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

August 10, 2020

While all of us are still dealing with shutdowns and rising COVID-19 case counts, the market has already moved on, shrugging off concerns about the worst recession in modern history and roaring back within striking distance of its all-time highs.

We don’t have a strong opinion on whether the overall market is “correct” in this assessment, though we were surprised at how fast the market appeared to reach its level of optimism. Our overall economic assessment last quarter was that the short-term will be quite awful (massive unemployment, large reductions in spending and income), but once a vaccine becomes widely distributed, the economy should recover significantly. There will be some permanent changes, many being accelerated changes that were already happening: companies will be more flexible about people working from home; consumers will buy more groceries online; sales teams will video conference more and fly less; firms will outsource more of their computing (to the benefit of our Google and Microsoft investments).

This continues to be our assessment, with some caveats. The federal stimulus the CARES Act made a huge difference; even though unemployment soared and consumer spending fell, household incomes actually increased thanks to the unprecedented inflow of government aid. The Federal Reserve may have had an even larger impact on the fortunes of the largest companies, easing credit markets to the point where companies were able to raise enough cash to bridge them to an eventual recovery.

Tragically, these government successes were not matched in the field of virus management. We now know from the rest of the world that a program of universal mask-wearing, social distancing, and the avoidance of prolonged periods indoors can dramatically reduce the virus’s reproduction factor. Most developed countries have been able to reduce cases and manage some version of a reopening, but, unfortunately, our experience has been far worse.

This leaves us navigating a strange interim period. For now, economic activity seems to hinge on case counts, plus the generosity of Congress and the Fed. If federal stimulus keeps flowing and people take distancing measures seriously, we could have a reasonably functional economy by late fall. If not, the economy will remain abysmal.

How long this interim period will be—and how long it will take to recover—hinges on one thing that’s almost impossible to predict: how soon we get an effective vaccine. Given the virus’s rudimentary structure and how slowly it mutates, there will be a vaccine, although early versions might not be all that reliable or long-lasting, more akin to a seasonal, mostly effective flu shot than a foolproof measles vaccine that lasts a lifetime. The problem is that vaccines are difficult to test. Vaccines are administered to the healthy, and only a small percentage of healthy people will develop the condition. Several candidate vaccines are due to begin Phase 3 testing at the end of this month, but our sense is that the soonest a vaccine becomes widely disseminated is the first half of next year—and that’s if we get lucky. Our guess is in a downside scenario, it could be closer to two years based on more traditional vaccine development methods. Until then, our economy will run below capacity—far below in the absence of any effective treatments, moderately below if there are treatments but no vaccine.

We’re not basing our investment strategy on a fast or long recovery since we don’t know the answer. We own businesses we expect to increase earnings and generate cash flow in either scenario.

Total Returns as of June 30, 2020(A)

2nd QuarterFirst Half 20201 YearAnnualized 3 YearsAnnualized 5 YearsAnnualized Since Inception
Bretton Fund14.91%-10.66%0.53%11.52%7.61%10.58%
S&P 500 Index (B)20.54%-3.08%7.51%10.73%10.73%13.12%

(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.

Contributors to Performance
In the second quarter, investors drifted toward companies they deemed least impacted by—and even benefited from—the coronavirus: big tech. Google/Alphabet was the biggest contributor to our performance, adding 1.8% to the fund, followed by Microsoft with 1.4%. Mastercard added 1.3%.

The two laggards in the quarter were Ross Stores and Berkshire Hathaway, which each took off 0.1% from the fund.

We have underperformed so far this year, mostly due to our exposure to two sectors hit hard by the pandemic: retail and banking. We’ve reduced our exposure to banking a bit by eliminating our Wells Fargo position. (We discuss Wells specifically below.) Our remaining bank holdings in Bank of America and JPMorgan were hurt by the Fed reducing interest rates. They were also helped by government actions that ensure end users of capital are able to honor their obligations. We are cautiously optimistic that these benefits will support earnings over time.

We expect retailers like Ross and TJX to recover just fine, and based on recent anecdotal data (long lines outside T.J. Maxx stores), we think that recovery is already under way.


Security% of Net Assets
Alphabet, Inc.10.2%
Mastercard, Inc.7.1%
Union Pacific Corp.6.6%
Microsoft Corporation6.2%
Visa, Inc.5.7%
The Progressive Corporation5.6%
AutoZone, Inc.5.0%
NVR, Inc.5.0%
Canadian Pacific Railway Limited4.8%
Ross Stores, Inc.4.7%
The TJX Companies, Inc.4.4%
Bank of America Corp.4.1%
American Express Co.4.0%
JPMorgan Chase & Co.3.7%
UnitedHealth Group Incorporated3.6%
Carter’s, Inc.3.5%
Berkshire Hathaway, Inc.3.4%
S&P Global Inc.3.4%
Discovery, Inc.2.1%
Armanino Foods of Distinction, Inc.1.5%

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

Wells Fargo
We sold our entire Wells Fargo position, which we’ve owned since 2011, toward the beginning of the quarter. This wasn’t an easy decision. On one hand, we believe the shares continue to be undervalued, and we are hesitant to sell into a market panic. We also think the company will bring its costs in line with its competitors over the next few years. But we also feel the business is facing serious challenges. Pre-COVID, Wells wasn’t growing nearly as fast as its competitors JPMorgan and Bank of America. It also hasn’t been able to move past its regulatory issues as fast as we’d hoped, and we’re not optimistic that it will speed up in the COVID era. Given we like Bank of America and JPMorgan better and already own them, we decided to sell our Wells stake. Our total loss was -7.9%, or -1.8% on an annualized basis. Our opportunity cost, unfortunately, was greater.

We’re in truly unprecedented times, but through all of this, we have confidence people will keep Googling things, using their Mastercards/Visas/Amexes, driving their cars, and buying new houses.

As always, thank you for investing.

Stephen Dodson            Raphael de Balmann
Portfolio Manager         Portfolio Manager