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Bridgeway Has Struggled, But Its Culture Endures

Lagging returns and outflows haven't changed this firm's laudable practices.

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One big test of a firm's corporate culture comes when times are tough. Bridgeway certainly has been going through some tough times. Most of its funds have had an extended stretch of poor performance--only two of the 11 (not counting the recently launched Bridgeway Small-Cap Momentum (BRSMX)) land in the top half of their respective Morningstar categories over the past three or five years through Oct. 6, 2010. Investors have yanked a net $900 million from the funds since the end of 2007. Those outflows, along with investment losses stemming from one of the worst three-year periods for U.S. stocks, have caused Bridgeway's fund lineup to shrink to $1.4 billion at the end of September 2010 from a 2007 peak of $3.5 billion.

Still, Bridgeway looks resilient in the face of performance issues and declining assets. For example, it hasn't laid off any employees through the downturn, and no one has left, either. In fact, the firm lately has added two members to its research team and plans to hire more. Chalk up this stability to elements of the firm's distinctive culture. A rule that limits the highest-paid employee from making more than seven times the salary of the lowest-paid staffer has kept compensation costs down. That, in turn, has allowed Bridgeway to be fiscally conservative. During a recent visit to its offices, Morningstar analysts were told that the firm had established a cash reserve in the middle of the decade sufficient to get it through a four-year stretch in which it wasn't making a profit. The firm is enduring its second straight year where it isn't cash-flow positive, and reports that it hasn't dipped far into that reserve yet.

Still Shareholder-Friendly
Bridgeway also has made it through this tough period without attempting any moves that might run counter to the interests of shareholders. True, it recently launched Small-Cap Momentum, but that was after discovering a new combination of quantitative factors that tested extremely well. This is Bridgeway's first new fund in seven years, so it clearly hasn't been in a rush to launch new offerings. And the company always has brought out funds with strategies that appear to be within its circle of competence.

Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.