April 9, 2021
Dear Fellow Shareholders:
Ah, the light at the end of the tunnel. As vaccines get jabbed into arms and grandparents reunite with grandchildren, the end of the pandemic is in sight. Almost exactly a year ago, we wrote:
Once enough people are vaccinated to achieve herd immunity and the virus fades away, things will look pretty similar to the way they did before. Sure, governments will be more prepared for the next pandemic, people may use more hand sanitizer or occasionally wear face masks, and this will be a generational-defining event for our culture, similar to 9/11. But people will travel again, eat at restaurants again, and go about their daily lives.
We are on the verge of this return to almost-normalcy in the US. Despite a “fourth surge” in Michigan and a few other places, it does seem like the worst is past us (knock on the closest piece of wood, please), and it happened sooner than many people—including us—were expecting.
The butcher’s bill for our mismanagement of the crisis—about 555,000 dead at last count, versus 1,700 in South Korea, a country one sixth our size that reported its first case the same time we did—is hard to fathom. The D-Day invasion of Normandy was the seminal story of sacrifice in World War II; 2,500 Americans died in the attack. From early December to mid-February, we suffered greater losses every single day. In total, we lost more people than all the American battlefield deaths in all the wars of the 20th century.
Daily life will quickly return to normal. It’s a little less clear whether the rules of politics and the economy will snap back. The US government quickly approved enormous stimulus packages—far more generous than those in Europe and dwarfing the post–financial crisis recovery act—and the economy thrived.
Total Returns as of March 31, 2021
| 1st Quarter | 1 Year | 3 Years | 5 Years | 10 Years | Since Inception (A) | |
| Bretton Fund | 8.33% | 51.09% | 16.35% | 15.35% | 12.33% | 12.69% |
| S&P 500 Index (B) | 6.17% | 56.35% | 16.78% | 16.29% | 13.91% | 14.94% |
(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
As the markets bounced back, with many of the more economically sensitive stocks leading the way in recent months, we outperformed a bit this quarter.
Our largest holding, Alphabet/Google, contributed 1.7% to performance as advertising sales surged toward the end of last year. Significantly, Google was able to grow its costs slower than its revenue—something it hasn’t always been able to do—leading to eye-popping earnings growth. Like a lot of large technology companies, Google maintains an enormous amount of cash on its books—$120 billion at last count—for really no good reason. They generate tens of billions in free cash flow each year, which just adds to its stockpile. Yes, they are investing tens of billions back into their business by buying servers, building data centers, making self-driving cars, and creating other tech innovations, but they still generated $43 billion in cash last year even after those sizable investments.
So what’s it going to do with all that cash? One of the challenges of a public market investor is answering that question. The temptation for management—and often the default path—is to spend it on mega acquisitions. They could have spent it on, say, Time Warner and would have gotten HBO, Warner Brothers, TNT, et al., and somehow combined that content with YouTube to create YouTubeHBOwbTNT+. Or they could have purchased a Korean auto manufacturer to combine with their Waymo business. If these sound a little silly, keep in mind corporate history is full of very silly mega mergers: AOL merged with Time Warner, Coca-Cola once owned Columbia Pictures, and London-based Diageo, parent company of Guinness and Johnnie Walker, at one point owned Burger King.
Google’s track record with acquisitions is pretty good (e.g., YouTube), and the company resisted the temptation to blow their cash on “transformative” deals. They’ve also steadily ramped up their stock buybacks, which we take as a good sign that they’re thinking about shareholder value. We remain bullish.
Our financials did quite well in the quarter. Interest rates rose, and, in particular, the yield curve became “steeper”: that is, the difference between long-term rates and short-term rates expanded. Since a classical definition of a bank is an institution that borrows short term to lend long term, this situation tends to be beneficial for banks. In addition, the wave of loan defaults everyone was concerned about never came to be, in no small part helped by government stimulus. Bank of America added 1.3% to performance, JPMorgan 1.0%, and American Express 0.8%.
PerkinElmer took off 0.3% from performance as investors are anticipating a drop in COVID-related testing as the pandemic nears its end. Visa, newly facing a government antitrust investigation over its debit business, dragged down performance 0.1% (we don’t think it’s that material to Visa’s overall value). TJX’s stock lagged a bit, taking away 0.1%.
A few days before the end of the quarter, Canadian Pacific proposed an acquisition of Kansas City Southern (KCS). There are seven “Class I” railroads in North America, with six operating in three duopolies: Canada (Canadian National and Canadian Pacific), the western US (Union Pacific and Berkshire Hathaway–owned BNSF), and the eastern US (CSX and Norfolk Southern). KCS is a bit of a wildcard, with a north-south railroad that reaches from Mexico to Canada. Integrating it with Canadian Pacific will bring significant network advantages by giving customers a single rail network that extends from Vancouver to Veracruz. While the price for KCS is a little steep, we think the operational benefits will be significant.
Portfolio
| Security | % of Net Assets |
| Alphabet, Inc. | 11.0% |
| Union Pacific Corp. | 6.3% |
| Mastercard, Inc. | 6.2% |
| JPMorgan Chase & Co. | 5.9% |
| Bank of America Corp. | 5.7% |
| American Express Co. | 5.6% |
| Microsoft Corporation | 5.3% |
| NVR, Inc. | 5.3% |
| AutoZone, Inc. | 5.3% |
| Canadian Pacific Railway Limited | 5.3% |
| The Progressive Corporation | 4.9% |
| S&P Global, Inc. | 4.9% |
| Ross Stores, Inc. | 4.9% |
| UnitedHealth Group Incorporated | 4.7% |
| Visa, Inc. | 4.6% |
| The TJX Companies, Inc. | 4.6% |
| Berkshire Hathaway, Inc. | 3.6% |
| PerkinElmer, Inc. | 2.6% |
| Armanino Foods of Distinction, Inc. | 1.4% |
| Cash* | 2.0% |
*Cash represents cash and cash equivalents less liabilities in excess of other assets.
The fund didn’t initiate or eliminate any positions in the quarter.
It’s harder to find bargains with the market up 50% over the last year, and market-level multiples are quite high. That said, the market is so segmented that it is increasingly difficult to think of it as a single entity. As we mentioned in our last letter, there are some excellent businesses that are priced to perfection, and some businesses are downright silly (the waves of euphoria in “meme” stocks come to mind), and we think we have a nice collection of 20 very good businesses at attractive prices. We are hopeful that will pay off over time.
As always, thank you for investing, especially in these volatile times.
Stephen Dodson Raphael de Balmann
Portfolio Manager Portfolio Manager