October 12, 2018

Dear Fellow Shareholders:

The Bretton Fund’s net asset value per share (NAV) as of September 30, 2018, was $35.00, and the total return for the quarter was 9.24%.

Total Returns as of September 30, 2018 (A)

3rd Quarter1 YearAnnualized
3 Years
5 Years
Annualized Since
9/30/10 Inception
Bretton Fund9.24%26.35%14.74%9.99%12.41%
S&P 500 Index (B)7.71%17.91%17.31%13.95%14.81%

(A) All 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® Index is a broad-based stock market index based on the market capitalizations of 500 leading companies publicly traded in the US stock market, as determined by Standard & Poor’s, and captures approximately 80% coverage of available market capitalization.

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. The index shown is a broad-based, unmanaged index commonly used to mea- sure performance of US stocks. The index does not incur expenses and is not available for investment. The fund’s expense ratio is 1.50%. The fund’s principal underwriter is Rafferty Capital Markets, LLC.

Contributors to Performance
The market was up quite a bit this quarter, with almost all our holdings appreciating. Union Pacific lifted performance by 1.0% as its stock price rose 15% on strong volume and pricing, as well the formation of a new operating plan—an industry practice known as “precision railroading”—to significantly cut costs by running trains less frequently in longer formations. Ross Stores and TJX appreciated on strong results and better investor sentiment toward retailers, adding 1.0% and 0.9%, respectively, to the fund. Continental Building Products ran up 17% in the quarter as builders bought more drywall and Continental pushed through higher prices, adding 0.9% to the performance. After a couple of rough years for our AutoZone investment, the company saw improved demand from favorable weather and continued to take market share. Despite a 16% increase in the quarter that added 0.8% to the fund, the stock remains very cheap.

Three stocks declined in the quarter, the most significant of which was our new holding NVR, which we’ll discuss in more detail below. The short story is investors are concerned higher interest rates are going to stifle the market for new houses. It had a –0.6% impact on the fund. Carter’s, for years a solid and steady performer for us, saw its stock price drop 9%, hurting performance by 0.4%. Toys “R” Us, one of its largest customers, filed for bankruptcy earlier this year. We think customers will eventually buy their Carter’s clothes through other means, but the Toys bankruptcy is causing some short-term disruption. Wells Fargo’s regulatory woes kept coming, causing a 5% drop in the stock price and –0.2% impact on the fund. Like both Bank of America and JPMorgan did a few years ago, we think Wells will eventually move past its own compliance issues with its economic model more or less intact.


Security% of Net Assets
Alphabet, Inc.10.6%
Union Pacific Corp.7.8%
Ross Stores, Inc.6.7%
Mastercard, Inc.6.5%
Bank of America Corp.6.3%
AutoZone, Inc.6.0%
The TJX Companies, Inc.5.9%
Continental Building Products, Inc.5.8%
American Express Co.5.5%
Visa, Inc.5.4%
JPMorgan Chase & Co.5.4%
Berkshire Hathaway, Inc.5.0%
Wells Fargo & Company4.9%
Canadian Pacific Railway Limited4.9%
Carter’s, Inc.4.3%
Discovery, Inc.3.3%
NVR, Inc.3.1%
Armanino Foods of Distinction, Inc.2.1%

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

New holding NVR is a housebuilder with a focus on the Mid-Atlantic region. The conventional wisdom is that since house prices are inversely correlated with interest rates, housebuilders are precisely the companies to avoid in a rising rate environment. So why would we buy a housebuilder when rates are rising?

To begin with, the US has produced far less housing since the financial crisis than we would expect given a normal replacement cycle and population growth. For example, in the 1960s, coming off a late-1950’s recession and peak births of about 4.2 million per year, the US population increased by 24 million people, and we built a bit more than 9 million single-family houses. Over the past 10 years, coming off the financial crisis and peak births of about 4.3 million per year, the US population also increased by 24 million people, but we only built 6 million single-family houses in a decade with much lower interest rates.

Indeed, over the past 10 years we have built fewer houses than during just about any other time period since the Korean War.

Even with rising rates, we think new house construction is going to grow at a fast rate for a long time.

For almost all builders, the workflow begins by buying land, going through the planning process, building the houses, and then selling them. There’s a saying that if you give an oil man money, he will drill a hole; well, give a builder money and he’ll buy more land. In good years, it means they can make more money from land appreciation than from the hard work of putting up houses. The problem with this approach is no cash leaves the system: the proceeds from one sale gets rolled—typically along with considerable debt—into more land, and when the economy hits an air pocket, all of a sudden there is a highly indebted portfolio of land and construction with no way to service the debt.

NVR takes a different approach. They don’t buy land. Instead, they give small deposits to the farmer or speculator who owns the parcel and complete payment only when they have purchase orders for their houses and are about to begin construction. Instead of a four- or five-year development cycle typical in the industry, they run about a 90-day cash cycle. And instead of plowing the cash into more land, they give it back to shareholders by buying back stock.

We think this is a better model of doing business. NVR’s return on equity, a key measure of profitability, is 37%, almost four times the industry average. We own the stock for about 12 times our estimate of forward earnings, and we expect the company to grow above 6% while continuing to enjoy a healthy return on capital.

To make room for NVR, we sold out of HD Supply, which we’ve owned since 2015. We achieved a gain of 31%, 11.1% on an annualized basis.

As always, thank you for investing.

Stephen Dodson            Raphael de Balmann
Portfolio Manager         Portfolio Manager