Getting It Right With Computer Screens
Bridgeway Aggressive Investors 2 (symbol BRAIX) is a rather awkward name for a fund. But forget the name; the fund is wonderful. Even if you don't normally like funds that employ computer models to pick stocks, you ought to give it a close look.
Its three-year annualized return is a stunning 33% (to February 21), and the fund is in the top 1% among mid-cap growth funds during that period.
It fell 19% in 2002, its first year, but that was three percentage points less than the SP 500. Since then, the fund has produced double-digit returns every year -- including 2006, when it is already up 13%.
But that's just the beginning. The fund is run almost identically to older brother Bridgeway Aggressive Investors 1 (BRAGX), which is closed to new investors. Over the past ten years, that fund has returned an annualized 23% -- putting in the top 1% among mid-cap growth funds.
There is one difference between the two funds, but it's one that hasn't mattered yet. If the funds grow large enough, Aggressive Investors 1 gets first dibs on promising small-cap stocks. But that hasn't happened yet.
My conclusion: John Montgomery, 50, who founded the Bridgeway funds, is one of the savviest money managers working today. Who cares if he makes his money by coming up with and refining brilliant computer models rather than researching companies the old-fashioned way?
Houston-based Montgomery won't tell you exactly what his computer models do. That has scared some institutional investors away. But that's a good thing. Why? Because it means Bridgeway is managing a total of $3.5 billion -- a lot of money, but still a small enough amount for a gifted quant to excel with.
For the Aggressive Investors funds, Montgomery employs five computer models, which he and two colleagues are constantly refining. Some of the models look for stocks with good growth characteristics; others look for stocks with good value characteristics. Each of the models independently picks stocks for a portion of the fund, but the proportions each runs change over time, Montgomery says. "The fund is growth leaning, but it has some deep-value models, too."
Aggressive Investors 1 was growth-oriented enough to return 121% to shareholders in 1999 -- the height of the tech mania.
Yet it and Aggressive Investors 2 were value-oriented enough to continue beating the pants off rivals during the vicious bear market that followed.
As if that weren't enough, Aggressive Investors 2 lately has had more than one-third of its assets in energy stocks -- once again, hitting the market's sweet spot.
Like most quants, Montgomery's funds tend to have high turnover. Aggressive Investors 2 tends to hold stocks only about nine months, on average. But Montgomery, who keeps all his own money in the funds, nevertheless manages these funds so that they don't produce a lot of short-term gains, which are often taxed at a high rate. "We're going to have capital gains, but we want as much of them as possible to be long term."
Expect a sometimes bumpy ride. For instance, the fund lost 19% in the third quarter of 2002. But if you're patient, Aggressive Investors 2 is one of the most promising growth funds you can buy.
Opinions expressed in this column are those of the author.