This shareholder letter is part of the Bretton Fund 2013 Semiannual Report. Here’s the full report (pdf).

August 23, 2013

Dear Fellow Shareholders:

The Bretton Fund’s net asset value per share (NAV) as of June 30, 2013, was $21.94. The total return for the fund for the second quarter was 7.39%. Over the same period of time, the total return for the S&P 500 Index was 2.91%, and the total return for the Wilshire 5000 Total Market Index was 2.77%.

 Total Returns as of June 30, 2013

2nd QuarterFirst Half 20131 YearAnnualized Since
9/30/10 Inception
Bretton Fund7.39%16.45%19.18%17.08%
S&P 500 Index (B)2.91%13.82%20.60%15.71%
Wilshire 5000 Total Market Index (C)2.77%13.97%21.10%15.62%

(A) Since Inception returns include change in share prices and, in each case, include reinvestment of any dividends and capital gain distributions. The inception date of the Bretton Fund was September 30, 2010.

(B) The S&P 500® is a stock market index based on the market capitalizations of 500 leading companies publicly traded in the U.S. stock market, as determined by Standard & Poor’s, and captures approximately 80% coverage of available market capitalization.

(C) The Wilshire 5000 Total Market Index measures the performance of all U.S. equity securities with readily available price data.

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. All returns include change in share prices, reinvestment of any dividends, and capital gains distributions. Current performance may be lower or higher than the performance data quoted. 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. You may obtain performance data current to the most recent month-end here or by calling 800.231.2901. The fund’s expense ratio is 1.50%. An investment in the fund is subject to investment risks, including the possible loss of the principal amount invested. The fund’s principal underwriter is Rafferty Capital Markets, LLC.

Contributors to Performance

Coach and Armanino Foods, our two newest additions, immediately started pulling their weight this quarter as the two largest contributors to returns. Armanino’s stock returned 30% in the quarter, adding 1.3% to the fund’s NAV, and Coach added 1.2% as its stock appreciated 15%. This kind of immediate gratification will not, unfortunately, happen every time we add a new stock.

Two others that pitched in significantly during the quarter were Wells Fargo and Carter’s, contributing 1.1% and 0.9%, respectively. The main detractor from performance was America’s Car-Mart, dragging down NAV by 0.6%.


Security% of Net Assets
Wells Fargo & Company10.0%
Coach, Inc.9.3%
America's Car-Mart, Inc.8.2%
Ross Stores, Inc.7.0%
Aflac, Inc.6.1%
Armanino Foods of Distinction, Inc.5.6%
American Express Co.5.0%
JP Morgan Chase & Co.4.7%
Union Pacific Corp.4.3%
CSX Corp.4.1%
The Gap, Inc.4.1%
Norfolk Southern Corp.4.0%
Carter’s, Inc.4.0%
New Resource Bank3.4%
Standard Financial Corp.1.9%
SI Financial Group, Inc.1.4%
Apollo Group, Inc.0.7%

*Cash represents cash and other assets in excess of liabilities.

Sadly, no Armanino- or Coach-caliber opportunities presented themselves this quarter despite the diligent turning over of many stones by your portfolio manager. The fund neither initiated nor eliminated any investments during the quarter ended June 30, 2013.

Relevance and Defense

Value investing, the guiding principle of the Bretton Fund, is no more and no less than buying securities for less than they’re worth. The good news is that valuing a business is theoretically straightforward: The value of any business is what it earns over time for its owners. The bad news is that in practice it’s incredibly hard to reliably predict what any business will earn five, 10, 20 years from now. The microeconomic forces that determine business outcomes are a hodgepodge of rules and tendencies, not an elegant unifying framework with immutable laws such as what exists in, say, physics.

That said, there are a handful of microeconomic factors that are bigger levers than others, and it’s helpful to think about these when evaluating the underlying economics of various businesses. I’ve found much of any business’s economics can be broken down into two questions: How relevant will this business be in the future? How defensible is this business? For an ideal business, the answer to both these questions is “very much so”—a good business needs both relevance and defense.

I’m defining relevancy here as how much of a given product customers will want, i.e., demand growth. As the manufacturers of buggy whips and CD-ROM drives can attest to, a company doesn’t have much of a business if people don’t want its products anymore. For decades Kodak had a wonderful business selling camera film, a business that was both increasingly relevant and highly defensible. The number of pictures people took increased over time, and because almost no one else could make and distribute film the way Kodak could, the company could charge high prices. It had a moat. But when digital cameras arrived, film stopped being relevant, and that moat didn’t help much as demand collapsed. At the other end of the relevancy spectrum, initial investors in Costco or Wal-Mart, with enormous runways of relevance ahead of them, achieved outstanding returns.

Defensibility is less obvious than relevance, and I believe much less appreciated, despite being just as important. If it’s easy for anyone to enter your market and take away your business, you’re not going to see very good long-term returns despite even exceptionally high unit growth. I find the difference between the trucking and railroad industries so fascinating because both basically do same thing—they move large stuff from point A to point B—but the returns in trucking are awful compared to rail. Other than a handful of trucking companies that provide some type of extra service, such as logistics, most of the industry has, at best, mediocre long-term returns. Trucking and rail have equal relevance; the main difference between these two industries is defensibility, and that makes all the difference. There are only two large rail companies in each half of the US, so each railroad only has one significant competitor. It’s essentially impossible to create a large rail network from scratch today, but just about anyone can buy a truck, hang out a shingle, and start driving. If you’re a trucker and a customer doesn’t like the price you’re charging to ship lawn chairs from Dallas to Seattle, they can choose from an endless number of other truckers.

You can apply the framework of relevance and defense to any business. Here are some of our companies:

    • American Express: People will continue to charge more of their purchases to credit cards instead of using cash or checks, and it’s extremely hard to create an instant- payment network from scratch. Even successful newcomers like PayPal and Square mostly use the existing card networks like American Express and MasterCard. Great relevance, great defense.
    • Coach: There’s a very large opportunity to grow in Asia, and while a few new entrants have chipped away market share, Coach maintains a dominant market position. Great relevance, decent defense.
    • Wells Fargo: People and businesses will always need loans, and Wells can expand into the eastern US. Its huge deposit network gives it a lower cost of capital and a better source of loans than its competition. Good relevance, great defense.

Some non–Bretton Fund companies:

    • Coca-Cola: Worldwide soda consumption grows a few percentage points a year, and you could spend billions trying to displace Coke and Pepsi but wouldn’t make a dent. Good relevance, great defense.
    • Google: The quantity of Internet searches will continue to increase, and while Google has the best search engine now, it’s hard (for me) to tell if that’ll be the case 15 years from now. Google didn’t exist 15 years ago. How we interact with information online and what we even consider “search” is likely to change in unpredictable ways. Great relevance, unknown defense.
    • Netflix: Their old business of mailing DVDs for rental is declining, but it was, and continues to be, incredibly hard to do at scale. Poor relevance, great defense. Their new-ish business of streaming content is growing rapidly, but it’s not very hard for other companies to do, as we’ve seen with Amazon, Hulu, and others streaming much of the same content. So, the streaming business has great relevance, but terrible defense. (Netflix’s new-new business of producing its own content definitely gives it differentiation, but it remains to be seen whether it can do this consistently and profitably.)

Of course, this framework is only one tool that helps decide what price to pay for a business. An investment in even the most rapidly growing, utterly impenetrable business can turn out terribly if made at too high a price. There are a number of relevant and defensible companies out there that are easily identifiable; the hard part is finding the rare ones that are undervalued. The sweet spot for us continues to be relevant, defensible businesses at low prices (“cheap compounders”). I continue to spend my waking hours looking for them.

Mutual Fund Observer

The online publication Mutual Fund Observer started only a couple of years ago and has quickly become the go-to destination for investors looking for thoughtful commentary on undiscovered funds. (Mainstream mutual fund publications have increasingly focused on only the largest funds.) Bretton humbly remains un-large and undiscovered. Editor David Snowball recently started a conference call/podcast in which he interviews managers of highlighted funds, and he had me on in late May. David wrote up the interview into a mini-profile, and you can read that and listen to the full interview at Mutual Fund Observer’s website. An excerpt:

In imagining [starting up Bretton Fund] and its discipline, [Stephen Dodson] was struck by a paradox: Almost all investment professionals worshipped Warren Buffett, but almost none attempted to invest like him. Stephen’s estimate is that there are “a ton” of concentrated long-term value hedge funds, but fewer than 20 mutual funds…that follow Buffett’s discipline: He invests in “a small number of good business he believes that he understands and that are trading at a significant discount to what they believe they’re worth.” He seemed particularly struck by his interviews of managers who run successful, conventional equity funds: 50 to 100 stocks and a portfolio sensitive to the sector-weightings in some index. [Dodson says:]

I asked each of them, “How would you invest if it was only your money and you never had to report to outside shareholders, but you needed to sort of protect and grow this capital at an attractive rate for the rest of your life, how would you invest? Would you invest in the same approach, 50 to 100 stocks across all sectors?” And they said, “Absolutely not. I’d only invest in my 10 to 20 best ideas.”

In the Vanguard

The Bretton Fund is now available through Vanguard, so for those who prefer to invest through an online brokerage, Vanguard joins E*TRADE as the available online platforms for individual investors and Pershing for investment advisers.

If you have any questions about the fund, feel free to email me at As always, thank you for investing.

Stephen J. Dodson
Bretton Capital Management