Objective and Strategy
The Bretton Fund seeks to achieve long-term capital appreciation by investing in a small number of undervalued securities. The fund invests in common stocks of companies of all sizes. It normally holds a core position of between 15 to 20 securities whose underlying firms combine a defensible competitive advantage, relevant products, competent and shareholder-oriented management, growth, and a low level of debt. The manager wants to invest “in ethical businesses” but does not use any ESG screens; mostly he avoids tobacco and gaming companies.
Adviser
Bretton Capital Management, LLC. Bretton was founded in 2010 to advise this fund, which is its only client.
Manager
Stephen Dodson. From 2002 to 2008, Mr. Dodson worked at Parnassus Investments in San Francisco, California, where he held various positions including president, chief operating officer, chief compliance officer and was a co-portfolio manager of a $25 million California tax-exempt bond fund. Prior to joining Parnassus Investments, Mr. Dodson was a venture capital associate with Advent International and an investment banking analyst at Morgan Stanley. Mr. Dodson attended the University of California, Berkeley, and earned a B.S. in Business Administration from the Haas School of Business.
Management’s Stake in the Fund
Mr. Dodson has over a million dollars invested in the fund. As of April 5, 2011, Mr. Dodson and his family owned about 75% of the fund’s shares.
Opening date
September 30, 2010.
Minimum investment
$5000 for regular accounts, $1000 for IRAs or accounts established with an automatic investment plan. The fund’s available for purchase through E*Trade and Pershing.
Expense ratio
1.5% on $3 million in assets.
Comments
Mr. Dodson is an experienced investment professional, pursuing a simple discipline. He wants to buy deeply discounted stocks, but not a lot of them. Where some funds tout a “best ideas” focus and then own dozens of the same large cap stocks, Bretton seems to mean it when he says “just my best.”
As of 9/30/11, the fund held just 15 stocks. Of those, six were large caps, three mid-caps and six small- to micro-cap. His micro-cap picks, where he often discerns the greatest degree of mispricing, are particularly striking. Bretton is one of only a handful of funds that owns the smaller cap names and it generally commits ten or twenty times as much of the fund’s assets to them.
In addition to being agnostic about size, the fund is also unconstrained by style or sector. Half of the fund’s holdings are characterized as “growth” stocks, half are not. The fund offers no exposure at all in seven of Morningstar’s 11 industry sectors, but is over weighted by 4:1 in financials.
This is the essence of active management, and active management is about the only way to distinguish yourself from an overpriced index. Bretton’s degree of concentration is not quite unprecedented, but it is remarkable. Only six other funds invest with comparable confidence (that is, invests in such a compact portfolio), and five of them are unattractive options.
Biondo Focus (BFONX) holds 15 stocks and (as of January 2012) is using leverage to gain market exposure of 130%. It sports a 3.1% e.r. A $10,000 investment in the fund on the day it launched was worth $7800 at the end of 2011, while an investment in its average peer for the same period would have grown to $10,800.
Huntington Technical Opportunities (HTOAX) holds 12 stocks (briefly: it has a 440% portfolio turnover), 40% cash, and 10% S&P index fund. The expense ratio is about 2%, which is coupled with a 4.75% load. From inception, $10,000 became $7200 while its average peer would be at $9500.
Midas Magic (MISEX). The former Midas Special Fund became Midas Magic on 4/29/2011. Dear lord. The ticker reads “My Sex” and the name cries out for Clara Peller to squawk “Where’s The Magic?” The fund reports 0% turnover but found cause to charge 3.84% in expenses anyway. Let’s see: since inception (1986), the fund has vastly underperformed the S&P500, its large cap peer group, short-term bond funds, gold, munis, currency . . . It has done better than the Chicago Cubs, but that’s about it. It holds 12 stocks.
Monteagle Informed Investor Growth (MIIFX) holds 12 stocks (very briefly: it reports a 750% turnover ratio) and 20% cash. The annual report’s lofty rhetoric (“The Fund’s goal is to invest in these common stocks with demonstrated informed investor interest and ownership, as well as, solid earnings fundamentals”) is undercut by an average holding period of six weeks. The fund had one brilliant month, November 2008, when it soared 36% as the market lost 10%. Since then, it’s been wildly inconsistent.
Rochdale Large Growth (RIMGX) holds 15 stocks and 40% cash. From launch through the end of 2011, it turned $10,000 to $6300 while its large cap peer group went to $10,600.
The Cook & Bynum Fund (COBYX) is the most interesting of the lot. It holds 10 stocks (two of which are Sears and Sears Canada) and 30% cash. Since inception it has pretty much matched the returns of a large-value peer group, but has done so with far lower volatility.
And so fans of really focused investing have two plausible candidates, COBYX and BRTNX. Of the two, Bretton has a far more impressive, though shorter, record. From inception through the end of 2011, $10,000 invested in Bretton would have grown to $11,500. Its peer group would have produced an average return of $10,900. For 2011 as a whole, BRTNX’s returns were in the top 2% of its peer group, by Morningstar’s calculus. Lipper, which classifies it as “multi-cap value,” reports that it had the fourth best record of any comparable fund in 2011. In particular, the fund outperformed its peers in every month when the market was declining. That’s a particularly striking accomplishment given the fund’s concentration and micro-cap exposure.
Bottom Line
Bretton has the courage of its convictions. Those convictions are grounded in an intelligent reading of the investment literature and backed by a huge financial commitment by the manager and his family. It’s a fascinating vehicle and deserves careful attention.
