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


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.
  • […]

What a year! Looking back decades from now, we’re confident that 2020 will go down as one of the most memorable and important years in market history. With that in mind, we thought we’d close out the year getting some final thoughts from Ensemble Capital’s research team on the year that was, and what impacts it might have in the coming years.

Thank you for reading our articles this year. We hope you enjoy this holiday season!

What company impressed you the most in 2020?

Sean Stannard-Stockton: In our portfolio, it would have to be Ferrari. Remember Italy was the first place outside of Wuhan that was hit hard by the virus back in March. Hospitals were overflowing. People were dying in hospital beds that were stacked end to end in hallways. At the time, we had several Zoom calls with investors and business executives in Italy. Every one of them was horrified! Seeing this peak into the spare bedrooms or home offices of businesspeople living and working in Italy, and seeing the fear that was on their faces and in every word they spoke, drove home the fact that operating a business at that time was a near impossibility.

But Ferrari did the impossible. As described in a Harvard Business School case study of how the company responded to COVID, they recognized immediately that the most important thing was to protect their employees. While the Italian government struggled to care for its citizens, Ferrari rolled out testing and when an employee tested positive, they immediately put them up in an apartment and provided medical care in an environment isolated from the employee’s family and co-workers.

But they did not stop there. A company is not an island, it exists in an interconnected reality of customers, employees, suppliers, etc. As HBS wrote:

“[Ferrari] focused on all stakeholders, not only employees. At a time when businesses are hurting financially, many leaders are focused locally on cost-cutting — including layoffs and furloughs. By contrast, Ferrari has been thinking about its stakeholders more broadly. Ferrari’s suppliers can access the same voluntary coronavirus screening offered to employees and their families. In addition, all the protocols Ferrari is using internally are shared with its suppliers so that they can use the same procedures in their own companies, and it is distributing masks not just to employees but also to suppliers and residents of the three towns—Maranello, Fiorano, and Formigine—where most of the company’s employees live.”

Most people would not look to a luxury car company to be a standard bearer of social responsibility. But we believe that all companies, in every industry, need to understand their relationship with all stakeholders and strive to make each of them a positive sum relationship.

Arif Karim: If I were to pick one company as the poster child, I’d say Moderna impressed me most this year… but really it’s the dawning of the age of genetic medicine that really came to the fore this year.

The combination of technology and our understanding of life sciences came to the fore this year, highlighted by Moderna’s (and BioNtech) development of an RNA based vaccine. After getting its hands on the RNA sequence of the SARS-COV2 virus that comprise its genetic instructions, Moderna was quickly able to design the RNA template for the spike protein powering the vaccine response in just two days. Not only is this a win for humanity against COVID, but it demonstrates the front edge of the wave of gene-based therapies that are in development and will generate huge gains in the treatment of inherited and acquired gene and protein centered diseases over the next few decades. Powering this wave of therapies, Illumina’s sequencing technology has opened up the realm of our personal genomes at an affordable price. This will allow scientists and engineers to access and use population level insights using machine learning across millions, and eventually billions, of genomes from around the world.

Todd Wenning: As Masimo’s CEO Joe Kiani put it, Masimo was built for a COVID-type scenario. And, Masimo delivered. Not only were its existing pulse oximetry products instrumental in treating COVID cases, but the company made some of its newer products, such as hemoglobin monitoring, available to hospitals at no additional charge during the pandemic. Back in March, and within a matter of weeks, Masimo iterated on an existing product to create a way for hospitals to remotely monitor patients’ vital signs using wireless sensors and a smartphone app. When hospitals don’t have enough beds or monitors to treat patients, Masimo SafetyNet can continuously monitor patients at home and alert medical professionals and caregivers if they need to come to the hospital immediately. For eight days of continuous monitoring, the patient pays just $150. Everyone wins in that situation – the patient, the hospital, and the medical system. Post-COVID, we believe there will be a huge market opportunity for this product to be used post hospital discharge on patients with chronic illnesses.

What’s something you changed your mind about in 2020?

Sean: Despite Ensemble Capital embracing remote work years ago, I was initially very skeptical of the idea that there would be a big shift towards remote work. The fact is that most jobs in America can’t be done remotely. As professional investors, it is easy to look around and see your peers seamlessly working remotely (and enjoying it!) and think everyone feels the same. Yet studies show that single men and women, as well as married women with children, report far lower levels of satisfaction with remote work then married men. Yet much of the capital invested in the stock market is managed by married men. So, I had originally thought that the majority of investors were expecting[…]

Ensemble Capital’s Senior Investment Analyst, Arif Karim, recently had the pleasure of speaking with Stig Brodersen and Preston Pysh on their Investors Podcast show We Study Billionaires about our investment thesis on Charles Schwab (SCHW).

During the interview, Arif discussed:

  • Schwab’s history and  business evolution from its roots as a modest discount broker into one of the largest custodian of assets with over $4T of client assets.
  • The intermingled role of scale and culture in driving efficiency, customer value proposition, and competitive advantage for Schwab.
  • Importance of Schwab Bank in supporting low fees for all client services while generating a strong return for shareholders.
  • The impact of interest rates and inflation to Schwab’s business through the business cycle.

To listen to the interview, please click on the link here.

For more information about positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE.

Back in October, Arif Karim had the pleasure of presenting our investment thesis and company analysis on well-known sportscar maker Ferrari (RACE) at the virtually hosted 2020 MOI European Summit.

He argued that Ferrari is not in the business of selling cars, so much as it is in creating luxury experiences and products that cater to the emotional desires of its passionate customers. This underpins its moat and associated high return on invested capital (ROIC) while the company’s targeted model line up expansion and powertrain electrification, with cars like the SF90 Stradale and the upcoming Puro Sangue utility vehicle, support continued future unit growth while maintaining the exclusivity and value of the brand.

The presentation can be viewed at the link below, with additional information we’ve posted in the past here and here.


Ferrari: Luxury Identity Brand with Enviable Business Model

For more information about positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE.

“You do not need to know precisely what is happening, or exactly where it is all going. What you need is to recognize the possibilities and challenges offered by the present moment, and to embrace them with courage, faith and hope.” ― Thomas Merton

We’ve written in the past about the difference between thinking you can predict the future (hint: you can’t) vs being aware of the range of possibilities and the range of probabilities of each possible outcome. We’ve explored these concepts in posts such as Investing Under Conditions of Uncertainty and Pick Your Poison: Implicit vs Explicit Forecasts, both of which focused on how we think about incorporating macroeconomic assumptions into our evaluation of individual company investments.

Our message has been that while investors cannot hope to accurately forecast the behavior of the economy over the short term, it is inescapable that investors must maintain a set of expectations about the long-term path of macroeconomic variables. If investors do not make these expectations explicitly, then they do so implicitly, often without realizing that these assumptions are driving their individual company assessments.

When thinking about the future range of possibilities, not only for the economy but for anything related to how human society will operate, we can often look to history for guideposts. Could inflation in the US jump to 10% or more at some point in the future? Well it did in the 1970s, so this does seem to be a possibility we should consider. Could inflation jump to crazy levels like 50% or 100% a year or more? While this has happened in failing states such as in Germany after World War I, Zimbabwe in the years just before the global financial crisis or Venezuela in recent years, there is no precedent for hyperinflation in functional economies. And so, unless we are also willing to forecast the possible failure of the US economic system, it is very unlikely that we will see hyperinflation over any meaningful investment time horizon.

But despite the range of possible outcomes for inflation being relatively wide, until just recently it was very clear what American monetary authorities believed was the acceptable range of inflation outcomes. There was broad agreement that inflation should be guided towards a target of 2% while also never letting inflation rise much at all above 2% other than for very transitory periods. But this summer, the Fed updated their monetary policy framework saying:

“The Federal Open Market Committee has adjusted its strategy for achieving its longer-run inflation goal of 2 percent by noting that it “seeks to achieve inflation that averages 2 percent over time.” To this end, the revised statement states that “following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.”

Thus, the Fed changed the range of possible inflation that they would accept. Had they had this policy in place over the last decade, they may never have begun raising interest rates the way they did from 2016 to 2018 (and then subsequently had to reverse in 2019). While the Fed cannot completely control inflation, they are the most powerful actor in the global economy in influencing the rate of inflation. So, while previously it may have been logically inconsistent to think that inflation could run at 3% for a number of years, even while the Fed kept rates low, the Fed has now signaled that this sort of economic outcome is not off the table.

The best way to understand what happened at the Fed, is through the lens of The Overton Window. At Ensemble Capital, we believe the Overton Window is moving, not only in relation to the Federal Reserve policy towards inflation, but across a range of very important social contracts that govern the economic possibilities. We think it is critically important that investors pay attention to these shifts and consider to what extent the shifting Overton Window changes the possible range of explicit or implicit expectations they have about the future.

The Overton Window

The Overton Window is a concept named for Joseph Overton, a political theorist. Overton argued that the range of political policy possibilities was not directly related to any politician’s individual preferences, but rather by the range of options that are politically acceptable to mainstream voters. This range of politically acceptable outcomes changes over time, but at any given moment, only policy options that fall within the Overton Window have any hope of becoming reality.

(Source: Hydrargyrum via Wikipedia)

As the diagram shows, the Overton Window covers the range of options that are considered Popular or Sensible, but once a particular policy is only deemed Acceptable, its odds of becoming reality start falling. Radical or Unthinkable proposals have no chance of actually being implemented, even if they are completely possible in a practical sense.

This short video from the MacKinac Center for Public Policy, where Overton worked until the time of his death in 2003, offers a simple, two and half minute explainer on the Overton Window.

Some key points:

  • The Overton Window does not say what is good or bad, it only describes the range of possibilities that society will accept.
  • The authorities do not decide where the Overton Window lies, rather society collectively defines the Overton Window and authorities operate within the window.
  • The Overton Window is not static. It moves over time, typically slowly, but occasionally rapidly. These changes are triggered by a range of different inputs, but notably one key trigger for abrupt and large shifts in the Overton Window are major society-wide crises.

While the Overton Window concept is meant to describe political possibilities, the concept has broader application to any situation in which a group of people are[…]