2016 Q3 Shareholder Letter

October 18, 2016

Dear Fellow Shareholders:

The Bretton Fund’s net asset value per share (NAV) as of September 30, 2016, was $24.57. The fund’s total return for the quarter was 1.95%, while the S&P 500 Index returned 3.85%.

Total Returns as of September 30, 2016

3rd Quarter1 YearAnnualized
3 Years
Annualized
5 Years
Annualized Since
9/30/10 Inception
Bretton Fund1.95%4.35%3.61%12.35%9.89%
S&P 500 Index3.85%15.43%11.16%16.37%13.68%

Performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. You may obtain performance data current to the most recent month-end here or by calling 800.231.2901.

All returns include change in share prices, reinvestment of any dividends, and capital gains distributions. Indices shown are broad-based, unmanaged indices commonly used to measure performance of US stocks. These indices do not incur expenses and are not available for investment. The fund’s expense ratio is 1.50%.

Contributors to Performance

Our investment that had the largest impact this quarter was Alphabet, parent company of Google, adding 0.9% to the fund, as its revenue and earnings continued to grow rapidly. Union Pacific, Ross Stores, Mastercard, and Bank of America all added 0.7% each to the fund in the quarter.

The largest negative impact was Carter’s, which announced revenue growth that, while still strong, was below what investors were expecting, taking 0.9% off of performance. We think Carter’s has a long runway ahead of it and aren’t too concerned about the quarter. HD Supply took away 0.5% as it also reported slower-than-expected revenue growth, and MEDNAX, the physician-staffing group, had a negative 0.5% impact, with earnings falling short of expectations due to lower margins on its recent acquisitions.

As many of you are aware, regulators fined Wells Fargo for illegal sales practices around creating accounts for customers without their permission. The $185 million fine, at less than 1% of the bank’s market value of $230 billion, is immaterial. The real damage is to its reputation, which will be much costlier. While this wasn’t a grand conspiracy by senior management to earn extra fees (the estimated amount of revenue earned from the scheme is about $2 million), management should have recognized the consequences of unrealistic sales targets for branch tellers and had better compliance mechanisms in place. Wells Fargo needs to make real changes, and they appear to be taking this seriously: letting go CEO John Stumpf and the head of the retail banking group, eliminating sales targets for tellers, and putting in better controls. Despite this transgression, the vast majority of what Wells Fargo does on a daily basis adds genuine value to its customers: loans for homes, loans for small businesses, financial advice, and checking and banking services. The decline in the stock price hurt the fund by 0.3% this quarter. We believe the stock remains significantly undervalued, though we are closely watching how the company responds to this setback.

Portfolio

Security% of Net Assets
Alphabet, Inc.8.2%
Union Pacific Corp.6.6%
AutoZone, Inc.6.4%
MEDNAX, Inc.5.7%
Wells Fargo & Company5.7%
Ross Stores, Inc.5.5%
HD Supply Holdings, Inc.5.2%
Mastercard, Inc.4.9%
Bank of America Corp.4.7%
American Express Co.4.7%
JPMorgan Chase & Co.4.5%
Berkshire Hathaway Inc.4.5%
Valspar Corp.4.4%
Carter's, Inc.4.3%
Flowserve Corp.4.0%
Discovery Communications, Inc.4.0%
Nordson Corp.3.1%
Visa Inc.2.9%
Armanino Foods of Distinction, Inc.2.4%
Verisk Analytics, Inc.1.5%
Whole Foods Market, Inc.1.3%
Cash*5.5%

*Cash represents cash equivalents less liabilities in excess of other assets.

This past quarter, we made a number of changes to the fund that shifted the portfolio away from investments we were less certain about to higher-confidence investments. We eliminated our positions in Centene (for a 9.8% gain), PGT (5.7% gain), Realogy Holdings (22.2% loss), and Community Health Systems (74.6% loss), the latter being the fund’s worst investment to date by far. Community made a disastrous acquisition, and its revenue could not keep up with its increasing costs. It’s a humbling mistake and one we hope to never repeat.

We added two new companies to the fund: Berkshire Hathaway and Visa. Berkshire, the large conglomerate run by Warren Buffett, is a collection of various industrial, retail, and energy businesses, financed by one of the world’s best insurance operations. We’ve bought into these businesses at a reasonable 1.35x book value. Visa, similar to Mastercard, is benefiting from the ongoing conversion of the world’s payments from cash to cards. We think the market is underestimating the benefits from its recent acquisition of Visa Europe, which previously operated as an affiliate of Visa that was owned by its member banks in Europe.

Our assessment of the market remains unchanged from last quarter: just so-so. Stocks seem expensive to us—which likely means weaker future returns—but not to an excessive degree. We continue to take a conservative approach and look for great businesses at reasonable prices.

As always, thank you for investing.

Stephen Dodson            Raphael de Balmann
Portfolio Manager         Portfolio Manager