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Bridgeway joins the 'Clean Funds' ranks
Readers like this fund family, and so do I. At this tiny firm, the only priority more important than great performance is integrity.
By Timothy Middleton
Houston, Texas, has a well-earned reputation as a free-wheeling business town. From the oil barons to Enron, the city has a knack for attracting companies and tycoons who skate too close to the ethical edge, which is why its ironic to hear readers rave about the virtues of Bridgeway Funds, a small mutual fund company that calls Houston home.
The average performance of its funds was a gain of 54.3% in 2003, and performance isnt even the companys top priority. Bridgeway Funds has a mission statement that defines its role as primarily, but not exclusively, a financial one. Maintaining outstanding performance is the second of five goals; the first is to uphold the highest standards of integrity.
When I asked readers for nominations to my Clean Funds list, Bridgeway came up again and again. Ive owned the Bridgeway Ultra-Small Company Market Fund (BRSIX) for three years, and from what I can tell, (John) Montgomery runs a clean operation, says Miller Logan, a psychiatrist in Dallas. Of course, like many of the Bridgeway funds it is closed to new investors, but I have money in three of the four new Bridgeway funds that have opened just recently.
As president and majority owner of Bridgeway and lead manager of its 11 mutual funds, Montgomery has delivered outstanding investment returns while running one of the most transparent and investor-friendly operations in the fund industry. The formula that governs his salary gives a weighting of 10% to personal integrity; 50% depends on the funds' performance.
So Bridgeway is the second fund firm to be added to our Clean Funds list, joining Tweedy, Browne, which I profiled last month. It has the characteristics that set Clean Funds apart from their scandal-tainted brethren.
More on trustworthy investments
Little space, big performance
Although Bridgeway has only $1.4 billion in total assets -- less than any of the 570 largest individual funds in the marketplace -- four of its funds are closed to protect the interests of existing shareholders. Montgomery invests solely in his own funds, and all outside directors have investments of more than $100,000 in them, as well.
Independent directors are paid (modestly) in fund shares. Company expenses are bare bones. No Bridgeway employee is paid more than seven times as much as the lowest-paid of the firms 17 workers, who are crammed into 4,600 square feet of space -- about the size of just the trading floor at a big fund company.
Montgomery can squeeze a lot of bang out of a buck. The fund Dr. Logan owns shot up 79.4% last year. Bridgeway Ultra-Small Company (BRUSX) did even better, gaining 88.2%. Bridgeway Balanced (BRBPX), which is 45% invested in bonds and cash, spurted 17.8%.
Bridgeway Balanced is one of only three of the companys funds with extensive performance records that remain open to new investors. The others are Bridgeway Aggressive Investors 2 (BRAIX), up 44.5%, and Bridgeway Blue-Chip 35 Index (BRLIX), up 28.7%.
Blue-Chip 35 is an index fund that tracks a benchmark Montgomery created of selected ultra-large companies. The custom index isn't market-cap weighted, as most indexes are, which means it automatically tilts toward out-of-favor, or value, stocks. Still, it edged out the 28.5% gain of growth-seeking Vanguard 500 Index (VFINX).
Montgomery employs proprietary software to screen the universe of stocks for specific characteristics, such as value and growth. The four funds too new to have performance records are Bridgeway Small-Cap Growth (BRSGX), Bridgeway Small-Cap Value (BRSVX), Bridgeway Large-Cap Growth (BRLGX) and Bridgeway Large-Cap Value (BRLVX).
Socially responsible, to a point
As a sub-adviser, Montgomery also manages Calvert Large Cap Growth (CLGAX), which was up 38.2% in 2003.
Calvert is a so-called socially responsible (SR) fund. Bridgeway doesnt put that label on its funds and has invested in gaming stocks and Big Oil, such as Exxon Mobil (XOM, news, msgs), which SR eschews. But Montgomery says he wont invest in tobacco -- a terminal industry, he calls it -- and shares many of SRs goals.
There are different ways to influence people, he says. Traditional SR investors vote with their feet; Montgomery prefers proxies. Were not very big yet, but as we get bigger, we intend to use our influence in voting shares to encourage companies to be better corporate citizens, he says.
Montgomery isn't required to divulge his salary by the SEC, but he does: Last year it was $350,785. Outside directors, who include the Rev. Kirbyjon Caldwell, pastor of Houstons Windsor Village United Methodist Church, the largest in that denomination, were paid between $9,000 and $11,000 (in shares). (Montgomery, a Presbyterian, isn't rewarding his own pastor with a seat on the board.)
2 caveats
Bridgeway violates two criteria I like to see in well-run funds, which are low expenses and turnover. Aggressive Investors 2 and Bridgeway Micro-Cap Limited (BRMCX) have expense ratios of 1.9% and portfolio turnover rates of 144% and 108%, respectively. Ratios of 1% for expenses and 50% for turnover would please me more.
Turnover is a function of Montgomerys style, a dynamic computer-driven calculation of the markets opportunities rather than a stock-pickers deliberation. Most of the candidates for my Clean Funds list are value-oriented, which tend to have low turnover. Bridgeway is a more go-go shop that may appeal to more aggressive investors.
Expenses are based on performance at these two funds and would be less if they hadnt performed so brilliantly; the management fee can go as low as 0.2%.
On the plus side, the expense ratio of Bridgeway Blue-Chip 35 is only 0.15%, less even than Vanguard 500 Index.
Distributing costs
Also, Bridgeway is vigilant enough about fees that it's creating a new class of shares for the fund-supermarket firms, which charge funds 35 to 40 basis points to be included in no-transaction-fee networks.
Existing shareholders, and those who buy directly from Bridgeway, qualify for the lowest-cost N share class. Fund-supermarket customers will buy R shares, which charge 25 basis points more. Thats an excellent idea; more funds should force those who value convenience to pay for it, rather than impose those costs on all shareholders.
On balance, therefore, so many of Bridgeways practices are positive that I would trust it with my money. Indeed, such policies as paying fund directors in shares rather than cash and charging fund-supermarket customers at least some of the costs they impose on the portfolio are visionary; the whole industry should follow.
The industry wont be anxious to follow yet another of Bridgeways practices, which is to give half of the advisory firms profits to charity. It was the lust for dirty money that underlay all the scandals; this company doesnt even lust for honest money.
If Bridgeway is not the most ethical fund company, I'll eat my hat! exclaims Ronald W. Kenyon, an American management consultant working in Dhahran, Saudi Arabia, who owns the same Bridgeway fund as Dr. Logan. They deserve the blue ribbon.
Nominations to the clean-funds list can be e-mailed to timothy@middleton.net or posted at our Start Investing community. At the time of publication, Timothy Middleton did not own any securities mentioned in this article.
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