odds of a recession were indeed elevated as we discussed in our letter a year ago. However, 2019 is a near perfect case study in how it is changes in expectations that drive market returns. This is why the market was so strong, even as economic growth did indeed slow. Investors had priced the market a year ago as if a recession was a foregone conclusion and those investors who recognized the very real risk of a recession, but the very real probability that a recession may not occur, were extremely well rewarded for thinking in probabilities rather than trying to guess if a recession was going to occur or not.

The performance of the Ensemble Fund (“the Fund”) this quarter was strong, showing the continued absolute and relative outperformance that we saw across much of 2019. The Fund was up 9.87% vs the S&P 500 up 9.07% this quarter. On a year-to-date basis, this bring the Fund to up 39.55% vs the S&P 500 up 31.49%.

As of December 31, 2019

4Q19 1 Year 3 Year Since Inception*
Ensemble Fund 9.87% 39.55% 17.37% 14.56%
S&P 500 9.07% 31.49% 15.27% 13.16%

*Inception Date: November 2, 2015

Performance data represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted. Performance data current to the most recent month end are available on our website at www.EnsembleFund.com.

Fund Fees: No loads; 1% gross expense ratio.

One of the frustrating things about investing is that the outcomes you achieve tend to be separated from the actions that lead to those outcomes by a significant amount of time. For instance, in the 4th quarter of 2018 the Fund underperformed as we stuck with and added to names in our portfolio that we believed had sold off excessively based on overblown recession fears. But those actions actually led to incrementally worse performance in that same quarter. But it was those same actions a year ago that set the stage for our strong performance this year.

In fact, if you look at our strongest performing stocks in 2019, it was work we’ve done over the past few years that generated our strong performance. Ferrari (6.8% weight in portfolio) was up 67% this year, but it was our decision to maintain our position despite the unexpected and untimely death of their CEO in the summer of 2018, and the insights we brought back from this trip to attend the company’s Investor Day in Italy, that were the actions which led to strong outcomes this year. The 84% return in Transdigm (2.1% weight in portfolio) this year was something we benefited from due to the extensive work we did in 2017 when the company came under extensive pressure from short sellers claiming the company was engaged in fraud. An accusation that we did not believe, and which seems to have now been thoroughly refuted. And the 59% return this year for Mastercard (6.2% weight in portfolio) cannot be traced to any actions we took this year, but to our recognition years ago that the company was not at risk of disruption, but rather was empowering a generation of financial technology companies to innovate and improve on global payment systems.

I highlight this because while it would be easy to say that we had a “good year” this year, the fact is we won’t know the outcomes related to this year’s actions until the next few years play out. Was our decision to add significantly to Google (7.2% weight in portfolio) earlier this year the right action? How about our decision to maintain our weight in Charles Schwab & Co (5.1% weight in portfolio) in the face of trading commissions becoming free? Or our decision to exit Oracle? Or the fact we chose to stick with Netflix (7.0% weight in portfolio) even as Disney Plus entered the market to massive customer sign ups.

Each of these decisions were themselves not individual, unique actions, but instead came out of cumulative analysis and experience. We’ve followed Google since their IPO, and Charles Schwab & Co going back to the inception of Ensemble Capital. We never would have become bullish on Netflix if we hadn’t owned Discovery Communications many years ago at the dawn of streaming TV and then later owned TimeWarner while they attempted to use HBO as a vehicle to compete against Netflix.

When we talk about long-term investing, it’s not just about the length of time that we typical own a stock, but rather its embedded in our whole research and portfolio management process. The research and relationships we undertake in any given year compound our ability to build conviction in the companies we invest in. And that conviction underpins the actions taken in our clients’ portfolios. It’s not usually the case that the work done in any given year, with the extraneous circumstances that always manifest themselves, will result in a direct line between our work and the returns from the portfolios we build. In some years, such as 2019, our portfolio companies are rewarded greatly, while in others they may not get the recognition of the valuation that we believe they deserve.

This ambiguity, this inability to actually pass judgement, good or bad, with certainty on an investment strategy is one of the most frustrating things about being an investor. However, we do know that while in any given quarter, or year, the performance of our portfolio can vary depending on the “mood” of the market, or economic, or political concerns, over the long term, we believe that the underlying value creation and associated future cashflows will be the ultimate arbiters of the quality of our investment process.

This is why it is so critical for investors to develop a strategy they believe in, refine it over time of course, but stick to the core principles. For the Ensemble Fund, that means owning businesses with strong competitive advantages and bright futures, with outstanding management teams, and operating with a business model and product offering that we think we can understand and forecast with reasonable accuracy. This is what we did in 2018 as well as 2019. Yet 2018 saw the Fund fall in value and slightly underperform the market, while 2019 saw a massive increase in the Fund’s market value and strong outperformance.

We know that for our investors, staying invested when our strategy underperforms or when the market is weak can be challenging. So, we deeply appreciate the confidence and trust our investors have placed in us to the extent that this past quarter the asset under management of Ensemble Capital, the advisor to the Fund, surpassed $1 billion. Our growth over the years has been due to the trust that our clients and investors have placed in us. Thank you for having entrusted us with your wealth and telling your friends and family about the Fund.



Investors should consider the investment objectives, risks, and charges and expenses of the Fund carefully before investing. The prospectus contains this and other information about the Fund. You may obtain a prospectus at www.EnsembleFund.com or by calling the transfer agent at 1-800-785-8165. The prospectus should be read carefully before investing.

An investment in the Fund is subject to investment risks, including the possible loss of the principal amount invested. There can be no assurance that the Fund will be successful in meeting its objectives. The Fund invests in common stocks which subjects investors to market risk. The Fund invests in small and mid-cap companies, which involve additional risks such as limited liquidity and greater volatility. The Fund invests in undervalued securities. Undervalued securities are, by definition, out of favor with investors, and there is no way to predict when, if ever, the securities may return to favor. The Fund may invest in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. More information about these risks and other risks can be found in the Fund’s prospectus. The Fund is a non-diversified fund and therefore may be subject to greater volatility than a more diversified investment.

Distributed by Rafferty Capital Markets, LLC Garden City, NY 11530.

For more information about positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE.

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Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. The opinions expressed within this blog post are as of the date of publication and are provided for informational purposes only. Content will not be updated after publication and should not be considered current after the publication date. All opinions are subject to change without notice and due to changes in the market or economic conditions may not necessarily come to pass. Nothing contained herein should be construed as a comprehensive statement of the matters discussed, considered investment, financial, legal, or tax advice, or a recommendation to buy or sell any securities, and no investment decision should be made based solely on any information provided herein. Links to third party content are included for convenience only, we do not endorse, sponsor, or recommend any of the third parties or their websites and do not guarantee the adequacy of information contained within their websites. Please follow the link above for additional disclosure information.