April 21, 2023

Dear Fellow Shareholders:

Well, bank runs are back. We can’t say we saw that coming, but we are fortunate that the two banks we own, JPMorgan and Bank of America, were stable ports in the storm. Their share prices flagged with all the chaos in the sector, but we expect them to be net beneficiaries over time. We discuss banking more fully below.

Total Returns as of March 31, 2023

1st Quarter1 Year3 Years5 Years10 YearsSince 9/30/10 Inception
Bretton Fund4.52%-5.04%17.65%11.16%10.16%11.22%
S&P 500 Index (B)7.50%-7.73%18.60%11.19%12.24%13.00%

(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 at 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 measure performance of US stocks. The index does not incur expenses and is not available for investment. The fund’s expense ratio is 1.35%.The fund’s principal underwriter is Arbor Court Capital, LLC.

Contributors to Performance
Tech stocks rebounded in the quarter, and Alphabet and Microsoft were our largest contributors to performance, adding 1.32% and 0.96%.

Despite high mortgage rates, housing demand remains relatively strong, and homebuilder NVR added 1.01% to the fund this quarter. One factor that’s contributing to the demand for newly built homes is the reluctance of existing homeowners to sell. If you’re sitting on a sub-3%, 30-year mortgage, it’s pretty hard to swallow the current rate of 6.5%. Owners are sitting tight, restricting the supply of available homes for sale.

UnitedHealth was the largest detractor this quarter, taking 0.61% off performance. As we have mentioned in previous letters, one of UnitedHealth’s fastest-growing businesses is MedicareAdvantage plans. MedicareAdvantage is an alternative to traditional “fee for service” Medicare, in which the government pays a portion of the beneficiary’s healthcare bill and the beneficiary pays the rest; with MedicareAdvantage, the government pays a health insurer a flat fee per patient per month and the health insurer pays its patients’ health expenses, often with no copay but a more restricted network of providers. The government proposed to reduce the rate schedule for the insurance companies, which hit UnitedHealth’s and its competitors’ share prices. Subsequent to the quarter end, the government released its final rate schedule for 2024, and the proposed reduction turned out to be an increase. Health insurance stocks promptly rebounded.

Ross took off 0.51% from the fund. The company hasn’t been able to raise prices as fast as its costs, which has squeezed margins. We think they’ll be just fine in the long term.

Bank of America’s shares were dragged down in the banking panic, taking off 0.53% from performance. Bank of America has a large amount of unrealized losses in its bond portfolio due to higher rates (more below), and it will take some time for its asset base to reset to current interest rate levels. In the meantime, the bank remains well-capitalized and systemically important.

Portfolio as of March 31, 2023

Security% of Net Assets
Alphabet, Inc.9.01%
AutoZone, Inc.7.47%
The Progressive Corporation7.26%
NVR, Inc.5.84%
Microsoft Corporation5.61%
The TJX Companies, Inc.5.60%
Ross Stores, Inc.5.60%
American Express Co.5.29%
Visa, Inc.5.24%
Mastercard, Inc.5.18%
UnitedHealth Group Incorporated5.17%
Union Pacific Corp.5.07%
S&P Global, Inc.4.87%
JPMorgan Chase & Co.4.56%
Bank of America Corp.4.12%
Moody's Corporation3.86%
Berkshire Hathaway, Inc.3.52%
Dream Finders Homes, Inc.2.51%
PerkinElmer, Inc.2.23%
Armanino Foods of Distinction, Inc.1.47%

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

When the financial crisis of 2008 hit, there hadn’t been anything like it since the Great Depression. Multiple, major financial institutions suddenly collapsing isn’t something that happens all that often. With so much increased regulation and the scars from that crisis still somewhat fresh, it really didn’t seem like we’d see it happen again so soon, and yet here we are.

Unlike the ’08 crisis, the problem this time wasn’t bad loans, but a decline in bond values due to higher rates and, in a way, “bad” deposits. Silicon Valley Bank placed most of their money into high-quality, long-term bonds, and when higher rates lowered the present value of those bonds, they were technically still well-capitalized, with plenty to cover their deposits, unless their depositors suddenly wanted their money back. Which is what ended up happening. The challenge had more to do with their deposits being more susceptible to coordinated, sudden withdrawals than a deterioration in their assets.

A fair working definition of a “bank” is not necessarily an entity holding a banking license, but rather any entity that borrows short-term money to invest long term. A real estate speculator who “land banks” by buying a lot of unproductive land using short-term loans is in some sense taking the same risks as a retail bank down the street: she is constantly at risk of not being able to roll her funding.

Seen this way, there are two closely related—but different—risks to a bank: solvency and liquidity. Solvency is the risk that the assets supporting the borrowing are no longer worth enough to support them. Liquidity is the risk that the asset can not be sold quickly enough to pay off the borrowing it supports. These distinctions often compress in stress—if lenders and depositors are concerned about solvency and rush to get their money back, that creates a liquidity issue—but it’s useful to view them as separate conditions.

Given the widespread destructiveness bank runs can have, there’s a landscape of agencies charged with protecting the bank system. When a bank becomes insolvent, the FDIC takes over and sells the bank to the highest bidder. When banks need liquidity, the Federal Reserve and other government entities offer lending facilities, but there are parameters around the type of collateral accepted and the cost of this funding. For Silicon Valley Bank, the unprecedented speed and magnitude of the withdrawals from interconnected, fast-moving tech companies prevented the bank from accessing those facilities in time.

First Republic saw a milder version of the problem. It had massive deposit flight, though not as severe, which gave it more time to replace its lost deposits with borrowings from the Fed and a consortium of other banks. The initial bleeding was stemmed, but at the cost of entering a strange limbo: First Republic now has very high funding costs relative to the yields on its assets, so it might only be marginally profitable in the near term. It can’t easily sell itself because any entity that would buy it would need to recognize the current value of its asset, and this recognition would create a large capital shortfall.

It bears mentioning that First Republic got into this mess by being a successful bank. For years, customers have flocked to it for its excellent service, and deposits surged during the pandemic. The deposits had to go somewhere, and First Republic put them into mortgages. Should they have protected themselves against a sudden rise in interest rates? Of course. And this one mistake cost them decades of work building a franchise. At some point, the market may yet offer us a chance to benefit from this dislocation in the regional banking world.

The megabanks deemed systemically important, including JPMorgan and Bank of America, are likely to benefit significantly from the flight from community banks and what we expect to be greater regulation of the larger community banks.

As always, thank you for investing.

Stephen Dodson            Raphael de Balmann
Portfolio Manager         Portfolio Manager