October 21, 2014

Dear Fellow Shareholders:

The Bretton Fund’s net asset value per share (NAV) as of September 30, 2014, was $24.07. The total return for the fund for the third quarter was 3.08%. Over the same period of time, the total return for the S&P 500 Index was 1.13%, and the total return for the Wilshire 5000 Total Market Index was 0.08%.

Total Returns as of September 30, 2014

3rd Quarter1 YearAnnualized
3 Years
Annualized Since
9/30/10 Inception
Bretton Fund3.08%8.70%20.49%14.54%
S&P 500 Index (A)1.13%19.73%22.99%17.12%
Wilshire 5000 Total Market Index (B)0.08%17.91%22.82%16.83%

(A) The S&P 500 is a broad, market-weighted average dominated by blue-chip stocks and is an unmanaged group of stocks whose composition is different from the Fund.

(B) The Wilshire 5000 Total Market Index measures the performance of all US 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. Current performance may be lower or higher than the performance data quoted. You may obtain performance data current to the most recent month-end 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

The largest single contributor to performance for the quarter was Ross Stores, adding 1.1% to the fund.

As a group, our railroad investments also contributed 1.1% to the fund. The four major freight railroads are the lifeblood of the industrial economy, the cheapest way of moving heavy goods over long distances. We own three of them: Union Pacific, Norfolk Southern, and CSX. (The fourth is Berkshire Hathaway’s Burlington Northern Santa Fe, known as BNSF.) The economic recovery has brought more railcars with more goods onto our companies’ rails, and the returns to the railroad from incremental utilization are enormous: It costs very little to attach another freight car. When we invested in the railroads, the market was concerned that coal use might decline and take with it a steady customer. It was a legitimate concern; four years ago, coal was 45% of the US power grid and is now barely 32%, an unheralded victory for public health. Yet, the railroads more than replaced the lost volume and have thrived in our four years of ownership.

The fund did not initiate or eliminate any investments this quarter. We added to our positions in Ross Stores and The Gap.


Security% of Net Assets
Wells Fargo & Company14.7%
Ross Stores, Inc.7.9%
Union Pacific Corp.5.4%
Norfolk Southern Corp.5.3%
Armanino Foods of Distinction, Inc.5.3%
America's Car-Mart, Inc.5.0%
Bank of America Corp.5.0%
CSX Corp.4.9%
JPMorgan Chase & Co.4.8%
Coach, Inc.4.6%
Aflac, Inc.4.1%
American Express Co.3.9%
The Gap, Inc.3.6%
Carter’s, Inc.2.8%
New Resource Bank2.1%
Standard Financial Corp.1.3%
SI Financial Group, Inc.0.9%

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

Ross Stores

As longtime investors know, Ross Stores is a discount retailer—or “off-price retailer,” as industry parlance has it—of branded apparel and accessories, with around 1,400 stores concentrated in the western half of the US. Ross is able to deliver lower prices by buying overruns and unsold inventory from apparel manufacturers and providing a barebones shopping experience.

A typical department store, such as Macy’s, operates elaborately laid-out stores in high-rent districts that it staffs with teams of salespeople and stocks with the latest fashions. To make the math work, the department store charges full price and demands that its vendors extend it generous financing terms, provide marketing support, and buy back unsold merchandise if all else fails. Ross is different. Ross’s stores are mostly in inexpensive, suburban areas, with simple racking, little organization, and no sales support; the only employee you’re likely to see outside the checkout line is a security guard. Ross gets better prices from its vendors by paying upfront and taking full risk for its purchases. When Ross combines those low prices with its leaner retail environment, it can pass along significant savings to bargain-hunting shoppers. A $20 shirt at Macy’s is $10 at Ross.

When we first invested in Ross, buying shares for $27 in late 2010, there was concern that its success was due to people downgrading to Ross from Macy’s and JCPenney temporarily because times were tough. Further, many were concerned that e-commerce “flash” sites like Gilt and Rue La La were the wave of the future and would capture Ross’s value-conscious customers. Then a funny thing happened. It turned out that e-commerce did not have the same economics as Ross. A mass e-mail only has room to display a few items; any more and the reader stops paying attention. Furthermore, e-commerce fulfillment is expensive; $5 in shipping charges has a major impact on a $10 ticket. A Ross customer might touch a couple hundred items in her treasure hunt through the store, an experience that’s not replicable online. The shift to cheaper venues for buying clothes isn’t something that only happens during recessions. It’s been happening for a long time; Ross and its main competitor, TJX Companies (T.J. Maxx, Marshalls), have increased sales per store steadily for decades. It’s a structural shift to lower prices in simpler settings, not unlike the shift from department stores to Costco and Walmart, or full-fare airline flights with hot meals to “no frills” discount airlines like Southwest and JetBlue.

As the durability of Ross’s model became clear, the share price rose from our original $27 in 2010 to a high of $82 in November 2013. Then it reversed, rapidly. Although Ross was growing at the same pace and operated more stores with higher sales per store, by July 2014, Ross’s share price had fallen from $82 to $62, losing a quarter of its value. Somehow the market decided that the Ross of July 2014 was worth $4.2 billion less than the Ross of November 2013. This struck us as strange. If there was no quoted market for the stock and we simply owned the company, we would hardly have thought the business lost a quarter of its value. We bought more stock at $64, and it has since rebounded to over $76. Sometimes there’s not really a rational explanation for even large moves in a stock price. You might consider our purchase at $64 a discount to the $82 high, or a sharp premium to our original $27 purchase; we view it as a fair price for a strong company.

As always, thank you for investing.

Stephen J. Dodson
Bretton Capital Management