Ensemble Fund Investor Letter – Third Quarter 2020

9 October 2020 | by Ensemble Capital

Below is the Q3 2020 quarterly letter for the ENSEMBLE FUND (ENSBX). You can find historical Investor Communications HERE and information on how to invest HEREEnjoy!


The performance of the Ensemble Fund (“the Fund”) this quarter was up sharply, producing strong relative and absolute returns. After a second quarter that saw little in the way of pullbacks, the third quarter was more volatile with the S&P 500 at one point being up a remarkable 16% for the quarter, before experiencing the first greater than 10% correction of the current recovery. The Fund was up 11.60% vs the S&P 500 up 8.93%. On a year to date basis, this brings the Fund to up 11.37% percent versus the S&P 500 up 5.57%.

As of September 30, 2020

3Q20 1 Year 3 Year Since Inception*
Ensemble Fund 11.60% 22.36% 16.82% 14.69%
S&P 500 8.93% 15.15% 12.28% 12.28%

*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.

A quarter ago, we wrote about the more rapid than expected economic recovery that had been playing out since mid-April. We also highlighted the growing wave of COVID cases in Southern border states and the risk to the recovery of unemployment benefits coming to an end in late July. Now three months later we can see that the more rapid than expected economic recovery has continued, even picking up steam.

New daily COVID-related hospitalizations did indeed double during July from the levels observed at the end of the second quarter. A heart breaking 80,000 Americans died from the virus during the quarter. But just as the wave of infections in the Northeast peaked and went into decline in April, the wave of infections in the Southern border states peaked in late July and went into decline. Today there are signs that a wave of infection is growing in the Midwest. It seems likely to us that case counts in the Midwest will follow a similar path as the wave of infection that swept first the Northeast and then the Southern border states, with cases continuing to rise until human reactions and the basic math of viral outbreaks causes new cases to peak and then go into decline.

As we wrote last quarter, there is no way to return to normal life absent an effective vaccine. But in aggregate the country has shown amazing adaptability in figuring out how to continue engaging in economic activity, even while it remains unsafe to do so many of the things we all once took for granted. For instance, the US housing market continued its torrid recovery, despite the fact that open houses are banned in many parts of the country. Yet, amazingly, this has not seemed to constrain home sales given the volume of transactions occurring in the third quarter exceeded the level of sales seen in the third quarter of 2019, bringing the year to date volume of home sale transactions to a bit above 2019 results.

So despite the fact that it is estimated that more Americans contracted the virus during the wave of cases this summer than did during the horrifying months of March and April, the economy was able to operate at a far higher level of activity.

Last quarter we wrote:

“One mistake we think some investors have made during this unprecedented period, is substituting a forecast of the virus for a forecast about the economy or financial market performance.”

Indeed, one way to think about the disconnect between a pandemic that has yet to be controlled and an economy that is recovering faster than expected, is to realize that economics and investing are forms of social sciences, not the hard sciences. No matter how accurately you can model the behavior of the virus, this does not tell you how people are going to behave or the level of economic activity they will engage in.

As an example, for many Americans flying on an airplane seems like one of the last things they would choose to do in the midst of a pandemic. And it is true that airlines and other travel related companies are experiencing much slower economic recoveries. Yet, by the end of September, an average of about 700,000 people were flying on a commercial flight in the US every day. While this is about a third of the volume of airline passengers who traveled last year, it also means that in the midst of a pandemic one out of every three potential airline passengers chose to fly anyway.

The study of epidemiology will not provide an accurate forecast of economic activity during a pandemic. It turns out that sociology and psychology play a huge role as well. This is of course what makes economic and financial markets so difficult to forecast. While the hard sciences offer the potential to make highly accurate forecasts if you have the right data, the economy and financial markets are made up of people whose behavior is not guided by logical algorithms. Or as famed physicist Richard Feynman once said, “imagine how much harder physics would be if electrons had feelings.”

So our view on the virus and its impact on the economy is relatively similar to our views a quarter ago. We believe widespread distribution of an effective vaccine is likely to occur next year. That until that occurs, we will see the virus continuing to circulate in the US and other major global economic centers. Waves of outbreaks are likely to continue, with a Midwest wave appearing to be growing now and a major second wave of cases clearly building in Europe. But we also think that while a full recovery of the economy will not occur until after a vaccine is broadly administered, humanity will continue to innovate, adapt, and engage in increasing levels of economic activity.

One key driver of economic activity has been the fiscal stimulus that was approved on a bipartisan basis at the beginning of the pandemic. Last quarter, we indicated that we thought the expiration of the enhanced unemployment benefits at the end of July would lead to a material slowdown in consumer spending in the following months. But we seem to have be wrong in this assessment. There has been little in the way of signs of a slowdown in consumer spending since the enhanced benefits expired, despite the fact that many millions of Americans had their income slashed by as much as 75% and are now living on a couple hundred dollars a week from the standard unemployment benefits that remain ongoing.

It is not clear to us why a spending slowdown has not materialized. It may be the fiscal stimulus pumped up the amount of savings these households had on hand and they’ve been spending down those savings over the last two months. If that’s the case, the savings would be running out very soon and a slowdown may still materialize. Indeed, senior members of the Federal Reserve have been giving multiple speeches saying that it is critical that Congress pass more stimulus. While it seemed likely at the end of the quarter that any sort of new stimulus deal was dead until after the election, as this letter was going to press, there was rising hope that a deal might get done. The GOP’s official position has been that they want to pass a $1 trillion stimulus bill, while the president has endorsed the bipartisan Problem Solvers Caucus’s $1.5 trillion bill and the Democrats are advocating for a $2.4 trillion bill, although these positions were all shifting quickly as the fourth quarter began.

Even the GOP’s $1 trillion bill would represent a similar amount of stimulus spending as was done during the entire financial crisis in 2008-2009. So, with all parties at the table wanting some sort of massive stimulus bill, we do think that one will eventually pass with only the timing being uncertain.

The timing and character of that bill (or series of bills) will be largely shaped by the outcome of the election in November. We believe that in general, investors should ignore politics when it comes to making investment decisions. Certainly, individual government policies can and do impact the financial opportunities of individual companies. But history shows clearly that who sits in the White House or controls Congress has never been a major driver of economic growth or market returns.

In 2008 and 2012, investors with conservative political views were horrified by the election of Barack Obama, but if they let their political views cause them to have a very negative investment outlook, they missed out on massive gains. Similarly, investors with liberal political views who were shocked and worried by the election of Donald Trump in 2016 missed out on massive gains if they let these views dictate how they managed their portfolio.

One thing to keep in mind is that the stock market is not a mechanism for passing judgement on everything that happens in the world. Instead, the market is simply a way for investors to trade ownership of various companies whose value is primarily a function of how much those companies will earn in the future.

Whether Donald Trump or Joe Biden is president has almost no influence on how many people will subscribe to Netflix (9.0% weight in portfolio), or how many home loans First Republic (7.7% weight in portfolio) will make, or how many ads Google (5.0% weight in portfolio) users will click on. Yes, corporate tax rates could be different, or the level of stimulus could be different. And yes, very dramatic things that are highly relevant to all of us as citizens could be quite different depending on the outcome of the election. But the level of economic activity and the fortunes of individual companies is simply not heavily influenced by government actions.

All that being said, it would be disingenuous of us not to acknowledge that to many people, including us, this feels like an election of unprecedented importance. Our point is just that this importance is much more about how we as a society decide to conduct ourselves as a collection of 330 million citizens seeking to build a common community, then it is about how much money Booking Holdings (4.6% weight in portfolio) or Mastercard (5.9% weight in portfolio) or Home Depot (8.3% weight in portfolio) will generate for shareholders in the decade ahead.

We also know that large, unprecedented events cause unprecedented reactions. Back in March, it was viewed as conventional wisdom that we were on the verge of a depression and that companies of all types and sizes would be under enormous pressures. But instead what has happened is the unprecedented event of the pandemic led to many unexpected outcomes, with a surprising number of large companies actually seeing their earnings enhanced by the pandemic.

Case in point: Home Depot came into 2020 with a Wall Street consensus that they would grow their revenue by about 4% for the year. By early April, the consensus was that the company would see revenue decline as the pandemic roiled the economy. But this downward revision wasn’t just an overreaction, it got the direction of change wrong. Today, with the benefit of seeing how American homeowners reacted to the pandemic by splurging on home improvement projects, the consensus expects 2020 to see the fastest revenue growth for Home Depot since the turn of the century when the company was less than half the size it is today and a housing boom was just getting started.

So while we will be up late on election night like the rest of the country and we fully recognize the stark choice that has been laid out for American voters, we also intend to stick to our discipline of finding competitively advantaged companies with strong, long term growth prospects, that trade at a price that we believe will reward shareholders for sticking with them through good times and bad.




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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