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An unsung bonanza fund
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September 22, 2000: 8:00 a.m. ET
Quant shop Bridgeway's aggressive growth fund keeps shareholders on top
By Staff Writer Jeanne Sahadi
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NEW YORK (CNNfn) - There are days when Bridgeway Aggressive Growth Fund's portfolio manager John Montgomery buys stocks he would rather just take a pass on.
A self-described contrarian investor who founded Bridgeway Capital Management in 1993, he has the hardest time throwing money at Nasdaq names that can trade at 200 times earnings.
Also in this column, natural resource funds offer haven from the burden of high oil prices; plus, Vanguard issues a tax advisory.
"All they have to do is sneeze and the stock price gets cut in half. And they still could be overvalued," Montgomery said.
 But he forces himself to issue the buy order anyway. And that's been good for shareholders.
It's good for him, too. His management fee is tied to performance, and so is his nest egg. Twenty-five percent of it is invested in the fund, and the rest is spread among other Bridgeway funds.
Long-term shareholders have profited handsomely. The no-load, diversified Aggressive Growth Fund has delivered consistent peer-pounding, index-walloping returns. On a five-year basis, it ranks as the No. 1 fund in the mid-cap growth category, with average annual returns of 42.77 percent, according to data from Morningstar. It has also consistently beaten the S&P 500 Index.
Trust the machine
Montgomery, whose background includes a Harvard M.B.A. and work as a research engineer at MIT, credits the quantitative computer models he designed and his firm's research for the fund's performance.
"We really follow the models," he said. So much so that some days he doesn't check to see if the market is up or down. And he has no interest in speaking with the management of companies in which he buys stock. Unless, of course, he wants to confirm data quality.
Bridgeway who?
If you haven't heard of Bridgeway Aggressive Growth, you're not alone.
In keeping with the shop's desire to be a cheap, no-frills operation, the fund doesn't advertise, except to send out prospectuses on request. It's not in many 401(k) plans, nor is it on the recommendation lists of many fee-based advisers. What's more, you'd be hard-pressed to find a broker hawking it.
With the exception of E*Trade and Web Street Securities, Bridgeway hasn't made any deals with brokers to waive a transaction fee when retail investors purchase it. And its Web site - well, it's not pretty but it does the job.
With the main focus on keeping costs low for the current shareholder, not winning over prospective investors, the fund carries no marketing -- or 12b-1 -- fees.
Technology still a big play
Asset growth has been swift. In June 1999, fund assets totaled $9.5 million; a year later, they were near $45 million. This week they topped the $100 million mark.
The fund's overall weighting in technology is now about 40 percent, down from 60 percent-plus in the last quarter of 1999. As of the end of June, Montgomery had invested as follows: 14 percent of the fund's assets in oil and gas stocks - a sector he is still bullish on, he said; 13.2 percent in software; nearly 10 percent in telecommunications equipment; and 10.5 percent in retail shares.
Savvy but not scared of volatility
The typical Bridgeway shareholder is a savvy one, Montgomery said, since chances are good he or she had to know enough to sniff out the funds.
But he makes no bones about the volatility of the Aggressive Growth fund, citing its precipitous fall into the red during the spring tech-wreck after posting gains of at least 40 percent in February. Recovery has been swift, however. The fund is up 36.7 percent as of Sept. 20.
The nature of Montgomery's models is such that shareholders should "expect the fund to fall farther in a down market but come back faster" than other funds, he said. That's one reason why he advises short-term investors or those with weak stomachs to stay away.
Click here to read about three sure-fire mutual fund portfolios.
Benefiting from oil prices
You may be all set to curse your heating bill this winter and mutter all sorts of obscenities at your local gas station, but your bad mood might be mitigated somewhat if you got into one of the top-performing natural resources funds earlier this year. They have enjoyed high double-digit returns year-to-date on the back of the stiff rise in oil prices.
A lot of the sector's fund managers are still bullish on oil, said Morningstar fund analyst Michael Gaul. As a result, he added, "the prices of the companies they own are sensitive to the price of oil," with a fair number of investments in independent exploration and oil production firms as well as drillers.
Here are how some of the winners have performed year to date through the close of trade on Sept. 20, according to Morningstar data.
- State Street Research Global Resources A +69.33 percent
- Fidelity Select Natural Gas +58.45 percent
- Icon Energy +55.24 percent
- INVESCO Energy +54.85 percent
- Fidelity Select Energy Service +48.13 percent
Of course, sector funds aren't for everyone. But a focused play in the volatile arena of natural resources might make sense for investors who believe in the future of the sector and want to control their direct exposure to it, Gaul said.
Vanguard issues tax advisory
The Vanguard Group said this week it estimates that five of its 54 equity and balanced funds will have capital gains distributions of 10 percent or more for the year, and cautioned investors from making sizeable purchases in those funds until after the funds' record dates if they have their funds in taxable accounts. Investors who purchase shares after a fund's record date will not assume the capital gains distributions for that year.
If you buy before the record date and unless you are doing so on a dollar-cost averaging basis, "you are simply incurring a potential tax liability that could have been avoided or reduced," Joel Dickson, a principal in Vanguard's Portfolio Review Group, said in a statement.
The five funds projected to have capital gains distributions of 10 percent or more are: Explorer; U.S. Growth; Windsor; Strategic Equity; and Small Cap Index. Most of their record dates should fall sometime in December, a Vanguard spokesman said.
The No. 2 mutual fund family also said half of its equity and balanced funds would have no capital gains distributions for 2000, while the remaining 22 will have gains estimated at between 3 percent or 4 percent of net asset value or NAV. 
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