Ensemble Fund Investor Letter – First Quarter 2020
The performance of the Ensemble Fund (“the Fund”) this quarter was down significantly along with the market. After outperforming significantly during the strong rally of 2019, the Fund finished the quarter down a bit less than the market in the first quarter. The Fund was down 18.64% vs the S&P 500 down 19.60%. Over the last year, this brings the Fund’s performance to down -3.28% vs the S&P 500 down -6.98%.
As of March 31, 2020
|1Q20||1 Year||3 Year||Since Inception*|
*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.
While we write about performance on a quarterly basis and we think this is the appropriate cadence on which investors should evaluate us, we saw a significant impact on our relative performance over the last four days of the quarter that we thought would be worth sharing as it speaks to some of the unique dynamics driving market performance during this unprecedented time.
First of all, it is worth noting how volatile the market was in February and March, and how this volatility was apparent in our relative performance, not just absolute performance. During 2019 for instance, the excess return of the Fund vs the market on any given day tended to be much less than half a percent. While the last two months have seen many days on which the Fund under or outperformed by a full percentage point or more. During the six-week period after the market began to decline in mid-February, we saw our relative performance vs the market swing by 1.5% or more on six separate occasions. These swings were caused by the highly unusual market volatility which saw days in which many stocks were up 10%, while many others were down 10%. Historically, the volatility of the Fund has been similar or somewhat less than the market and in the last quarter it continued to display similar relative volatility. So, these big price swings and shifts in our relative performance were a function of broader market volatility, not a function of our portfolio of holdings exhibiting higher than normal relative volatility.
From the market high on February 20th though Wednesday March 25th, we saw our relative outperformance expand materially. This was true during the selloff, as well as during the first leg of the market recovery through March 25th. But the last four days of the quarter saw a large decline in our relative performance of approximately 2.5% which led to us finishing the quarter just a bit ahead of the market compared to having been materially ahead just a few days earlier.
There is one highly unusual statistic to know about the market recovery at the end of the quarter that speaks to why the Fund did not keep up with the overall market during the last few days. The utilities sector of the S&P 500 only makes up 3.5% of the index and so, the performance of these stocks does not by themselves influence overall returns all that much. However, these stocks are generally considered the safest stocks in the market having exhibited far less volatility than the overall market during the past twenty years. But during the sharp 15.6% rally in the S&P 500 from the lows, the utilities sector exhibited much higher volatility than the market while rallying 23.8%.
The unusually strong performance of low volatility stocks, of which utilities are one example, was most pronounced during the last four days of the quarter, the period during which the Fund rallied significantly but not as strongly as the market. We believe that this unusual dynamic was a function of the massive, forced rebalancing by many allocators who have a mandate to maintain a pre-set allocation between stocks and bonds. With forced selling of bonds and many investors still terrified of risk, these bond sale proceeds appear to have been dumped into low volatility, “bond proxy” type stocks that offer the closest risk/return profile in the equity market to what investors might otherwise find in bonds.
We like low risk investments as much as anyone. In seeking out companies to own, we put a high value on businesses which exhibit stable, long duration cash flows that can be depended on. But we also pay close attention to how much in the way of potential returns we must give up in order to reduce risk. So, it is very notable to us that the utilities sector finished the quarter trading at a valuation that puts it at the average level seen over the past 30 years, while the overall market is trading about 10% cheaper than the 30-year average. And, more economically sensitive sectors, such as Industrials, are trading at a nearly 25% discount to average valuation, at levels only seen during the depths of the Great Recession.
As we move forward, we are focused on owning companies which we strongly believe can make it through this crisis as well as thrive on the other side in an environment in which many of their competitors may be deeply damaged. But we also seek to control risk by refusing to overpay for perceived safety. Balancing these three considerations; near term resilience, long term opportunity and current valuation are all critical to investment success during this crisis and we urge investors to not overly focus on any one of these attributes to the exclusion of others. This is what appeared to happen during the last four days of the quarter as investors became willing to pay a significantly higher valuation for stocks offering perceived short-term resilience even in the absence of any compelling long-term opportunity or particularly attractive current valuation.
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.
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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.