Ensemble Fund Investor Letter – First Quarter 2022
The Ensemble Fund was launched in 2015. Ensemble Capital’s investment strategy has been offered since 2004 via separately managed accounts. In this quarter’s letter to separately managed account clients, we offered commentary on our past periods of underperformance that occurred prior to the launch of the Ensemble Fund. You can find a copy of that letter here.
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*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.
Over the first seven quarters after COVID began, from March 31, 2020, to the end of 2021, the S&P 500 returned 89% with positive returns reported in every quarter. Over this same time period, the Ensemble Fund returned 101%, also generating positive returns in each quarter. But the first quarter of 2022 saw an abrupt shift in fortunes with the S&P 500 declining 4.60% while the Ensemble Fund declined 15.63%.
In this letter, we will lay out the drivers of the market pullback, the reasons we believe our strategy has underperformed so sharply, the attributes of our portfolio holdings that we think mean they are well positioned to navigate the uncertain economy ahead, and provide a profile of Google (6.6% weight in the Fund) and Chipotle (6.0% weight in the Fund), two companies that characterize well the robust way that so many of our holdings have navigated the COVID era.
But first we want to put our sizeable underperformance this past quarter in context. Like every investment manager with a strong, long term track record, we have endured numerous periods of underperformance along the way. Our focused portfolio is designed to attempt to outperform the market and doing so requires that our investment performance be different than the market.
From November 30, 2015 to February 10, 2016, the Fund was down 16.75% while the S&P 500 was down 10.61%, for 6.13% underperformance. From June 8, 2018 to December 13, 2018, the Fund was down 11.83% vs the S&P 500 down 3.53%, for 8.29% underperformance.
While this recent quarter represents our largest degree of underperformance, so too did our 2020 results represent our largest degree of outperformance. In 2020 the Fund was up 30.89% vs the S&P 500 up 18.39% for 12.51% outperformance. It is clear to us that the pandemic has caused much larger and more rapid relative swings in asset pricing as investors struggle to grapple with the implications of an economic event of an unprecedented nature.
In this context, you can see that our first quarter underperformance of 11.03% is clearly a bad outcome, and yet is not inconsistent with other periods of weak performance that have occurred in the context of our long term track record of outperformance.
Each of these prior periods was unique in its own way. But each time, we stayed focused on our long term strategic priorities, maintained conviction in our core process, made adjustments to our portfolio as needed, and were rewarded for staying the course.
We have every intention of reacting to our most current bout of underperformance in the same way that has served us so well during past periods of disappointing results.
There are many times when market volatility is caused by somewhat esoteric financial market issues that may not be the subject of mainstream news coverage. But the market volatility seen in the first quarter, during which the S&P 500 fell as much as 13% from its highs, marking the first correction since the March 2020 COVID bottom, was driven by the news events that are on the front page of every newspaper. Inflation worries and the Russian invasion of Ukraine combined to trigger a panic over the potential for stagflation, the term for an economy that exhibits slow or negative real growth, in the face of high inflation. These worries sent stock prices lower, even as the prospect of inflation driven Federal Reserve interest rate increases drove down the price of bonds, with the Bloomberg US Aggregate Bond Index, a broad measure of intermediate term corporate and government bonds, falling 5.93%.
Worries about inflation are not new. We wrote in depth about heightened inflation pressures in our essay describing how to invest in a high pressure economy, published in June of 2021. Year over year CPI, which measures consumer price inflation, jumped above the Federal Reserve’s 2% target as far back as March 2021. By May it was over 5%. And during the fourth quarter of 2021, as the S&P 500 rallied by 11%, inflation was running at well over 6%. But during this time period, financial markets assumed that the high levels of inflation were a function of the slow restart of the supply side of the economy, as seen in snarled supply chains and a shortage of workers relative to the number of people who were working prior to COVID.
In the middle of January of this year, the CPI measure of inflation was reported at 7% for the first time and during that same week, Russia and US diplomatic talks regarding Ukraine were ended with no resolution. It was at this point that the selloff began in earnest as investors began recalibrating their expectations for inflation, interest rates, and economic growth.
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.
Important Risk Information
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 Arbor Court Capital, LLC member FINRA/SIPC.
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