The Ensemble Fund (the “Fund”) returned 16.73% for the fiscal year ended October 31, 2020. For comparative purposes, the S&P 500® Index (“S&P 500”), which is the Fund’s benchmark, had a total return of 9.71% over the same time period.
The Fund began the fiscal year performing similarly to the S&P 500 up until February 19th, when the S&P 500 hit its peak level prior to the Coronavirus driven sell off. The Fund then slightly outperformed the market during the 33% decline that occurred over the following four weeks. But during the recovery of the market, the Fund materially outperformed the S&P 500 generating returns of 55.65% versus the S&P 500 up 47.71%. We attributed our outperformance during the market recovery to our portfolio companies as a group being less negatively effected by Coronavirus related headwinds than the average company in our benchmark and being more positively affected by the acceleration towards digital commerce triggered by the pandemic.
During the fiscal year, we owned 25 different companies of which 20 generated a positive return for the Fund. Significant detractors from the Fund’s total return included the following:
- Sensata Technologies: The Fund owned Sensata from inception until late March of 2020. We exited this position after it had declined materially during the Coronavirus fueled sell off because we believed that despite it trading at a very discounted value versus our assessment of intrinsic value, that we had better investment opportunities to direct the sales proceeds into. We also believed that while Sensata remained a mission critical supplier to global automakers, that the massive potential disruption to the global auto supply chain would be difficult for Sensata to navigate.
- Booking Holdings Inc. (4.4%* weight in Fund): Booking Holdings Inc. is the leading global online travel agency with a focus on making hotel reservations, particularly in Europe. After the stock price declined by nearly 42% during the month-long market selloff (from February 14, 2020 through March 23, 2020), the stock rallied by 47% through the end of the Fund’s fiscal year for a full fiscal year return of -17%. While we expect demand for hotel rooms to remain depressed for a number of years, we also believe that the independent hotels that depend on Booking to deliver customers to them will need Booking more than ever. The company has a strong balance sheet to weather a period of even very weak demand and we continue to believe the stock is materially undervalued.
- First American Financial Corporation (3.7%* weight in the Fund): First American Financial is one of the two leading title insurance companies in the United States. Under US real estate law, any disputes about the title to a home must be resolved in the courts. There is no single, centralized, government record database that determines who holds title to a house. Therefore, mortgage lenders require home buyers to purchaser title insurance. We believed prior to the pandemic that the US housing market was on the verge of staging a multiyear increase in the number of homes being sold. While the pandemic initially halted the sale of homes, during the recovery phase there has been an intense interest in moving, with the number of home sales on a year to date basis fully making up for the lost sales in the spring. First American’s stock price was down over the Fund’s fiscal year, but we believe that the pandemic has triggered a long awaited recovery in housing transactions and are confident in First American’s medium to long term outlook.
Significant contributors to the Fund’s total return included the following:
- Netflix Inc. (8.6%* weight in Fund): Netflix Inc. was our largest average holding during the fiscal year and one of our top performers, rallying by 65.53%. While the pandemic negatively impacted the financial results of most public companies, at least initially, the requirement for people around the globe to shelter in their home greatly boosted the number of new Netflix subscribers. This huge increase in paying customers coincided with the closure of movie theaters and postponement of televised sporting events, both of which are alternatives to watching Netflix. We continue to believe that Netflix has a long path of future growth ahead of it as it consolidates its position as the first truly global streaming media company.
- Masimo Corp (6.5%* weight in Fund): Masimo Corp. is a provider of patient monitoring systems to hospitals, with many of their offerings focused on monitoring the level of oxygen in a patient’s blood stream. Coronavirus is a respiratory illness and the severity of a patient’s illness can be monitored using Masimo’s sensors. In addition to spurring increased demand for their existing products, the company also launched a new remote monitoring product that allows hospitals to send patients with mild cases of Coronavirus home, while continuing to monitor them and bringing them back to the hospital should their oxygen levels decline. We believe that these remote monitoring tools have broad applicability beyond monitoring Coronavirus cases and think that the company is building a large new addition to its earnings power via this tool set.
- Chipotle Mexican Grill, Inc. (3.8%* weight in Fund): We first purchased shares of Chipotle during the initial stages of the pandemic fueled market sell off in March after it had declined by over 20%. We then added materially to our position in late March after the stock had declined further. Given high levels of volatility in Chipotle and other stocks in our portfolio, we traded out of some of our shares during the market recovery before adding materially to our position in June as it became clear to us that Chipotle was greatly benefiting from the pandemic as independent restaurants went out of business and Chipotle’s best in class digital ordering and delivery offering made it well prepared to serve customers during the pandemic and beyond.