This shareholder letter is part of the Bretton Fund 2021 Annual Report (pdf).

February 15, 2022

Dear Fellow Shareholders:

On December 31, 2021, the S&P 500 was 50% higher than it stood two years earlier. Did the long-term prospects of corporate America improve by 50%? Did we become 50% smarter, 50% more creative, 50% more productive, 50% better governed, 50% more secure? That seems hard to believe. Optimism is high, interest rates are low, and multiples are at levels rarely seen since the dotcom era.

Our portfolio is not immune. We are shareholders in immense enterprises that collectively employ millions of people. These people worked very hard over the past year to improve our businesses. Did they really improve them by 28%? Probably not. We must be seeing some exuberance.

That said, for better or worse we have stayed away from the deep end of companies with ambitious valuations. Each of our portfolio companies is profitable, cash-generative, earns a useful return on its invested capital, and trades for a price that appears reasonable. Alphabet, for example, is one of the most successful companies of all time, continues to increase its earnings by more than 20% per year, and trades for about the average multiple of the entire S&P 500. We think our collection of businesses at these prices is going to set us up well for the coming years.

Returns as of December 31, 2021 (A)

4th Quarter1 YearAnnualized
3 Years
5 Years
10 Years
Since Inception
Bretton Fund11.14%27.76%23.33%16.80%13.70%13.45%
S&P 500 Index (B)11.03%28.71%26.07%18.47%16.55%15.84%

Calendar Year Total Returns (A)

YearBretton FundS&P 500 Index
9/30/10 – 12/31/106.13%10.76%
Cumulative Since Inception313.54%423.15%

(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 largest contributor to performance in the quarter was Union Pacific, which added 1.4%. UnitedHealth added 1.3% and AutoZone 1.2%. All three announced strong earnings.

Canadian Pacific was the main detractor, which took 0.4% away from performance. JPMorgan and American Express each took off 0.1% as financials underperformed in the quarter.

Contributors to Performance for 2021
On top of a big 2020, Google’s stock price put up another big year, which added 5.6% to the fund. AutoZone, after a tepid 2020, rebounded strongly to add 3.1% to the fund. And Microsoft, benefitting from some of the same industry dynamics as Google, added 2.4%.

The stock with the largest negative impact was new holding Dream Finders Homes, which took off 0.9%. As a small, newly public company in a cyclical industry, its stock price is going to be a bit more volatile than our typical holding. Ross Stores had a negative impact of 0.3%.

The fund issued a long-term capital gain dividend of $0.346742 per share to shareholders on December 17, which amounted to 0.6% of the fund’s NAV. The fund continues to have very low tax impact, in big part due to its low turnover.


Security% of Net Assets
Alphabet, Inc.12.2%
AutoZone, Inc.6.2%
Microsoft Corporation6.0%
Union Pacific Corp.5.7%
NVR, Inc.5.4%
UnitedHealth Group Incorporated5.4%
S&P Global, Inc.5.2%
Bank of America Corp.5.2%
American Express Co.5.1%
The Progressive Corporation5.1%
Mastercard, Inc.5.0%
Visa, Inc.4.9%
JPMorgan Chase & Co.4.9%
The TJX Companies, Inc.4.2%
Ross Stores, Inc.3.7%
Dream Finders Homes, Inc.3.6%
Berkshire Hathaway, Inc.3.3%
PerkinElmer, Inc.3.3%
Canadian Pacific Railway Limited2.8%
Armanino Foods of Distinction, Inc.1.2%

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

As a reminder, Google’s advertising business got hit in the early days of the pandemic when travel and other sectors pulled their ads as they tried to figure out what was happening. Advertising as a whole came rushing back at the end of 2020, and that momentum kept going into 2021. Revenue increased 41% and earnings per share almost doubled. As one of the largest companies in the world, with revenue of $250 billion, these kind of growth numbers are incredible. We feel lucky to have been part of the ride. When we first bought our shares in 2015, Google—since renamed Alphabet—had already been public for 11 years. Our initial purchase price of $627 was many times greater than its $85 IPO price. Lots of investors felt most of the growth had already been had. With its stock at $2,894, it’s tempting to say the same thing, yet its core business shows no sign of slowing down. Plus, its cloud computing business is just getting up to speed and is likely to be as profitable for Google as it is for Microsoft and Amazon. Amazingly, we think the stock is still cheap despite being up 65% last year.

After a decade-plus of sleepy growth—and a sleepier stock price—Microsoft is in the middle of a bona fide renaissance thanks to the explosion of cloud computing. Corporate IT departments spent decades buying and maintaining their own servers, networking equipment, and software, all to be able to run core functions of their businesses. It was expensive, time-consuming, and worst of all, susceptible to failure and hackers. Now, companies are turning to Microsoft and other cloud computing services to do this work for them. Corporations large and small are jumping full bore into cloud computing, and we’re still in the early days of this transition. Powered by this growth, Microsoft’s revenue increased 15% last year and earnings per share by 34%. The stock returned 55%.

After a long run of outperformance, the stock prices of Mastercard and Visa had a weak year, with Mastercard up 1% and Visa flat. Some of it was gravity; no stock can outperform every year. And some of it was over concerns about the core business. Ever since Visa and Mastercard reached ubiquity decades ago, merchants and competitors have been trying to figure out ways around them. The European Payments Initiative (EPI) launched with the idea of uniting 20 eurozone banks in a new payments system; in the US, the Federal Reserve is in the early stages of developing its own payments system, FedNow. The stock market fell in love with “Buy Now, Pay Later” firms that offer a layaway experience directly from the merchant. Amazon threatened to stop accepting Visa credit cards, though soon reversed course. And naturally, no discussion of payments would be complete without cryptocurrencies, which for a decade have been a solution in search of a problem but have advocates with evangelical fervor.

These are real threats. And while we don’t want to sound blindly sanguine, it’s just very, very hard to displace the existing payment networks that most of the developed world revolves around. It is not just the speed of the processing—think about how fast a transaction finishes once you tap your phone to a register—but the security and mediation they provide. I sleep better knowing that if I lose my credit card or someone steals the number, I don’t have to pay for any fraudulent transactions. Visa and Mastercard have also been great about inviting potential competitors into their fold, offering them the ability to “ride their rails” and create their own economics on top of their platform. When Apple created Apple Pay, it could have started its own payment system from scratch and tried circumventing the payment networks, but it was just a lot easier for Apple to create an Apple Pay “layer” on top of Visa’s and Mastercard’s (and Amex’s) and instantly plug into all those cardholders and merchants.

All of this is to say, despite these potential threats and weak stock prices, we remain quite bullish. Even with continued headwinds from the lack of international travel, Mastercard and Visa still managed to increase earnings by 30% and 15%, respectively.

S&P Global Investors spent most of the year in regulatory limbo. In late November 2020, they announced the acquisition of IHS Markit, another provider of market data and indexes. The transaction is now expected to close in the first quarter of 2022, at which point the hard work of generating synergies will begin. Both legacy companies are themselves the product of multiple mergers, and they reflect Wall Street’s desire for order in a world with an ever-increasing number of securities. The stock returned a blistering 45% last year, while earnings per share increased 17%.

A little less than two years ago, the banks were preparing for a mass wave of defaults that never came, in large part due to unprecedented—and very much warranted—government stimulus. As the banks unwound these charges, earnings jumped. Bank of America’s earnings roughly doubled; JPMorgan’s were up by 73%. Interest rates crept up as inflation took off, and rates will almost certainly increase further this year. When we first invested in the banks a decade ago, their stock prices were deeply distressed (mid-single-digit price-to-earnings ratios) and were recovering from the 2008 financial crisis. They recovered—and then some—and we’ve done quite well on JPMorgan and Bank of America. With a strong economy and higher rates, we think there’s room for more. Bank of America returned 47% and JPMorgan 28%.

American Express bounced back nicely from its pandemic lows, with its stock returning 37%, despite being held back a bit by the lack of corporate travel. Consumers kept consuming, and after dropping by over half in 2020, earnings per share bounced back by 2.5x, which is 20% above pre-pandemic levels.

Progressive had a disappointing year by its lofty standards. It continued to take share in the auto insurance sector, increasing its number of policies in force by 7% and its net premiums written by twice this amount. However, the pandemic took its toll. Readers with long memories may recall that at the beginning of the pandemic, Progressive received a windfall when lockdowns reduced driving. Progressive gave some of this back to policyholders in the form of special rebates, and then kept rates low from 2020 to 2021. In 2021, drivers got back on the roads, yet they did not give up some of the bad habits they developed before the pandemic (driving while texting) or during the pandemic (excessive speed). At the height of the lockdowns, drivers sped aggressively on suddenly traffic-free roads, which led to worse car crashes. But it’s somewhat of an industry mystery why accident rates remain high even as traffic has returned to pre-pandemic levels. Covid restrictions and labor cost inflation have also increased the cost of car repairs. And, in a display of global economic interconnection, a shortage of automotive semiconductors limited new car production, which in turn caused a violent upward spike in prices for used cars. Since insurance claims are driven by accident frequency, accident severity, and the cost of repairing/replacing cars, the developments were unwelcome. Progressive hit a 95% combined ratio, up from 87% in 2020 and around 90% in the pre-pandemic era.

Crucially, these headwinds should abate in relatively short order. State Farm, the largest auto insurer in the US, saw even worse losses than Progressive, which is a leaner and more efficient organization. We expect Progressive to significantly raise rates, and we expect the industry to do so as well. It may take a bit longer for the used car market to stabilize, but the global auto industry tends toward overproduction, not underproduction. Its stock returned 11%.

AutoZone’s operational performance has been relatively steady for several years: store level growth of about 3% above inflation, 53% gross margins, and an aggressive stock buyback plan. There are about 275 million registered motor vehicles in the US, and the average age of this fleet creeps up by a couple of months each year as vehicles are more durable and remain in service longer.

The share price, on the other hand, has been anything but steady. A few years ago there was a major swoon when investors were concerned Amazon might disrupt the existing cozy triopoly (AutoZone, Advance Auto Parts, and O’Reilly), which didn’t come to pass. Recently there have been concerns about the advent of electric vehicles, which have vastly fewer moving parts than internal combustion engine–based vehicles. It’s legitimate, but premature. Yes, if all the vehicles in America were electric, there would be much less need for aftermarket engine parts (and also no tailpipe emissions and much less road noise—it would be great). That said, even if the auto manufacturers hit their goals of making half of new vehicles electric by 2030, that would represent about 8 to 9 million vehicles. It will take quite a long time to phase out the existing 275 million gas-powered cars plus the 100 million or so that will be sold over the next decade. AutoZone shares snapped upwards by about 77% last year and earnings per share by 32%.

Even having owned Ross Stores since the fund’s inception over 10 years ago, we continue to be amazed by how much people love their off-price shopping. Shoppers kept coming to Ross and T.J. Maxx looking for bargains. We estimate Ross and TJX both increased earnings per share in the ballpark of 10%, well above 2019 numbers. Yet their stock prices underperformed, and it’s hard to know exactly why. Ross returned -6% and TJX 12.8%. It’s possible investors are skeptical about in-person retailers in the Covid era or are concerned about their ability to manage the supply chain crunch. Regardless, the businesses continue to hum along, with their stocks trading at even more attractive levels.

Our little frozen-pasta-sauce manufacturer Armanino Foods had a nice rebound. Much of Armanino’s business is sales to foods-service venues like cafeterias, and 2020 wasn’t exactly a rip-roaring time for communal meal venues. Revenue dropped 25% from 2019 to 2020, and earnings fell 69%. But like much of our economy, they managed to figure it out eventually. Revenue is now above 2019 levels, though increased costs have pinched the bottom line. Its stock returned 33%.

Union Pacific continues to reap benefits of precision railroading, which has sped up deliveries and uses less equipment. Earnings per share increased 21%, and its shares returned 22%. Canadian Pacific, which adopted precision railroading well before Union Pacific, also found ways to deliver improved revenue and earnings with modest volume increases. Earnings increased an estimated 7%, though its stock only returned 4%. We likely weren’t the only investors who didn’t love the price they paid for Kansas City Southern.

When Paul Saville became CFO of NVR at the beginning of 2002, the company had just finished a record-breaking year in which it sold $2.6 billion in houses and generated $395 million in operating income, leading to $25 of earnings for each of its 9.5 million shares. Paul became CEO three years later, and NVR, still under his leadership, sold around $9.1 billion in houses last year, a healthy—if unspectacular—6.5% compounded growth rate over the preceding two decades. Its $1.5 billion in operating income represents a similar compounded growth rate of 6.9%. But there are fewer than 3.5 million shares outstanding now, and earnings per share are close to $330, a 14% compounded growth rate. Buying a significant amount of your shares over time can lead to outstanding returns for shareholders, and it’s not a coincidence most of our portfolio companies buy back their own shares. NVR shares can be maddeningly volatile, often driven by views on interest rate policy or other macroeconomic factors. The shares were up 45% last year; we could easily see that kind of dramatic move again this year, in either direction. We try to stay grounded in a few observations: the US has significantly under-built housing for decades; the regulatory factors that have prevented healthy development are unlikely to be addressed; and, through booms and crises, NVR has generated cash and given it back to shareholders.

Speaking of homebuilders with dramatic share prices, much smaller Dream Finders Homes is down about 18% from where we bought it. That the company’s float—the shares that are regularly traded—is relatively small exacerbates the market’s reactions, good or bad. A combination of strong demand and acquisitions roughly doubled its net income last year. The shares are exceptionally cheap, and we like Dream Finders for many of the same reasons we like NVR.

As a huge, acquisitive conglomerate, it’s tough for Berkshire Hathaway to find companies to acquire that are both material and compelling when markets are this expensive. Instead, it’s been putting the prodigious amounts of cash it generates into buying back its own shares, which (see above) we think increases the value of the remaining shares. Its shares were up 29%, and its book value per share increased around 12%.

UnitedHealth Group continues to deliver excellent growth, which is astonishing for a firm that already enrolls one in every seven Americans in its health plans. The large majority of UnitedHealth’s insurance business these days is more administration-like than insurance-like. Over 80% of its 45 million domestic members are enrolled either through a large employer—which takes on the risk while UnitedHealth collects a per member fee—or through a government program with similar economics. This is where enrollment growth is; UnitedHealth’s Medicare Advantage business grew by 800,000 members last year, about the population of North Dakota. Nationwide, the net enrollment in Medicare increases by about 1.5 million members per year as new cohorts age into the system more rapidly than older cohorts exit. Almost all of this enrollment increase goes to various Medicare Advantage programs like UnitedHealth’s, which we expect will continue.

Insurance and health-plan administration comprise about half of UnitedHealth’s business, but the equally large and faster growing part of the company is its healthcare services, which it groups together under the name Optum. UnitedHealth members buy drugs through the in-house pharmacy benefits manager, OptumRx, and in many cases see OptumHealth doctors or undergo procedures at OptumCare surgical facilities. Taken together, this collection of ancillary services is growing at a double-digit pace. Although the share price increased 45% in 2021, at the end of the year we still owned the company for about 23x earnings.

PerkinElmer performed well in 2021. Sadly, $1.5 billion of its $5 billion in revenue came from Covid-related products, an unexpected windfall from a disease we hoped would have been resolved by now. We still believe that demand for PCR Covid tests and tools will mostly go away, although perhaps on a longer timeframe. Meanwhile, the core platform remains extremely strong. On the diagnostics side, PerkinElmer makes the vast majority of its money from the consumables used by its diagnostic machines. Many of the machines currently pressed into service for Covid tests will remain in labs around the world to test for other diseases. On the life sciences side, we are at the beginning of a new phase of drug development with the evolution of large molecules and the revolutionary potential of mRNA. We expect continued demand for PerkinElmer’s reagents and imaging tools as firms redouble their efforts to bring drugs to market. Before the pandemic, PerkinElmer had revenue of $2.9 billion. In 2023, when the Covid revenue (hopefully) rolls off completely, we expect the company to have revenue of $4.5 billion. The share price increased by 40% over the course of 2021.

Investments Initiated in 2020
Dream Finders Homes

The fund didn’t exit any holdings last year. We sold down a substantial portion of our Canadian Pacific position.

Investing Climate
The main macroeconomic concern is inflation, which the government estimates to be at a 40-year high. Perhaps because the leadership of the US is comprised of people who reached political maturity during the Carter and first Reagan terms, we hear voices from Washington urging massive interest rate hikes. About a third of our portfolio is invested in the traditionally rate-sensitive sectors of insurance, banking, and house building, so this is of some interest to us. Yet it seems that our policymakers may be looking at the wrong point in history. High interest rates reduce inflation by choking off investment and causing unemployment, but they will not open a semiconductor fab that has idled because the employees have Covid or allow the elderly to get on a cruise ship safely.

In 1940, How to Pay for the War by John Maynard Keynes was published. Britain’s problem, he wrote, was this: huge amounts of productive capacity would be repurposed for munitions. People would work harder than ever, thereby earning more money than ever, yet because the usual consumer economy would not exist, there would be few opportunities to spend the money and massive inflation for what remained. More or less, that seems to be where we are now. Household balance sheets have never been stronger, yet huge swaths of the economy are either not operating fully (travel and entertainment) or beset by supply chain problems (autos and housing). When the crisis stops, we will get back to equilibrium. We hope that’s sooner rather than later.

As always, thank you for investing.

Stephen Dodson            Raphael de Balmann
Portfolio Manager         Portfolio Manager