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A Diversified Quantitative Investment Style
Bridgeway Ultra-Small Company Market Fund
Interview with: John Montgomery

Author: Dave Jennings
Last Update: , :

For complete profile and charts on Bridgeway Ultra-Small Company Market Fund
John Montgomery's fund doubled its investors' money during the worst bear market in history. One has to look really hard to find equity managers like that, and even harder to spot the ultra-small stocks Montgomery's investment microscope is focusing on.

Bridgeway Ultra-Small Company Market Fund

A: We're out there buying a large number of companies. The other value activity is the tax-advantage management. I'm very proud of the fact that Bridgeway in six years has yet to distribute a capital gain. This is the closest thing to an IRA you could come up with in a taxable account. We're very aggressive at pursuing our strategy to never pay a capital gain.

Q: These stocks normally don't pay dividends?

A: In the structure of a mutual fund company our expense ratio is about 70 basis points. It will be close to 75 basis points for the fiscal year. Our assets are up enough that we expect it to be falling into next fiscal year. That will offset the dividend yield on these stocks. In a normal year, we expect those to equal and not to distribute a dividend either. It should be one of a tax-efficient portfolio.

Q: How does this computer model figure out tomorrow?

A: It doesn’t. The last bit of value activity our modeling involves is not picking the winners; it's to try to statistically stay away from a smaller percentage of companies that go right out of business. What's really interesting about its math is you can make as big a difference in the average annual return in your portfolio, probably by avoiding the worst stocks and by including the best stocks. It’s the kind of secret ingredient in what I would argue is a passively managed portfolio.

Q: The staff is privy to sensitive information. Do you worry about the security risk when one leaves?

A: We do have a non-compete and non-disclosure agreement. We just don't want to be in a position where one day we’re competing with somebody who used to be at Bridgeway and who is buying the same shares of stock at the same time. The other thing we do is have an employee stock ownership plan. We try to give a strong financial incentive for people to want to make Bridgeway successful and stay with the firm. We really reward people for longevity. We also hire for stability. The final thing is integrity. There are four business values: ethics, investment performance, friendly service, and the last thing is if you have a great enough place to work, people won't want to leave.

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