Researching Bridgeway Funds and BRSIX

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bridgeway.gifAfter 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.

What’s Ultra-Small?
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.

Buying It?
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?

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  1. The problem with these type of funds is that they usually become victums of their own sucess. What I mean is that they make the top of a few fund lists and people start pouring money into them and there are only so many ultra small companies to go around. Resulting in managers having to lower their standards for companies or or they have to buy so any shares that they drive the price up themselves. I would suggest looking for a fund from the middle of the list or a brand new one that not many people have heard about. AS I have already seen the Bridge funds on several lists and mentiones in several articles.

  2. I’ve been really impressed with Bridgeway funds too. When I’ve built my shortterm savings back up a bit, they’re probably next on my list. However, I’ve had a hard time differentiating between some of their funds, especially where the original is closed and now there’s a II (e.g., Agressive Investors II). Ultra-Small Company vs Ultra-Small Market was one I pondered over.

    The only other company I’ve found that might be worth checking into is Royce, but they tend to hang out at the higher end of the smallcap arena or even midcaps, depending on the precise fund. They’re also known for shareholder friendliness, closing funds early, etc.

  3. I have to say, that standard of ethics sounds almost too good to be true. That looks like a list that alot of people would say they wished every company would do. It would be very impressive if they can continue to follow it. I will be interested to hear your thoughts on other alternatives as the expense ratios seem kinda high. Although they do say they base them on performace so that makes it seem more fair.

  4. Deymond Lashley says

    Morningstar has good things to say about the fund ( and I’ve heard good things about the company (although I think the socially responsible thing is a bit over-hyped).

    However, my guess is that they don’t really consider asset bloat to be a significant concern for this fund, most likely because of the passive management strategy. I say this because BRUSX is closed at $138 million, but BRSIX remains open at $1.087 billion.

  5. I’ve owned BRSIX for a while and it’s done very well. I didn’t even know most of this info about the company when I bought, but it makes me even more glad that I did! Definitely one of my luckiest picks.

  6. Personal Finance Blogger says

    Nice write up.

    Based on the recent dip, I would say this is a good time to buy. As long as the market doesn’t tank any further you should do well.

  7. Bigmouth says

    I’m a total noob in this area, so my question might be really dumb. Once you purchase mutual fund, how long should you hold it tell a reasonable profit is showing to justify your investment?

  8. I forgot to add that I don’t have short-term aspirations for this fund, as suggested by the prospectus. It is going to be a long-term holding. It is a very volatile are, and the only time I plan to sell any of it is to rebalance my portfolio.

    Note that there is a 2% early redemption fee (paid directly into the fund and therefore not a load) to discourage short-term trading.

  9. Greg – I think what you are referring to is asset bloat, which according to their track record they do address, as all but 4 of their funds are closed now.

    Louis – I think I’d like BRUSX, but it’s closed now to new investors and who knows if it will reopen.

    Jason – If you look at their annual reports, their expense ratios do vary quite a bit based on performance. Only if their funds are kicking butt do they enter the 2% ER range. BRSIX’s expense ratio has ranged from as .17% to 1.44% in the last 6 years. I think that’s pretty good consider this isn’t an easy index to follow.

    Deymond – I agree, BRSIX does hold about 5 times more companies than BRUSX as well, so they should be able to handle more money.

  10. StarHusker says

    FYI, also have BRSIX as a NTF.

  11. StarHusker – Thanks, you’re right.

    My only concern with Firstrade is that they offer no transaction fees on any funds that you hold 6 months, which I question the long term sustainability of. Scottrade pulled their NTF program very suddenly, leaving people with funds that they could no longer contribute to without fees.

  12. College Student says

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  13. I bought my mom BRAIX (bridgeway aggressive investors 2) a few months ago. It hasn’t been doing too well, but then again it’s only been a few months.

  14. Bigmouth, most advisors say that you should only buy a mutual fund if you expect to leave the money there for at least 5-10 years. Not that the fund can’t start providing profits right away, but since the market’s unpredictable, you might invest in an brilliantly run fund and then a 2 year bear market hits or something.

    For instance, two funds I’m in both have excellent 10-15 year records (First Eagle Global, SGENX, and Muhlenkamp, MUHLX), but they’ve had rather different results in the last year, to say the least, but at this point I don’t believe that MUHLX was a bad choice, just that it’s in a bad patch for the moment.

  15. I live in Houston and invested in BRUSX in 1998 based on a tip from a colleague at work. It is the best mutual fund investment that I have ever made. Unfortunately, I doubt that BRUSX will ever open to any investors–even to existing investors. The mutual fund charter stipulated that the fund must close to new investors as soon as assets reached $27.5 million and to existing investors once assets reached 55 million. Give n the fund’s phenomenal performance, I doubt assets ever falling below $55 millio–much less $27.5 million. According to Morningstar, the fund currently has assets of $121 million.

    John Montgomery is an MIT graduate who uses computer models to determine which companies to buy and sell. His strategy has proven particularly successful for very small companies where the market tends to be very inefficient. The “smart money” on Wall Street pays relatively little attention to these companies because their market caps are too small to sustain large investments. Since BRUSX only has $121 million in assets, it can assemble a manageable portfolio of companies with tiny market caps.

    Bridgeway has two relatively new unrated small-cap funds that are much smaller than BRSIX that warrant serious consderation from any investor looking for nimble, well-managed small cap mutual funds. They are Bridgeway Small Cap Growth (BRSGX) and Bridgeway Small Cap Value (BRSVX). Although neither is rated yet by Morningstar, both funds have performed quite well (better than BRSIX since their inception in late 2003). BRSIX is an excellent fund, but ALL of Bridgeway’s small cap funds are outstanding. Their mid-cap funds (BRAGX[closed] and BRAIX) are good too (4 stars according to Morningstar).

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