As of March 31, 2021
|1Q21||1 Year||3 Year||5 Year||Since
*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.
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It has now been a full year since global markets were shaken by COVID. If someone fell into a deep sleep on February 19, 2020 and woke up on March 31, 2021, they’d see the S&P 500 was up 19.72% since they last checked their portfolio. By historical standards, a great return in just over thirteen months! “Not much must have happened,” they’d think, “Oh well, back to bed.”
For the rest of us, we know the last year was anything but sleepy. Beyond the direct impacts of COVID, which we’ve covered in previous letters, the pandemic accelerated secular trends such as video gaming, remote working, and e-commerce.
As we begin lapping those impacts, the market is wrestling with what comes next for companies that prospered or struggled during COVID. The Goldman Sachs “reopen basket,” which consists of 35 US-listed stocks that Goldman believes stand to benefit the most in a reopening scenario, was up 22.0% this quarter. In contrast, the Goldman Sachs “US Stay at Home Basket” of stocks was down 2.4%. Last year, the “reopen basket” was down 51.9% while the “stay at home basket” was up 0.4%. What a difference a year makes.
We saw these dynamics at play in the Fund. Some of the worst-performing stocks this quarter were among our best performers in Q1 2020. Netflix (8.7% weight in the Fund) and Masimo (6.2% weight in the Fund) were up 16.1% and 12.1%, respectively, in the first quarter of 2020 when the market was down 19.5% as they were beneficiaries of the “shelter-in-place” era. More people stuck at home meant more time watching Netflix content. Masimo’s leading position in medical-grade pulse oximetry led to a surge in hospital demand for its products to provide solutions for COVID treatments. This quarter, as economies began to reopen, however, Netflix and Masimo were down 5.1% and 15.7% respectively, while the S&P 500 was up 6.4%.
Another example was the market’s reaction to Costco Wholesale (1.5% weight in the Fund) during the quarter. From December 31, 2020 to March 8th, Costco shares declined 17% and dropped below their pre-pandemic high. The common rationale offered by sell-side analysts was that Costco would face difficult one-year “comps” (i.e. same-store sales, which compare sales from stores open for at least a year). Because so many consumers rushed to Costco ahead of shelter-in-place and subsequent quarantines, it will be harder for Costco to meaningfully beat those results when compared year-over-year. That may indeed be true, but we struggle to understand how Costco could be “less valuable” than it was a year earlier when it concurrently increased its membership base by over 7%, or 3.9 million members. With membership renewal rates around 90%, the vast majority of the new customers Costco brought in last year will be around for years to come.
Analysts also complained about Costco raising its already industry-leading minimum wage to $16/hour, with an average “effective” pay of $23-$24/hour when you include overtime and bonuses. Costco paying its employees “too much” has been a common gripe of Wall Street analysts for at least two decades. While the extra pay does indeed impact short-term profit margins, it also serves to make Costco more durable, as its flywheel (i.e. a virtuous value cycle) starts with happy employees. A 20-year chart of Costco stock price is evidence that this strategy works and we’re confident that it will continue to work.
These examples show how the market can obsess over what’s at its feet rather than thinking about what’s on the horizon (which, by the way, is where most of a company’s intrinsic value is determined). To be sure, the long-term is made up of a bunch of short terms, but no company has a smooth trajectory up and to the right. That’s why it’s critical for us to build conviction in high quality businesses that add value for their stakeholders in good times and bad times. We firmly believe that Netflix, Masimo, and Costco are all stronger companies today than they were last February.
One of our best performing holdings in the first quarter, Charles Schwab & Co, offers a good example of this dynamic. The stock had underperformed the S&P 500 in recent years, as declining interest rates and the elimination of trading commissions dented profitability. As we wrote in October 2019, though, its decision to proactively “kill commissions” only fed its “flywheel of scale” and took its major competitors by surprise. Its immense scale allows Schwab to spread out expenses much wider than its competitors and its low-cost profile attracts investor assets to its platform. Its scale also provides Schwab an opportunity to launch new products and services for its large client base and gain immediate traction, while it may take an upstart years to scratch the surface.