After reading about how micro-cap stocks are a great way to improve your risk-adjusted return, I decided to read up more on BRSIX – Bridgeway Ultra-Small Company Market Fund. I thought Bridgeway was just another boutique mutual fund company, with sexy funds chasing hot sectors. Well, I was a bit right, but also found a lot more.
After reading some more , it appears Bridgeway Funds are known for their brutal honesty and their ethics. From this Statesman article, they were voted the most reputable company by financial advisors, even over Vanguard and Calvert. This is displayed by their code of ethics and the following (also from the article):
- The company raises or lowers its fees based on performance. “I don’t know of any other firm that reduces its fees if it underperforms the market,” Veres wrote recently.
- Portfolio managers cannot buy stocks owned by the funds or that might someday be owned by the funds. All partners are encouraged to invest mainly in Bridgeway shares.
- Fifty percent of the company’s profits go to charity.
- Annual reports list not just the best-performing stocks in each fund but the worst ones. “I think it’s fair to say that just about every other fund company would have pretended it had never owned those underperforming stocks and might never have had to disclose them, since disclosure is only mandatory twice a year,” said Veres.
- Founder John Montgomery’s pay is limited to seven times that of his lowest-paid employee.
- Bridgeway won’t deal in soft-dollar commissions, which are back-scratching arrangements between fund managers and stockbrokers. They run up costs for investors.
Also, I see that all their funds are no-load and have relatively low fees.
Of course, even if a fund is run by nuns, that doesn’t mean you should necessarily but it. But BRSIX actually looks pretty good.
First, I initially thought Ultra-Small was the same as Micro-Cap, but Bridgeway defines ultra-small stocks as the smallest 10% of the NYSE. The next smallest 10% is termed Micro-Caps.
Bridgeway likes the Ultra-Small arena better because according to them, they have historical 2% performance advantage even over Micro-Cap stocks (13% vs. 11% annual return).
Here is another great interview about this 2% edge with Montgomery.
Second, it is a passively-managed stock portfolio, which means it is trying to match the market, not beat it. Accordingly, it doesn’t try to pick a few great individual stocks. Instead, it holds about 500 stocks to try and diversify away the company risk and simply track that bottom 10% well and get that nice 2% edge. It is a purely quantitative fund, which means all decisions are made by formulas and computer models, and not grilling and schmoozing with corporate executives.
It looks like this fund is less aggressive than the Bridgeway Ultra-Small Company Fund (BRUSX), which is now closed to new investors. I think the name “Market” means that they are trying to track the overall market more closely with this fund, buying more stocks and having lower portfolio turnover. This also leads to a lower expense ratio (0.73% vs. 1.12%) and better tax performance.
This additional archived interview includes more information about the funds and specifically BRSIX vs. BRUSX.
The fact that four of their other funds are already closed also allieviates another concern for such small-cap funds – asset bloat. You can’t really be nimble and invest in a company only worth $100 million when your trades are $10 million each. In fact, BRSIX was closed already previously and then re-opened to the public.
I’m strongly considering buying a bit of this fund to round out my portfolio, and also to get in the door before they close this fund again too. The initial minimum investment is only $2,000.
After looking around, it looks like the only place that this fund is available without transaction fees is either directly through Bridgeway or via E-Trade’s NTF funds section. I think E-Trade’s customer service stinks, so I’m probably going to open up an account with Bridgeway directly.
But before I jump in, I’ll have to look more at the alternatives, including ETFs (PZI, IWC, FDM) and other Micro-Cap funds. There doesn’t seem to be that many similar mutual funds that are open to investors… unless I’m overlooking some?
By Jonathan Ping | Investing | 5/28/06, 11:01pm