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Bridgeway Ultra-Small Tax Advantage Fund

Really small companies can have really big returns



If you're a fan of small-cap stocks and understand their risks and rewards, here's a fund that invests in really small-cap stocks that's outshining nearly all of its competition.

The Bridgeway Ultra-Small Company Tax Advantage Fund, (800-661-3550), has been around for five years and for most of that time has hummed along unnoticed by many investor's radar screens. That is, until recently.

At year-end in 2002, this quantitative fund that picks stocks for its portfolio based on what the models and computer numbers suggest, ended the year ranked No. 2 in performance in Lipper's Small-Cap Value category. While the average fund of its type was down 13 percent, the Bridgeway Ultra-Small Company Tax Advantage fund (BRSIX) was up 5.15 percent. Out of the box this year, it's also up; through Jan. 3, 2003, its year-to-date performance was plus 1.44 percent.

John Montgomery is the fund's portfolio manager. He " loves" this asset class because of the opportunities it affords. "Ultra small companies have higher short-term risk but if the investment works out, you should get compensated for that risk." Here's more about the fund from Montgomery:

Q: How large are ultra-small companies?

Montgomery: Currently, the cut-off for ultra-small companies in Morningstar's data base is a market capitalization of about $120 million. Right now, we‚ve got about 400 stocks in the fund and the average market cap of it is $76 million.

Q: How did you become interested in ultra-small cap investing?

Montgomery:When we were building our company, one of the questions we asked ourselves is what can Bridgeway do that the big guys can't do. And the answer to that question was, large fund companies can't offer this product because they can't make any money with it because you can't throw billions of dollars at companies this small. So, since our cost structure is radically different than the industry's, and because we're a quant shop, we can make money with a lot less money under management.

And then, in the small-cap arena why would you mess with anything except ultra-small? That's where all the action is.

Q: As a quant fund manager, you really don't care what kinds of companies you own or how they are managed. Right?

Montgomery: I don't even follow news on the companies or care if a new CEO comes in or what their next great product is. All we're trying to do is to replicate the performance characteristics of the asset class and then try to add a little value on the trading side. And, do it in such a way that hopefully means we won't have to return a capital gain to shareholders. Even since the fund's been in existence, we have yet to distribute a capital gain.

Q: How have you managed to do that?

Montgomery: One thing we do is to routinely go through and harvest losses selling the lots of a company's stock that are the most tax advantaged. ( A "lot " represents the number of stocks purchased at one time.) So, rather than tracking the whole position, we account for each purchase of one company and sell the lots that are underwater.

Q: Who is this fund best suited for?

Montgomery: The fund is a good diversifier for a portfolio that's primarily invested in large-cap stocks. However, there are cycles to the performance of ultra small-cap stocks and their performance can be volatile. So, before investing you need to understand the asset class and then have a steel stomach for its volatility.

How much you own of this asset class depends upon how you're using it. If you're using it to lower the volatility of your overall portfolio of funds, you don't want to add more than five or 10 percent. If you're using it to juice up the returns and you don't care about the downside in a quarter, a week or a year or more, you can have more exposure.

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Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.


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