This shareholder letter is part of the Bretton Fund 2020 Annual Report (pdf).

February 16, 2021

Dear Fellow Shareholders:

After a number of years of competitive relative returns, we had a disappointing 2020. Many of our holdings—namely our retailers and banks—were disproportionately hit by the pandemic, and we did not hold enough of the more exuberant areas of the market that took off in the latter half of the year. Our underperformance wasn’t solely because we didn’t participate in those sectors, but it didn’t help. We have pushed ourselves to adjust to the realities of low interest rates and high valuations by “paying up” for faster-growing businesses and trying to keep an open mind on what the future holds, but we’re not going to put our capital—and yours—at risk in securities whose prices have no relationship to their underlying value. We don’t think the current market is a bubble. But we do think there are areas of the market that are seeing excesses that haven’t been seen since 2000, and we suspect it ends the same way it did then.

Returns as of December 31, 2020 (A)

4th Quarter1 YearAnnualized
3 Years
5 Years
10 Years
Since Inception
Bretton Fund11.52%8.44%12.92%13.50%11.80%12.14%
S&P 500 Index (B)12.15%18.40%14.18%15.22%13.88%14.66%

Calendar Year Total Returns (A)

YearBretton FundS&P 500 Index
9/30/10 – 12/31/106.13%10.76%
Cumulative Since Inception223.68%306.47%

(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 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. 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 1.35%.The fund’s principal underwriter is Rafferty Capital Markets, LLC.

4th Quarter
The market kept up its surge in the fourth quarter, with almost all of our holdings increasing in value. The biggest contributor to the fund was Google, which added 1.6% to performance. Ross Stores and JPMorgan each added 1.3%.

The main laggard was S&P Global, which took off 0.3% from performance. The company announced a large acquisition of another market-data provider, which may have dampened its share price. While we’re generally skeptical of mega mergers, we’re optimistic this will turn out well for the company. We bought more shares during the quarter.

We parted with Discovery Communications in the fourth quarter. We were originally attracted to its loyal fan base, high cash flows, and cheap stock. While Discovery retains those attributes, we’ve become less optimistic that Discovery will find a home in the new media ecosystem as lucrative as its old one. As people cut the cable cord, they are re-bundling content from various providers like Netflix and Disney, but media companies without enough “must have” content risk being left behind. Discovery recently launched its own streaming service, discovery+, but people only want to subscribe to so many services. By last quarter, it was only a 2% position, but it was still a drag on our returns. We recognized a loss of 36.6% on the investment, -9.3% on an annualized basis.

Contributors to Performance for 2020
Our largest holding remains Google (aka Alphabet), so its stock-price performance—good or bad—is often going to have the largest impact on performance. Its stock did well this year, which contributed 2.8% to the fund’s 2020 performance. Progressive, which benefited from fewer people driving during the pandemic and thus fewer accidents, contributed 1.9%. Microsoft, another Covid-19 beneficiary, contributed 1.8%. Railroad operator Canadian Pacific, which continues to grow revenue and cut costs, added 1.7%.

The three main clunkers this year were companies that we have since parted with, albeit too late in hindsight: Wells Fargo, -2.2%; Discovery, -1.1%; and Carter’s, -0.9%. Armanino Foods took off 0.5% from performance as many restaurants closed, though we remain optimistic the company will do just fine in the imminent post-vaccine world.

The fund issued a long-term capital gain dividend of $0.126701 per share to shareholders on December 18, 2020, which amounted to 0.3% of the fund’s NAV. We continue to have a very small tax burden given our low portfolio turnover.


Security% of Net Assets
Alphabet, Inc.10.2%
Mastercard, Inc.6.8%
Union Pacific Corp.6.5%
The Progressive Corporation5.5%
Microsoft Corporation5.4%
Ross Stores, Inc.5.4%
JPMorgan Chase & Co.5.4%
Canadian Pacific Railway Limited5.2%
American Express Co.5.2%
Visa, Inc.5.2%
The TJX Companies, Inc.5.1%
NVR, Inc.5.0%
Bank of America Corp.4.8%
AutoZone, Inc.4.8%
UnitedHealth Group Incorporated4.6%
S&P Global Inc.4.6%
Berkshire Hathaway, Inc.3.5%
PerkinElmer, Inc.3.2%
Armanino Foods of Distinction, Inc.1.3%

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

Google (aka Alphabet) was one of our best performing stocks last year, returning 30.9%, while its earnings per share increased 19%. As lockdowns first went into place in the spring, many advertisers hit pause on their campaigns, waiting—like a lot of us—to see what the world would look like. And then—like a lot of us—advertisers adjusted. Travel companies cut back their campaigns, while ads for other goods, like athleisure wear and video games, picked up the slack. Google had a rough second quarter, but was back in the swing of things by the next quarter.

Microsoft’s stock also had a great year, returning 42.4% on increased earnings per share of 30%. The main driver of their growth in recent years is their cloud computing business, and while it did see a bump in demand as office workers went remote, most of the growth is from the continued shift of corporate computing systems to “the cloud.” We think this shift is still in its early stages.

While consumers resumed much of their spending by summer, what and how they used their Visas and Mastercards changed. For obvious reasons, people shifted to contactless payments—one of the Covid-era changes we think is permanent—and replaced travel purchases with online shopping and food delivery. Consumers spent more on their debit cards and less on their credit cards; Visa and Mastercard make more per transaction on the latter. They also make more on cross-border transactions that come mostly from international travel, which ground to a halt early in the pandemic. Visa’s and Mastercard’s earnings per share fell by 7% and 16%, respectively, compared to their usual mid-teens growth. We’re not too worried, and we think they’ll catch up nicely in the post-vaccine world. Visa’s stock returned 17.1% and Mastercard’s 20.2%.

Not surprisingly, Ross and TJX were among the hardest hit in our portfolio. In spring, almost all of their stores were closed. As health officials found that masks and distancing could significantly reduce transmission, the stores were able to reopen and continue operating during the recent winter surges. We estimate earnings per share declined roughly 80% for both companies. Most of the losses came from the second-quarter shutdowns, yet by the third quarter, sales were roughly the same as pre-crisis levels, which was honestly a little surprising to us. People really love their off-price apparel. Ross’s stock returned 5.8% and TJX’s 12.3%.

Homebuilder NVR’s stock dropped much more than the rest of the market as conventional wisdom held that an economic collapse wouldn’t exactly set the housing market on fire. But that’s exactly what happened. As the economy held up better than expected with government help, families flocked to the suburbs looking for new homes with more space and took advantage of working from home. Single-family home construction is booming, inventories are at an all-time low, and homebuilders can’t build houses fast enough. As we’ve discussed a number of times, there is a structural shortage of homes in the US, and we expect there to be many years of growth ahead for NVR, even post-Covid. Its stock returned 7.1%, and earnings per share grew 4%.

Like all retailers, AutoZone saw its sales drop sharply at the beginning of the lockdown, but since most of AutoZone’s sales are nondiscretionary (think spark plugs and brake pads), sales rebounded quite quickly. Earnings per share increased 13%, while the stock returned -0.5%.

Armanino Foods really struggled last year as so many of its food-service customers, like cafeterias, remain shut down. It hasn’t announced its 2020 earnings yet; they’re on track for a decline of over 50%. The total return from the stock was -24.9%.

After a strong performance in 2019, we wrote this about our bank stocks in last year’s report: “There will be another recession sooner than later, and our banks will see larger loans losses, but we think this is more than priced into the stock, and our banks are well reserved for that eventuality.” Little did we know “sooner” really meant “a few weeks from now.” Despite the economic shock, the banks still have huge capital cushions that can absorb large loan losses. Our remaining bank investments, JPMorgan and Bank of America, increased their reserves significantly at the beginning of the Covid-19 crisis in anticipation of imminent loan defaults, but with the government stimulus and perhaps a more resilient economy than many would have guessed, actual loan losses are up only slightly. They might happen later in 2021, but with an additional stimulus package and the vaccine rolling out, the large-scale losses may not be as bad as most people predicted. The bigger drag on the banks’ earnings power is lower rates, which in our opinion will persist for a long time. Despite this drag, we estimate both JPMorgan and Bank of America will continue to grow revenue and earnings over the next few years, while we believe their stocks remain bargains in a somewhat expensive market. JPMorgan’s earnings per share declined 17% last year, and its stock returned -5.5%. Bank of America’s earnings, which are more sensitive to interest rates, were down 32%, and its stock returned -11.6%.

American Express has elements of both a bank (it extends credit card loans) and a payments processor (most of its revenue is fees from cardholders and merchants) and was hit pretty hard by Covid-19, though we expect most of the impact will be transitory. It has a relatively diversified customer base overall, but a meaningful portion of its card activity is from business travel, which…there wasn’t a lot of last year. Similar to the banks, American Express recognized loan losses in anticipation of large defaults, though it’s not clear all of that will come to pass. Its stock returned -1.1%, while earnings per share were down 53%.

Progressive was one of the few companies that benefited significantly from lockdowns. People drove less and got into fewer accidents, but kept paying their car insurance bills. Like most of the major auto insurers, Progressive kicked some of those gains back to customers through rebates, but still increased earnings per share by 42%, leading to a 41.5% return for the stock. And in the mirror image of the banks, those excess gains will revert once drivers are on the roads again.

Bond rating agency and new holding S&P Global was also a Covid-19 beneficiary, as companies issued a record amount of debt given low rates and the desire for cash to bridge through the crisis. Earnings per share increased 23%, and we are up 23.8% so far on the investment.

Union Pacific and Canadian Pacific saw their rail traffic rebound by the end of the year and are now seeing higher volume from pent-up shipping demand. Union Pacific’s earnings were essentially flat from 2019, while its stock returned 17.6%. Canadian Pacific managed an 8% increase in earnings per share, while its stock returned 34.7%.
Berkshire Hathaway’s wide collection of businesses held up okay last year, though its stock trailed the market with a modest 2.4% return. Book value per share, the most relevant metric for Berkshire, increased an estimated 9%, while the ratio of its stock price to book value remains quite low compared to its historical average. While owning good, cash-generating businesses at reasonable prices can be decidedly uncool in a soaring market, history suggests that this works out well in the long run.
There may be no better example of the strangeness of our healthcare system than the performance of the largest health insurer in the middle of a pandemic that has killed 400,000 Americans. UnitedHealth’s earnings increased 12%, from $15.11/share to $16.88/share, as foregone medical care more than outweighed the costs of coronavirus treatment. Meanwhile, after a year that began with the two major political parties offering vastly different views of the healthcare landscape, from eliminating private health insurance to eliminating Medicaid, we elected a divided government with other priorities and a general tendency to make only marginal changes to the existing ecosystem. UnitedHealth returned 27.1% during our partial year of ownership, and we expect it to have a strong 2021 as employers resume hiring and Medicare Advantage continues to grow in popularity.

PerkinElmer is a laboratory testing equipment company with two major lines of business: Diagnostics and Discovery & Analytical (DAS). Both have broadly similar business models where PerkinElmer sells a piece of capital equipment and then monetizes a long stream of consumables purchases by customers; 70% of the revenue and the overwhelming majority of the operating income come from these consumables purchases.

The Diagnostic division focuses on the identification of diseases. For obvious reasons, this year the business was dominated by Covid-19, with PerkinElmer generating over $1 billion in revenue selling the most accurate coronavirus tests in the US. Crucially, this was accompanied by the installation of nearly two thousand testing machines; while Covid-19 may go away, we expect the testing machines to stay busy for years to come running other tests. Labs tend to use their tools. The company’s portfolio as a whole offers 500 tests, largely clustered in autoimmune, allergy, and infectious diseases. Diagnostics also houses the legacy core of the company, which is the prenatal screening franchise; PerkinElmer is the leader in noninvasive prenatal testing (NIPT), which uses fragments of fetal DNA found in the mother’s bloodstream to test for genetic disorders. We expect demand for NIPT to increase substantially after the American College of Gynecology’s decision in September 2020 to endorse NIPT for all pregnant women as the “standard of care”; commercial insurers have historically denied reimbursement to women under the age of 35.

The DAS business is similar to Diagnostics, except that instead of providing tests that will be used to identify conditions in people, it provides tests that are used to identify conditions in processes. The bulk of its business is with pharma companies, where it sells tests for all steps in the drug development and manufacturing processes. (A researcher might use a PerkinElmer test to identify antibodies in a sample, while a production engineer might use very different tests to check for contaminants in a manufacturing process.) Smaller portions of DAS sell into the food and cannabis industries.

Setting aside the Covid-19 windfall, we expect PKI to earn about $7/share on a sustainable basis. We own it for a little more than 20 times earnings and are up 13.9% so far.

Investments Initiated in 2020
S&P Global

Investments Exited in 2020, Internal Rate of Return
Carter’s, 5.5%
Continental Building Products, 18.5%
Discovery Communications, -9.3%
Wells Fargo, -1.8%

Investing Climate
The financial markets’ story of the year was exuberance. In the face of a pandemic, the US government unleashed so much fiscal and monetary stimulus that household balance sheets are better today than they were a year ago. Stocks are up, real estate is up, lucky- number schemes that call themselves “blockchain” are up. In most cases, the riskier the better.

Is this exuberance rational? We don’t know for sure. When Alan Greenspan famously described the market as “irrationally exuberant” in December 1996, the S&P 500 was 744. It went down on the day of his speech, then up to 1,522 in March of 2000, and on a total return basis, never came back to Greenspan’s irrational level. While the market of 1996 was expensive in terms of the preceding years, it turned out to be quite inexpensive based on what the future would offer.

At the same time, price matters, even for quality companies with fantastic prospects. Take Microsoft, perhaps the most successful American company of the last half century. In early 2000, Microsoft was generating about $8 billion in net income on $20 billion in revenue. The leading software analyst at the time projected that revenue growth would slow from nearly 30% in 1999 to closer to 6% as PC shipments slowed. He told investors not to worry about the slowing growth, and he had a “buy” rating on the stock. His projections ended up being too conservative, and today the company generates almost $50 billion of net income on $150 billion in revenue. But the advice to buy? From a peak of $56 (split-adjusted) in early 2000, Microsoft stock fell to $23 by the end of that year. In 2009, Microsoft’s only year of revenue contraction, it traded for $15, having lost 73% of its value despite tripling its revenue and doubling its net income. It would not reach its 2000 peak again until 2016 (16 years!), at which point it quadrupled the next four years. Put slightly differently, it went from trading for 30x revenues to 3x revenues to 11x revenues.

There are exceptional companies for sale in today’s market. At zero interest rates, maybe there is no time value of money and it is impossible to pay too much for growth. At the risk of being prisoners of our history, we don’t think this will persist over time. We think capital will generally be cheaper in the future than it has been in the past—and we can see the logic that this means prices should generally be higher—but we still think our investments need to combine elements of strategic relevance, business growth, profitability, and prices that account for an uncertain future. As it happened, we did not weigh these factors properly for last year’s market activity. We were insufficiently exuber- ant. We expect that discipline will work for us over a longer time frame.

As always, thank you for investing.

Stephen Dodson            Raphael de Balmann
Portfolio Manager         Portfolio Manager