THIS IS AN UPDATE OF THE FUND PROFILE ORIGINALLY PUBLISHED IN February 2012. YOU CAN FIND THAT ORIGINAL PROFILE HERE.
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 formal 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 and a large fraction of the fund’s total assets come from the manager’s family.
Opening date
September 30, 2010.
Minimum investment
$2000 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
1.35% on $67.7 million in assets.
Comments
We first profiled Bretton Fund in February, 2012. If you’re interested in our original analysis, it’s here.
Does it make sense to you that you could profit from following the real-life choices of the professionals in your life? What hospital does your doctor use when her family needs one? Where does the area’s best chef eat when he wants to go out for a weeknight dinner? Which tablet computer gets our IT staff all shiny-eyed?
If that strategy makes sense to you, so will the Bretton Fund.
Bretton is managed by Stephen Dodson. For a relatively young man, he’s had a fascinating array of experiences. After graduating from Berkeley, he booked 80-100 hour weeks with Morgan Stanley, taking telecom firms public. He worked in venture capital, with software and communications firms, before joining his father’s firm, Parnassus Investments. At Parnassus he did everything from answering phones and doing equity research, to co-managing a fixed-income fund and presiding over the company. He came to realize that “managing a family relationship and what I wanted in my career were incompatible at the time,” and so left to start his own firm.
In imagining that firm and its discipline, he was struck by a paradox: almost all investment professionals worshipped Warren Buffett, but almost none attempted to invest like him. Stephen’s estimate is that there are “a ton” of concentrated long-term value hedge funds, but fewer than 20 mutual funds (most visibly The Cook and Bynum Fund COBYX) that follow Buffett’s discipline: he invests in “a small number of good business he believes that he understands and that are trading at a significant discount to what they believe they’re worth.” He seemed particularly struck by his interviews of managers who run successful, conventional equity funds: 50-100 stocks and a portfolio sensitive to the sector-weightings in some index.
I asked each of them, “How would you invest if it was only your money and you never had to report to outside shareholders but you needed to sort of protect and grow this capital at an attractive rate for the rest of your life, how would you invest. Would you invest in the same approach, 50-100 stocks across all sectors.” And they said, “absolutely not. I’d only invest in my 10-20 best ideas.”
And that’s what Bretton does. It holds 15-20 stocks in industries that the manager feels he understands really well. “Understands really well” translates to “do I think I understand who’ll be making money five years from now and what the sources of those earnings will be?” In some industries (biotech, media, oil), his answer was “no.” “Some really smart guys say oil will be $50/bbl in a couple years. Other equally smart analysts say $150. I have no hope of knowing which is right, so I don’t invest in oil.” He does invest in industries such as retail, financial services and transportation, where he’s fairly comfortable with his ability to make sense of their dynamics.
When I say “he does invest,” I mean “him, personally.” Mr. Dodson reports that “I’ve invested all my investible net-worth, all my family members are invested in the fund. My mother is invested in the fund. My mother-in-law is invested in the fund (and that definitely sharpens the mind).” Because of that, he can imagine Bretton Fund functioning almost as a family office. He’s gathering assets at a steady pace – the fund has doubled in size since last spring and will be able to cover all of its ‘hard’ expenses once it hits $7 million in assets – but even if he didn’t get a single additional outside dollar he’d continue running Bretton as a mechanism for his family’s wealth management. He’s looking to the prospect of some day having $20-40 million, and he suspects the strategy could accommodate $500 million or more.
He might well have launched a hedge fund, but decided he’d rather help average families do well than having the ultra-rich become ultra-richer. Too, he might have considered a venture capital capital of the kind he’s worked with before, but venture capitalist bank on having one investment out of ten becoming a huge winner while nine of 10 simply fail. “That’s not,” he reports, “what I want to do.”
What he wants to do is to combine a wide net (the manager reports spending most of his time reading), a small circle of competence (representing industries where he’s confident he understands the dynamic), a consistent discipline (target undervalued companies, defined by their ability to generate an attractive internal rate of return – currently he’s hoping for investments that have returns in the low double-digits) and patience (“five years to forever” are conceivable holding periods for his stocks). He’s currently leveraging to fund’s small size, which allows him to benefit from a stake in companies too small for larger funds to even notice.
This is a one-man operation. Economies of scale are few and the opportunity for a lower expense ratio is distant. It’s designed for careful compounding, which means that it will rarely be fully invested (imagine 10-20% cash as normal) and it will show weak relative returns in markets that are somewhat overvalued and still rising. Many will find that frustrating.
Bottom Line
The fund is doing well – it has handily outperformed its peers since inception, outperformed them in 11 of 11 down months and 18 of 32 months overall. It’s posted solid double-digit returns in 2012 and 2013, through May, with a considerable cash buffer. It will celebrate its three-year anniversary this fall, which is the minimum threshold for most advisors to consider the fund. While he’s doing no marketing now, the manager imagines some marketing effort once he’s got a three year record to talk about. Frankly, I think he has a lot to talk about already.
