Ensemble Fund

Annual Letter

October 31, 2019

The Ensemble Fund returned 23.76% for the fiscal year ending October 31, 2019. For comparative purposes, the S&P 500, which is the Fund’s benchmark, had a total return of 14.33% over the same time period.

The Fund began the fiscal year performing similarly to the S&P 500® Index until December 24th when the stock market bottomed after a material decline. From that point onward until the end of the fiscal year, the Fund generated significant outperformance. While the Fund did hold a more economically sensitive set of securities than the benchmark causing strong levels of performance during the market recovery, the large majority of the outperformance came from idiosyncratic, company specific performance drivers.

As we have discussed each year since launching the Fund, we believe that investors are currently overvaluing stable, low growth companies and undervaluing more economically sensitive, but still high-quality businesses. Therefore, our portfolio’s heavier exposure to more economically sensitive names is not the result of a particular economic forecast, but our simple observation that in looking for undervalued securities we have found them in more economically sensitive sectors due to the market conditions that have persisted in recent years.

During the fiscal year, we owned 27 different companies of which 23 generated a positive return for the Fund.

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

  • Apple Inc.: The Fund owned Apple from inception until January of 2019. We exited the position after coming to the conclusion that the long-term growth of the iPhone franchise had become both limited and uncertain. While we invest in companies exhibiting all levels of growth, we generally avoid investing in companies with low and uncertain levels of growth. When long term growth of a company is less than the growth of the overall economy, the company’s products and services are effectively losing relevancy. While we believe that Apple may well be successful in launching the next great technology platform that eventually replaces the smartphone, the level of certainty we have in that outlook in light of the full maturation of the smartphone market declined to a level where we decided Apple no longer qualifies to be included in our portfolio.
  • Netflix (6.5% weight in Fund): Netflix’s stock was very volatile during the Fund’s fiscal year. From the beginning of the fiscal year through late December, the stock declined by 26% as recession worries caused investors to sell risk assets. From late December through early July, the stock appreciated by 62%. After the company reported weaker than expected subscriber growth and market worries about the competitive implications of Disney Plus and other streaming services entering the market, the stock declined by 25%. We believe that the competitive entries are occurring because of the late recognition by legacy media that Netflix has become too powerful and has become a major risk to their business models. While we think Netflix will be impacted by the competition, we think these efforts are too little, too late and we maintain conviction that Netflix will thrive over the long term.
  • Charles Schwab & Co (4.6% weight in the Fund): Charles Schwab & Co, provides custodial and related services to retain investors and independent registered investment advisors. During the fiscal year, they strongly grew the asset base they administer and were even featured in a Wall Street Journal story titled “How Schwab Ate Wall Street”. However, the company generates a significant and growing part of their earnings from “net interest income” on the cash that investors hold in their accounts. The level of these earnings is driven to a significant extent by the shape of the yield curve (the relative level of short term and long-term interest rates). With interest rates declining during the fiscal year and the yield curve “inverting” (long term rates declining to levels lower than shorter term rates in a behavior that occurs from time to time, but has never remained persistent), Schwab’s earnings were temporarily (in our opinion) reduced causing the stock to underperform.

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

  • Ferrari (6.9% weight in fund): After selling off during the recession scare at the end of calendar year 2018, the stock came flying back as these fears faded. It is important to note that despite the share price performance suggesting Ferrari is highly subject to economic conditions, historically they have actually been the most recession resistant automaker due to the long wait lists to buy one of their cars. This wait list means that even is some potential buyers decline to purchase due to economic conditions, there is a long line of buyers behind them.
  • Tiffany & Co: After exiting our Tiffany position completely in June 2018 when it reached $136 a share, we bought it back starting in December 2018 at $80 a share. Then in late October 2019, just before the close of the Fund’s fiscal year, a rumor broke that luxury holding company LVMH had offered to buy Tiffany. With the stock appreciating 30% on this rumor, we chose to exit our position at $128 a share. While we do not typically enter and then exit a position repeatedly, we believe that Tiffany’s stock price is far more volatile than the underlying business which causes us to buy and sell more frequently given the large changes in how other investors value the company. Should the LVMH transaction not occur and Tiffany remains a public company, we would not be surprised if we end up owning it again in the future.
  • Mastercard (6.0% weight in fund): Mastercard is one of our highest conviction holdings in the portfolio. The company exhibits high and stable growth, outstanding returns on capital and a low cost of capital due to its ability to finance much of its growth through the issuance of relatively low-cost debt. We believe that Mastercard is extremely well positioned within the global payment ecosystem and will continue to thrive over the very long term.

Much of the last fiscal year saw market moves primarily driven by changing economic outlooks as recession worries came and went and trade negotiations between the US and China were ongoing. While these are important issues that we monitor closely, we believe that investors are best served not by trying to guess how short-term macroeconomic and geopolitical events will unfold, but rather on how individual companies will perform over the long term despite shifting and uncertain economic and geopolitical conditions.

As we continue to manage the Fund in fiscal year 2020 and beyond, we will continue to seek to identify outstanding companies that exhibit three core characteristics:

Moat: We seek companies that have strong and persistent competitive advantages and offer products and services from within this moat that we believe consumers will continue to value over the long term.

Management: We seek companies that are managed by executive teams who have displayed strong talent for both creating economic value as well as allocating excess capital to the benefit of shareholders.

Forecastable: We seek companies that operate in industries and use business models that we believe make their financial results relatively forecastable over the long term and which we believe that our research team has the specific domain expertise to analyze as well or better than our competition.


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.