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JUNE 16, 2003
Who Says Nice Guys Finish Last? Fund manager John Montgomery cares about his shareholders, and it shows John Montgomery may be the only mutual-fund manager who's afraid of becoming too rich. The 47-year-old founder of Bridgeway Capital Management in Houston donates half the profits from his management firm to charity because he doesn't want to be one of those "people who make money the most important thing in their lives." Life, he says, "should be about relationships, not owning more stuff." O.K., so maybe money manager was an odd career choice. But Montgomery's altruism also benefits his shareholders. He keeps costs low and avoids practices that fund managers often use to fatten their wallets. "Montgomery always puts his shareholders' interests before his own," says John Bogle, founder of fund giant Vanguard Group. That has been a boon to his funds, all seven of which have beaten their peers since their inceptions. The firm's flagship Bridgeway Aggressive Investors 1 has the ninth-best five-year annualized return, 19.4%, of any fund tracked by Morningstar. NO PERKS PERMITTED. Some of Montgomery's shareholder- friendly policies are virtually unheard of in the fund biz. He's one of the few fund managers to disclose his salary, $282,701, and he has established a rule that he may not receive more than seven times that of the lowest-paid employee at his 16-person firm. He does not accept soft-dollar payments -- perks from brokers such as computers and junkets for sending trades their way -- and forbids employees from owning stocks outside of the funds. Both practices, he says, lead to conflicts of interest that harm investors. One reason Montgomery's funds have trumped their peers is that he closes them to new investors at manageable asset levels. "Good performers often get flooded with money, and then they don't perform as well," explains Montgomery. Funds can't trade as nimbly when they have too much cash, but managers hungry for assets often leave them open to collect more fees. Not Bridgeway. Montgomery closed Ultra-Small Company and Micro-Cap Limited to new investors at $28 million -- the lowest closing levels in the industry. At $55 million, existing investors were barred from putting in new money. He shut Aggressive Investors 1, which buys stocks of all sizes, at $275 million. Bridgeway's fees are also shareholder-friendly. Bridgeway's Ultra-Large 35 Index Fund, which tracks a customized index of 35 blue chips, has one of the lowest expense ratios -- 0.15% -- of any stock mutual fund. Ultra-Small Company Tax Advantage Fund, a quasi-index fund, charges 0.75%, making it the lowest-cost micro-cap fund for individuals. Three funds that aren't indexed use performance-based fees that vary depending on whether a fund has beaten its benchmark. Says Montgomery: "If we underperform, it hits our pocketbook hard." AN ENGINEER'S EYE. Although he has an MBA from Harvard Business School, Montgomery says his Masters in civil engineering from Massachusetts Institute of Technology has proven more useful to him as an investor. (Before starting Bridgeway in 1993, he worked as a transportation engineer.) "At MIT, I learned about statistics and computer modeling," he says. "That showed me the tremendous advantage of taking emotion out of the investment process." He uses five computer models to pick stocks in his nonindexed funds, three of which find growth stocks, one that finds value stocks, and another that looks for stocks with strong price momentum. Using a mix, he adds, allows him to perform better in markets that favor different kinds of companies. Montgomery's largest holding in three of his funds is cellular company Nextel Communications, which he bought last fall. That's because the company was turning profitable after years of losses, yet it was getting pummeled in the telecom rout. "When companies drag Wall Street through a lot of red ink, like Nextel did in earlier years, they aren't forgiven so quickly," he says. "It takes a while for the Street to pick up on the improvements. Our models capitalize on that recognition lag." Montgomery says his faith inspires his charitable giving. He's an elder at St. Andrew's Presbyterian Church in Houston, where he plays the flute for church functions. His donations often go to educational charities. A recent project was to help build the second floor of a school in Haiti. Bridgeway also supports the YES Academy, a Houston charter school for disadvantaged youth. Between heart and hard-nosed investing, Montgomery attempts to reach the right balance. Judging by the results, his priorities seem to be well aligned.  By Lewis Braham Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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