Ensemble Fund

Annual Letter

October 31, 2018

The Ensemble Fund returned 6.49% for the fiscal year ending October 31, 2018. For comparative purposes, the S&P 500, which is the Fund’s benchmark, had a total return of 7.35% over the same time period.

After generating returns similar to the S&P 500® Index during the first three months of the fiscal year, the Fund’s performance began to exceed its benchmark in February. This outperformance persisted for the balance of the year until early October. During the month of October, the Fund underperformed during the steep market selloff, declining 9.98% while the benchmark declined 6.84% for the month.

Last year, we observed that “stocks trading at a discount to what we believe is their intrinsic value could be most readily found in economically sensitive sectors such as industrials, technology and consumer discretionary. From our perspective, stocks in less cyclical sectors such as utilities and consumer staples generally offer much less value and appear to be trading at steep valuations.” For the first eleven months of the fiscal year, stocks in the Technology and Consumer Discretionary sectors outperformed the broader market, while Utilities and Consumer Staples underperformed.

In October, investors became worried that economic growth may start slowing, even as the Federal Reserve seemed to communicate that they believed the economy could handle materially higher interest rates. This combination led to a reversal of the performance trends that drove the market in the first eleven months of the fiscal year, with Utilities and Consumer Staples not just outperforming but rising in value even as the broader market declined sharply.

During the fiscal year, we owned 30 different companies of which 17 generated a positive return for the Fund.

detractors from the Fund’s total return included the following:

  • Now, Inc: This company is one of two leading distributors in the U.S. to oil and gas drilling and production companies. We had invested in this company believing that as oil prices rose and drilling activity in the U.S. expanded, the company would be well positioned to capture incremental spending from their customers. While the rebound in the U.S. rig count did materialize as we expected, the company did not benefit as much as we had forecasted. We exited this investment after experiencing a loss of 21% during the fiscal year.
  • First American Financial (5.7% weight in fund): First American is one of the two leading title insurance companies in the U.S. Every time a house is purchased using a mortgage, the lending bank requires that the buyer obtain title insurance. While home prices have increased significantly since the financial crisis, the volume of home sale transactions is still materially below what we believe are normal levels. However, home sales saw slowing growth in the spring of 2018 and began to decline in the summer and fall. We believe this is a temporary phenomenon related to the impact of rising interest rates and continue to believe that home sale volumes will expand materially in the years ahead. We took advantage of weakness in the stock to add to our position. Our investment in First American declined by 17% during the fiscal year.
  • Broadcom: Broadcom is a leading provider of technology used in mobile phones and mobile computing infrastructure. After the company’s attempted purchase of competitor Qualcomm was blocked by the government, we believed that the company would follow through on their stated intention to use their copious cash flow to buy back stock and raise their dividend. While this was initially correct with the company announcing a large stock buyback to accompany the previously announced 70% increase in their dividend, management subsequently announced their intention to purchase CA Technologies, a large acquisition that did not fit with our understanding of the company’s stated business strategy. The shift in strategy was at odds with management’s previous communications to shareholders. We exited this investment after experiencing a loss of 18% during the fiscal year.

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

  • Broadridge Financial Solutions (4.4% weight in fund): 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 very strongly, generating returns to the Fund of 38% during the fiscal year. The company has continued to execute well on their three-pronged strategy of maintaining a lock on the proxy business, expanding trade processing on a global basis and building a unique wealth management technology platform.
  • Mastercard (4.7% weight in fund): Along with Visa, MasterCard is part of an effective duopoly in the global payment processing industry. The stock continued its long run of strong performance as revenue growth accelerated during the year. The company has a very long growth runway ahead of it as the majority of consumer payments are still done with cash or check. Even after putting up a 35% rally during the year, we continue to believe the stock is undervalued.
  • Netflix (6.0% weight in fund): Given limited current profitability, Netflix is not a standard holding for the Fund. However, we believe that the company is intentionally keeping subscription fees well below what they could be in an effort to drive global growth. While the company sported a current PE ratio of well over 100 at the end of the fiscal year, we believe that if they were to raise the average subscriber fee from $10 to $15-$20, earnings would increase so much that the stock would be trading at a PE of under 20x. While this level of price increase could not be implemented immediately, we do believe that a Netflix subscription delivers value far in excess of this amount and that the company will continue their multiyear fee increases for a long time to come. The market has seemed to agree with our outlook, sending the stock up 55% during the first year.

As we discussed last year, 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. With interest rates moving up to multiple year highs and economically sensitive stocks outperforming for the first eleven months of the fiscal year, we believe that many of the fundamental and valuation conditions we identified previously have played out as expected.

However, despite relatively attractive valuations, economically sensitive stocks will still react negatively to growth scares such as the one that hit financial markets in October. Our goal is not to forecast the exact timing of the next recession, but instead to invest under the assumption that a recession will indeed happen at some point during our investment time horizon and identify stocks that are undervalued based on a conservative outlook for economic conditions and corporate fundamentals. Today, this strategy continues to identify economically sensitive stocks as offering the most attractive risk-return tradeoff.

Over the longer-term, we do not expect the Fund to have such a strong tilt towards economically sensitive sectors. Despite the economically sensitive positioning of the portfolio, the Fund’s beta, or its volatility relative to the S&P 500, was just 1.02 during the period. Over the longer term we seek to build a portfolio which we think will outperform, while being less volatile than the market. But in today’s market, we think risk-adjusted outperformance can be best achieved by accepting the cyclical economic risk that other investors are avoiding while refusing to overpay for companies that offer more defensive fundamental outlooks.


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.

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 or by calling the transfer agent at 1-800-785-8165. The prospectus should be read carefully before investing.

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