Bridgeway Balanced: Steady Performer
With stocks in bear-market territory, you may be looking for a safe place to hide. You can dial back your risk by swapping out your formerly high-flying stock fund for a Steady Eddy. In a case like this, Bridgeway Balanced (symbol BRBPX) is a solid choice.
Classified as a conservative balanced fund by Morningstar, Bridgeway is different from its peers in many ways. For one, manager Richard Cancelmo and his colleagues use sophisticated computer programs to select stocks and set the mix of stocks and bonds. Cancelmo also employs put and call options, which, if used correctly, can dampen the volatility of the stocks the fund holds.
Bridgeway's portfolio is more complicated than the typical balanced fund, too. The fund can invest from 25% to 75% of its assets in stocks of large and midsize U.S. companies. Half of the stock money follows Standard & Poor's 500-stock index, and the other half is actively managed using Bridgeway's black-box approach. The stocks are evenly divided between growth and value investing styles. (Bridgeway Aggressive Investors 2, a member of the Kiplinger 25, our list of the best no-load funds, focuses exclusively on growth stocks.)
Bonds make up a minimum of 25% of Bridgeway Balanced's assets. The bulk of the bond allocation is kept in U.S. Treasury bills and short-term notes. "Bonds are best used as more of an anchor than a sail," Cancelmo says.
In addition, Cancelmo, the firm's director of stock trading, sells covered call options on the stocks his fund owns, and he also sells put options on many of the stocks. He employs his options strategies without the assistance of computer models.
Investing with options is a trade-off. Selling calls -- which give the buyer the right to buy a stock at a specific price -- limits gains in a bull market and gives a small amount of protection during a bear market. On the flip side, selling puts -- which gives the holder the option to sell a stock at a specific price -- adds to upside in rallies but can hurt returns during downturns. So there's no free lunch here.
This fund is designed to be no more than 40% as volatile as the SP 500. From its inception on June 30, 2001, through July 3, 2008, the fund has gained an annualized 5%. That may not seem like a lot, but it's pretty good considering that the S&P 500 returned just 2% annualized during that period. Over the same period, Bridgeway also beat the average balanced fund with a conservative portfolio of stocks and bonds by one percentage point per year. "We've beaten the SP 500 with 60% less risk since inception," Cancelmo says. "That's what we are supposed to do."
Bridgeway Balanced's strategy has helped during the current unpleasantness, too. Between October 9, 2007, when the market peaked, and July 3, the SP 500 lost 17%, and Bridgeway lost 5%.
Bridgeway Balanced has an annual expense ratio of 0.93%. That's average for a conservative balanced fund, but very reasonable for a fund that invests with options.