Houston-based Bridgeway Capital, founded in 1993 by MIT graduate John Montgomery, has always used number-crunching as a fundamental, well before ETFs began relying on computer algorithms to select value or growth stocks. That foundation could be one reason why its $504 million Bridgeway Small-Cap Value fund has beat 99% of Morningstar’s Small Value Category with a 14.9% in the last 5 years, according to a profile on the firm in Barron’s.
Montgomery began his career as an engineer in the transit industry, until earning his M.B.A. from Harvard in 1985. That was where he became passionate about the investment models developed by Fama & French, combining his work in investing with his love for numbers and statistics. Montgomery recognized early on that computers could work more efficiently and inexpensively doing the work of human analysts, and that made Bridgeway competitive on fees from the start. The firm currently manages $4.5 billion, the article reports.
These days, Bridgeway has evolved beyond the Fama & French price-to-book value model, after meticulously testing new metrics with existing quant models in order to increase returns without also increasing risk, and incorporating factors such as quality and sentiment. While the fund carries low valuation statistics in its category, that valuation is driven by Bridgeway’s tendency to select smaller companies that many other managers miss. For example, while most Small Value funds only hold 5% in microchips, Bridgeway holds 63.5%.
And Bridgeway takes a more nuanced approach to value, exemplified by its purchase of Teekay Tankers earlier this year. Teekay’s cash flow and earnings were in the negative at the time of the purchase, which made investors unable to assign a value based on price/earnings or price-to-cash flow ratios. But Bridgeway’s unique model that assesses “deep value” by factoring in company sales actually showed that Teekay was a good pick. Because there are “multiple individual models” within the value and quality components, co-manager Elena Khoziaeva told Barron’s “…diversification comes…from the individual models that are run independently within each [factor.]”
70% of the fund is generally given over to small-cap value stocks while the other 30% goes to stocks that align with the quality and sentiment categories. And currently, the number-loving Bridgeway team is developing research that factors in ESG metrics. But before any of those metrics are added into their models, they will be vetted by actual human beings, just as every quant alteration at Bridgeway has done since its founding.