Ensemble Capital: Investing

Ensemble Capital offers investment management of custom-built portfolios. We invest in individual stocks and bonds based on our independent, objective research.

We manage portfolios on behalf of...

families
trusts
foundations
nonprofits

Philosophy

We use a COMMON-SENSE APPROACH to discovering INTRINSICALLY
VALUABLE COMPANIES.

We believe that investors are best served by owning a portfolio of companies, both emerging and established, that have significant growth opportunities and competitive advantages that allow them to sustain their profitability while returning capital to shareholders over time. Rather than trying to guess which way the market or certain stocks may move in reaction to short-term news, we look to participate in the profitability of companies that will achieve superior long-term corporate performance.

We are business analysts, not stock market pundits. We spend our time learning as much as possible about the industry trends, competitive dynamics and customer demands that give rise to intrinsically valuable companies. Many investors, on the other hand, are nothing more than stock market speculators, analyzing the stock market instead of the actual companies in which they invest. While it is seductive to think that an investor can guess which way the market will turn, sustainable returns are generated through investing capital based on extensive analysis of the specific businesses in which you take a position.

We believe the best approach to investing in the stock market is based on identifying strong businesses, evaluating what these companies are worth and then buying the stock of these companies when they are priced at a discount to their intrinsic value. The attraction of this approach is based on the timeless nature of its applicability.

While we bring our own take on the best way to evaluate investment opportunities and construct portfolios, the core of our process is the same essential approach used by many of the truly great investors over the last century. We think this will be the approach used by many of the truly great investors over the next century as well. While various styles of investing come in and out of favor, buying great companies at compelling prices based on the amount of cash earnings they can return to shareholders over time, is a common-sense approach that has worked over the long-term. It is an easy to understand but difficult to execute task and one on which we focus all of our time and energy.

We are business analysts, not stock market speculators. We spend our time learning as much as possible about the industry trends, competitive dynamics and customer demands that give rise to intrinsically valuable companies. We put our clients’ capital to work based on extensive analysis of the specific businesses in which we invest.

Importantly, we think that all investments that create cash flow have an intrinsic value that is distinct from the price set by the market. Investments like artwork, gold and other commodities do not have this same type of intrinsic value. They are instead worth exactly what people are willing to pay for them. Investments such as bonds or stocks, which generate cash flows, are valuable even if there is no market in which to sell them.

While market prices frequently are a good approximation of an investment’s intrinsic value, the key to long-term performance is doing the deep research required to identify those instances in which market value deviates from intrinsic value. Identifying and exploiting these occasions of market mispricing is the focus of our investment management process.

Case Study

Ensemble can help manage your assets to
COUNTERBALANCE POSITIONS HELD ELSEWHERE.

Michael oversees a significant base of assets on behalf of his extended family. He makes asset allocation and long-term planning decisions himself and places his family’s capital with various investment managers that demonstrate superior results within their area of focus.

Michael hired Ensemble Capital to manage his allocation to U.S. equities. Ensemble’s approach to equity management allows our clients to participate across the typical value vs. growth categories and regardless of whether small, medium or large capitalization stocks offer the best investment opportunities. Michael’s interest is in achieving the strongest possible long-term investment returns while minimizing risk. Ensemble Capital’s approach of building a focused portfolio of superior companies trading at reasonable valuations was a good fit for Michael’s long-term approach to investing.

| Portfolio Construction

We CAREFULLY CONSTRUCT CUSTOMIZED PORTFOLIOS of these
companies on behalf of each client.

Original in-house research is at the heart of our investment process. We look for companies that have superior competitive positioning and create real cash earnings on behalf of shareholders at a higher than average rate. These companies achieve above-average returns on the capital they invest into their businesses while growing at sustainable and attractive levels.

return on invested capital
ability to grow

We understand that any potential investment is far more than a blip on a stock screen; it’s a business. And, ultimately, businesses exist to create value for their owners. To this end, we focus on finding attractive businesses that deliver real and sustainable shareholder value. We believe return on invested capital (ROIC) – that is, the realized cash return on each dollar invested in the business – is the key metric to determine the value-creating ability of any company. We focus on companies that generate high or improving ROIC, as those businesses, all else equal, deliver the greatest shareholder value.

| Expectations Matter

Even the most attractive business does not have unlimited value. Frequently, the market will have excessively optimistic or pessimistic expectations about a company’s prospects, which are often reflected in stock valuations. Our objective is to identify companies with outstanding profitability and growth characteristics, at times when the market does not fully appreciate them.

We always seek to pay a compelling price for the businesses in which we invest. A fundamental element of our research process is estimating what a potential investment is worth — that is, its intrinsic value. Alongside our company’s due diligence, we use several methods to derive that estimate. We consider traditional valuation metrics, but we also generate an informed estimate of the economic profits a company can deliver now and into the future. We only invest client capital in companies which trade at a meaningful discount to our intrinsic value estimate, taking great care not to assume that every great company is also a great investment opportunity.

| Portfolio Management

The portfolio management process is a critical aspect of RISK CONTROL.

We believe that there are two key elements of successful portfolio management that are not practiced by the majority of investors. While it is possible to be successful without abiding by these guidelines, not sticking with them makes superior performance much more difficult to achieve.

| The True Cost of Diversification

Investment diversification has a SWEET SPOT.
Too much can be costly —
and too little can be much worse.

Over the years, the financial services industry has broadly accepted and promoted the mistaken idea that more diversification is always better. Both academic and real world studies show that for a portfolio of stocks, the risk reduction benefits of additional diversification is minimal beyond 20 to 30 positions. In addition, the cost of diversification beyond this point outweighs the potential benefits — adding a 50th or 100th position to a portfolio requires adding an investor’s 50th or 100th best idea.

At Ensemble Capital, we invest our clients’ equity assets in 15 to 30 securities. This degree of focus provides the benefits of diversification while keeping our clients’ assets in our best ideas. With this level of focus, we are able to know every company in our portfolio inside and out.

PARETO'S DIVERSIFICATION

Universe of public domestic stocks (NYSE and Nasdaq) 6,000
Universe of S&P 500 index 500
Typical actively managed equity mutual fund portfolio 200
Optimally diversified portfolio 25

Like the Pareto principle (the majority of the beneficial effect arises from the minority of the causes), Ensemble Capital invests in highly-focused, customized client portfolios of 15 to 30 securities. Selected by our own proprietary research, we believe these positions offer the greatest potential for market performance, as supported by academic research, real-world studies, and our own firm's superior performance over the last 15 years.

| Investing vs. Trading

We focus on making MULTIYEAR INVESTMENTS in companies we
think will thrive over the LONG TERM.

Our analysis focuses on the positive and negative developments that are likely to play out over the next 3 to 5 years or longer. Because we seek to benefit from superior long-term corporate performance in excess of market expectations, our holding period is designed to match the multiyear period over which corporate performance unfolds.

Our clients care primarily about the long-term performance of their assets and our investment analysis is focused on meeting those long-term goals. The majority of investors instead focus myopically on the positive and negative developments that are likely to occur in just the next couple of quarters. This short term focus leads investors to pay high prices for what’s hot now or sells at low prices in the face of transitory difficulties.

36-60 monthsEnsemble average holding time
VS
11 monthsWall Street average holding time

| Fixed Income

Over long time periods, we believe that stocks will deliver
SUPERIOR INVESTMENT RETURNS compared to bonds and cash.

The price of stocks' long-term outperformance is short-term volatility. Therefore, when clients have short-to-medium-term needs for their assets or simply wish to avoid some of the volatility inherent in stocks, we add bonds and cash equivalents to their portfolios.

Rather than seek to take undue risk in this portion of client portfolios in search of slightly higher returns, we focus on building very high-quality portfolios of bonds that we believe fairly compensate investors in light of their reduced level of risk. Our primary concern in fixed income investing is credit risk — that is, the risk the bond issuer will not deliver on its obligation to make timely interest and principal payments. We focus on issuers’ financial health, analyzing their cash flows, leverage and liquidity – but also their operating histories and management strength. In this sense, our bond analysis is not that dissimilar from key elements of our stock analysis – and we perform this research regardless of whether the issuer is a corporation, municipality or other borrower.

Holdings as of 09/30/2023

The positions below represent a partial list of holdings. For more information about positions owned by Ensemble Capital on behalf of clients as well as a full list of holdings and additional disclosure information related to these videos, please click here.

The positions above represent a partial list of holdings. For more information about positions owned by Ensemble Capital on behalf of clients as well as a full list of holdings and additional disclosure information related to these videos, please click here.