Ensemble Fund

Annual Letter

October 31, 2017

The Ensemble Fund (the “Fund”) returned 20.62% for the fiscal year ended October 31, 2017. For comparative purposes, the S&P 500® Index (the “S&P 500”), which is the Fund’s benchmark and is considered to be reflective of the US securities markets, had a total return of 23.63% over the same time period.

While we seek to outperform during all parts of the market cycle, our historical experience suggests that our strategy may lag during broad-based bull markets, such as was seen in 2017. While 11 out of 20 stocks that we owned for the entire period outperformed the S&P 500, significant declines in L Brands (-33%) and NOW, Inc (-40%) held back performance during our fiscal year.

Our fiscal year underperformance relative to the S&P 500 can be explained by weak results in two of our portfolio holdings from late July through late August, when our portfolio underperformed by 4.47% as both L Brands and NOW, Inc declined materially (discussed in more detail below). From August 22nd through the end of our fiscal year, L Brands rebounded sharply and the rest of the portfolio excluding NOW, Inc. performed strongly leading to our portfolio appreciating by 8.71% vs the S&P 500, which was up 5.33%.

As we look to 2018, we believe our portfolio is well positioned. NOW, Inc continues to be a drag on the portfolio during the first part of this new fiscal year, but at this time we believe that the company’s opportunity has only been deferred and we continue to believe our core thesis is correct.

During the period, we owned 28 different companies of which 23 generated a positive net return for the Fund. Significant detractors from the Fund’s total return included the following:

  • L Brands: L Brands is the parent company of Victoria’s Secret (about 2/3 of the business) and Bath & Body Works (about 1/3 of the business). Bath & Body Works is the leading retailer of fragrances (scented candles, body lotions, etc.). The fragrance business performed well this year, and we believe that this niche market is relatively immune to the threat of Amazon and other online retailers both because the company sells their own branded, proprietary scents and because there is still no way for consumers to smell fragrances while shopping online. Victoria’s Secret had a much more volatile year. After deciding to exit the swimwear business in late 2016, the company began reporting negative same store sales on a reported basis, as well as on an adjusted basis when excluding swimwear. While the market has been concerned that the business will be disrupted by Amazon, we believe that the company’s dominant position within the category (they sell approximately 40% of all women’s underwear in the U.S.), their strong brands, and their nascent expansion efforts in China all offer strong shareholder value generation potential.
  • NOW, Inc.: This company is one of two leading distributors in the U.S. to oil and gas drilling and production companies. After being a top contributor to Fund returns in 2016, NOW, Inc sold off sharply in 2017. While the rebound in the U.S. rig count that drove outperformance in the previous year continued, many of these newly drilled wells were capped rather than moved into the production phase. This has led “drilled but uncompleted wells” to reach record highs and limited the amount of revenue NOW, Inc is producing. We believe that these wells will eventually be completed, and the deferral of the company’s revenue opportunity does not justify the significant decline in the stock price.
  • Prestige Brands: A new holding for us, Prestige Brands sells over the counter health and wellness products. While a small company, their products typically have #1 or #2 market share in niche areas. While we believe that many consumer, staple-like, non-economically sensitive stocks are currently overvalued, we believe that Prestige is an exception. With fundamental results coming in largely as expected during the year, we believe the stock price decline was primarily due to industry and market pressures on its peer group, and we believe the current high free cash flow yield makes the stock an attractive investment.

Significant contributors to the Fund’s total return included the following:

  • MasterCard: Along with Visa, MasterCard is part of an effective duopoly in the global payment processing industry. For the second year in a row it was one of the top contributors to Fund performance. Even with the stock returning 40% in our fiscal year, we believe there is material additional upside. The company has a very long growth runway ahead of it as the majority of consumer payments are still done with cash or check.
  • Broadridge: Broadridge provides investor communications (statements, proxy voting and other notifications that security issuers, banks and brokers must send to shareholders and clients) and trade processing. They have an effective monopoly in proxy voting where 98% of mutual fund, ETF and corporate security shareholder votes are processed by the company. The stock performed strongly this year as fundamental performance was solid and the market re-valued the stock higher. We believe that the company can command an even higher valuation multiple in the years ahead that would bring it more in line with other high quality, financial-technology service providers.
  • Landstar Systems: After a period of weak trucking activity and weak load pricing, this truck brokerage business performed exceptionally well as both pricing and load volumes rebounded. We believe that the company benefits from being one of the leading truck brokers with a particularly dominant share of the flatbed truck market. As the U.S. industrial economy recovers, we expect the company to continue to report strong results.

Similar to last year, our portfolio continues to be significantly tilted towards economically sensitive stocks – notwithstanding the fact that the Ensemble Fund does not have a mandate to focus on economically sensitive sectors of the stock market. We strive instead to seek out the most attractively priced, high quality companies that exhibit significant competitive advantages. While many companies in less economically sensitive industries meet our criteria for potential investment, we believe that investors are currently assigning excessively high valuations to companies that offer non-cyclical business models.

With the 10-year treasury yield moving from 1.85% to 2.37% during our fiscal year, yield sensitive, defensive sectors, such as consumer staples and utilities, did indeed underperform the broader market. Our avoidance of these sectors benefited the relative performance of the Fund during the fiscal year. While we continue to think that more economically sensitive stocks currently offer better relative value, we would expect to rotate into a more balanced portfolio if defensive sectors continue to underperform return to more historically normal valuation levels.

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 by calling 1-800-785-8165.

The Ensemble Fund’s prospectus contains important information about the Fund’s investment objectives, potential risks, management fees, charges and expenses, and other information and should be read and considered carefully before investing. You may obtain a current copy of the Fund’s prospectus by calling 1-800-785-8165. Distributed by Rafferty Capital Markets, LLC-Garden City, NY 11530.

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.

Fund Fees: No loads; 1% gross expense ratio, 2% redemption fee on shares held 90 days or less.

Distributed by Rafferty Capital Markets, LLC Garden City, NY 11530.