Bridgeway Funds Determined to Cross Over to Success
News summary by MFWire's editors
Bridgeway funds has fallen on tough times as of late. According to the Wall Street Journal, the most positive returns since 2007 have recently ended and were "modest" at best.
The Wall Street Journal reports that Bridgeway funds' total assets declined drastically to less than $1.4 billion from $3.4 billion for the 11 remaining funds. Despite decreasing assets, John Montgomery, chief investment officer and founder, is "determined to turn things around," according to Wall Street Journal.
"Until late 2007 and into 2008, every fund we managed was beating its benchmark since inception. I want to get back to that statement," said Montgomery.
To do so, Montgomery intends to refocus his efforts to ensure future success. "Our long-term goal is for our funds to be in the top 5% of their peer group. We have work to do," added Montgomery.
Fund Firm Tries to Regain Its Stride
It's been a tough few years for the once-heralded Bridgeway fund family.
After attracting attentionâ€”and assetsâ€”for shareholder-friendly policies and strong performance in the late 1990s and early 2000s, these portfolios from Bridgeway Capital Management Inc. in Houston have yet to fully recover from the market downturn that began in late 2007.
Only two of the eight current Bridgeway funds that existed in 2007 posted positive returns for the five years ended June 30, and those returns were modest, though good enough to beat the broad market. Bridgeway Managed Volatility returned an annualized 0.9% for the five years and Bridgeway Blue Chip 35 Index gained 1.2%. They were among four of the 10 Bridgeway funds that existed a year ago to post positive returns for the 12 months ended June 30.
Total assets for Bridgeway funds plummeted as performance suffered, from a peak of more than $3.4 billion in October 2007 to less than $1.4 billion for the 11 funds now in the group.
John Montgomery, the 56-year-old chief investment officer who founded Bridgeway in 1993, is determined to turn things around. "Until late 2007 and into 2008, every fund we managed was beating its benchmark since inception," he says. "I want to get back to that statement."
Bridgeway, which focuses mostly on tiny stocks and a quantitativeâ€”that is, data-drivenâ€”strategy, has retooled its computer models, merged funds, and recently launched two new funds in partnership with Buckingham Asset Management LLC in St. Louis (which isn't related to Buckingham Capital Management Inc. in Dayton, Ohio). "We think we have addressed the problems," says Mr. Montgomery. "Our long-term goal is for our funds to be in the top 5% of their peer group," he says. "We have work to do."
It's a Struggle
Only the Blue Chip 35 fund is in the top 10% of its peer group for the past five years, according to fund-research firm Morningstar Inc., and three Bridgeway funds are in the bottom 5%.
But so far this year the group as a whole has outperformed an asset-weighted average of the categories represented in its lineup of funds. Bridgeway Ultra-Small Company is in the top 2% of its Morningstar category with a return of 13.1% through June, and Bridgeway Ultra-Small Company Market is in the top 3% with a return of 13.9%, according to Morningstar's calculations.
Bridgeway has a tailwind this year: Micro-cap stocks have outperformed the broad market after taking a big hit in late 2011.
Mr. Montgomery says back-testing shows that had the new models been fully in place, all funds would have beaten their benchmarks in 2010 and 2011.
"It's a work in progress," says Greg Carlson, a senior analyst at Morningstar who follows the group. "They're struggling to make a comeback." He notes that Bridgeway funds got off to a good start last year as well, then underperformed in the third quarter and rebounded in the fourth. "We're taking a wait-and-see approach to their actively managed funds," he says. (Two Bridgeway funds that have done relatively well, Blue Chip 35 and Ultra-Small Company Market, are based on indexes.)
Quantitative funds in general have had a hard time in the turbulent markets of the past few years, in part because most of the computer models that guide their investments are based on past performance and don't respond quickly to changing circumstances. The markets have been driven by influences like the uncertain global economy, the European debt crisis and shifting employment numbers, rather than the attributes of specific companies, which is what computer models focus on.
Keeping It Friendly
Bridgeway has kept its shareholder-friendly practices. It annually discloses Mr. Montgomery's salaryâ€”$626,639 in 2011, including Bridgeway Capital's contribution to his 401(k)â€”and there is a rule that the highest-paid employee can't earn more than seven times the compensation of the lowest-paid staffer.
The funds have never engaged in soft-dollar arrangements, the practice of steering trades to a particular brokerage firm in return for research. This keeps trading costs and expense ratios low.
In good times, when assets were growing, Bridgeway moved to close funds to new investors relatively quickly to keep them flexible. More recently, it has merged funds in an effort to improve performance and, in the long term, reduce costs. It recently merged its Micro-Cap Limited fund, with less than $20 million in assets, into the larger Bridgeway Ultra-Small Company, which is closed to new investors. It also merged its Aggressive Investors 2 fund into Bridgeway Aggressive Investors 1 .
"I have a lot of respect for John Montgomery and his approach to investing," says Wes Peirce, founder of Peirce Capital Management LLC, who says he has personally invested in Bridgeway funds since the early 2000s. He is now investing some of the $50 million he has under management in the two funds developed with Buckingham.
The two funds, Omni Small-Cap Value and Omni Tax-Managed Small-Cap Value, are managed by Bridgeway and open only to clients of approved investment advisers, such as the 130 firms in Buckingham's BAM Advisor Services network, which including Buckingham has more than $15 billion under management. Buckingham, which has some $3.5 billion under management itself, was looking for an ultrasmall-company fund for its network and liked Bridgeway's data-driven approach and low costs, says Larry Swedroe, director of research for Buckingham and BAM Advisor Services. One fund was launched at year-end 2010 and the other last August.
For Bridgeway, it's a way to preserve assets, because investment advisers are less likely to jump ship in tough times. As of June 30, the two funds had combined assets of more than $305 million, according to Morningstar. Mr. Montgomery says he would consider the same model for other new funds, but nothing is currently in registration.
Although both funds have had some rough times this year, they came in slightly above their Morningstar benchmarks for the six months through June. Mr. Peirce says he's holding on. "I'm comfortable with the bumps," he says. "In the long term, I expect to do well."
"At some point," Mr. Montgomery says, "investors will get back to the basics and look at individual companies." He and his wife have more than $2.5 million invested in Bridgeway funds, half of it in Aggressive Investors 1, which has returned an average of 12.2% annually since it was launched in 1994 but is down 9.6% for the year ended June 30, according to Morningstar. "I'm right in there with the shareholders," he says. "What I plan to retire on is in Bridgeway funds."