For a long time, I've followed several mutual fund families that are respected by savvy investors, have admirable track records, eat their own cooking, and sport philosophies consistent with Foolish ones. Solid examples include the Oakmark, Longleaf, and Tweedy Browne families. But I've recently learned about another company that merits some attention -- Bridgeway Funds.
I'm not a big expert on Bridgeway, but after poking around the company's website, I found a lot to admire.
Investment philosophy
For starters, Bridgeway believes in long-term stock investing. This is the kind of stock market investing that makes sense to us at Fool HQ due to the volatile and unpredictable nature of short-term market moves. Sadly, like many unsuccessful individual investors, too many mutual funds are slaves to short-term thinking, jumping in and out of various stocks, hoping for a big score in a short time. Sometimes it happens, but you can't count on it. Instead, Bridgeway recommends that investors with long-term goals (at least five years, preferably 10) make stock market investments, while those with short-term goals (say, six months) rely on short-term money market accounts, CDs, and T-bills. (We agree with this short-term investment philosophy and created our Savings Center, with investment advice and special interest rates for Fools.)
Of the company's 11 funds, four of them are closed to new investors. Although this is bad news if you want to invest but can't, it is good news for current shareholders. It means the fund isn't likely to grow so huge that managers have trouble finding effective places to invest the fund's money. This often happens with other funds, and while the managers reap bigger bucks from more investors paying fees, the funds' performance can suffer. So three cheers for those fund families that close their funds!
Next, Bridgeway Fund managers must eat their own cooking, as they're restricted to only making stock purchases through their funds. In other words, they can't invest one way for themselves and another (possibly less attentive) way for their funds. Conflicts of interest are reduced or eliminated altogether.
Education
Bridgeway's information for investors has a nice educational slant, which I liked. For example, the company website offers a helpful look at inflation risk, noting that long-term investors have cause for concern. Short-term vehicles like money markets, T-bills, and bonds have a lower average rate of return and are less likely to keep pace with inflation than stocks over time. "The worst one-year period for T-bills... was 0% in 1938 -- very safe," explains Bridgeway. "But if you were invested in T-bills from 1940 to 1950, the purchasing power of your investment actually declined 41%. Generally, stocks have held up better against inflation over longer periods, and the smallest stocks have tended to do better than large ones."
Costs
In 1996 Bridgeway set its sights on becoming the low-cost industry leader, stating, "the data correlating low expenses and good long-term performance was just too compelling." By keeping costs low, providing solid performance, and adhering to a code of ethics, the company believes it can attract enough people without the aid of marketing. Bridgeway says, "This, in turn, would allow us to concentrate even more resources on investment management, which is what our shareholders are really paying us to do."
Although it's pretty unusual for a firm not to aggressively market itself and its offerings, it's not illogical. As the company expects, if it succeeds in offering compelling values, it will likely find customers, and business will likely grow by word of mouth. (Indeed, word-of-mouth marketing has served your friend the Fool quite well over the years.)
None of Bridgeway's funds carry loads, those sales fees that can eat up a big chunk of your investment on day one. It also aims to pay its employees fairly, but not seven-figure salaries -- the highest-paid Bridgeway employee's salary and benefits can't be more than seven times that of the lowest-paid full-timer. If only companies such as Citigroup (NYSE:C), and Goldman Sachs (NYSE:GS), and Time Warner (NYSE:TWX) had such philosophies in place.
According to Bloomberg, CEO compensation at 70 of the 100 largest U.S. companies rose to an average $14.1 million last year. That's 384 times the 2003 pay of the average U.S. employee ($36,764), according to the Bureau of Labor Statistics.
Finally, Bridgeway rewards its fund managers based on how they perform against their relevant benchmark index. This makes a lot of sense. It certainly runs counter to the practices of many major American companies, where CEOs enjoy massive compensation increases while their companies falter and the stock slides.
Performance
How have the Bridgeway funds fared recently? Not too bad. The five-year average annual returns for its oldest funds are 17.6% to 31.4%. The one-year returns for the other funds with one-year histories are 15% (Balanced fund that invests in both stocks and bonds) to 69% (for its closed Ultra-Small Cap Market fund).
Morningstar named Bridgeway founder John Montgomery a contender for manager of the year, and other press mentions have praised the fund family's ethics and performance.
Downside
Is there a downside to the Bridgeway funds? Well, here are a few things to keep in mind.
The actively managed funds (as opposed to the index-like passively managed funds) use mainly quantitative systems to select their investments. This can be effective, but the holistic investor in me likes to evaluate potential investments from several angles, both quantitative and qualitative. The value of a firm's brand names, for example, is hard to quantify but can be important information. Likewise, patents and intellectual capital can be tough to quantify. Still, there's an upside for quantitative systems -- they tend to be less expensive than employing scores of analysts.
Four of the family's funds are very young. They're not even toddlers, having been created in Nov. 2003. These include Small-Cap Growth, Small-Cap Value, Large-Cap Growth, and Large-Cap Value. Newness isn't necessarily terrible for a fund, but it does mean that there isn't much of a track record to evaluate.
Due diligence
So should you rush out and snap up shares of Bridgeway funds? Not without learning more about the company and the performance of the funds that interest you. Stop by our Mutual Funds discussion board to see what Fools are saying about Bridgeway and other funds. Meanwhile, to have compelling mutual fund ideas delivered to your doorstep monthly, check out our new newsletter, Motley Fool Champion Funds.)
Selena Maranjian produces the Fool's syndicated newspaper feature -- check it out . She owns shares of Time Warner. For more about Selena, view her bio and her profile . You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens. The Fool is investors writing for investors.
