HOUSTON — For Bridgeway Capital Management Inc., a $50,000 donation to a charitable foundation turned into a business strategy.
The largely retail quantitative money manager is making a push into the institutional market with its five-year goal of obtaining 50% of its assets under management for institutions vs. 20% currently said John Montgomery, founder, vice president and director of the Houston firm.
The firm gives 50% of its profits to charity, and it was while writing a check to a non-profit organization that a light bulb went off in his head and he decided to try to lure more institutional business.
“We'd love to have more foundations and endowments, and that ties in with our mission,” he said. “We can write a $50,000 check to an organization, or manage that money for them ... and make an even bigger difference.”
Institutions have a long-term investment horizon that fits better with the firm's products, which are generally high-alpha producers over a long period of time, Mr. Montgomery said. The firm offers 10 long-only equity portfolios and one balanced strategy that invests 25% of assets in fixed income.
Having an even split between retail and institutional also avoids large swings in asset flows because institutional investors are more patient during bursts of underperformance, said Mike Rome, head of the firm's business development group.
For example, the firm's Aggressive Investors 2 portfolio, an all-cap domestic equity strategy, experienced 17% gross redemptions in early 2007 when it underperformed its benchmark for the first time in five years, Mr. Montgomery said. The $751 million portfolio returned 6.72% in 2006 vs. 15.8% for the S&P 500. But it bounced back in 2007, returning 30.97% vs. 5.5% for the S&P 500, according to data from eVestment Alliance, Marietta, Ga.
The return for the year ended March 31 was 5.44% vs. -5.08% for the S&P 500, according to data on Bridgeway's website. In the three years ended March 31, the portfolio returned 11.71% annualized vs. 5.85% for the S&P 500 index.
The $844 million Ultra Small Company Market fund was down 17.69% for the year ended March 31, according to the firm's website. The fund's benchmark, the CRSP Cap-Based Portfolio 10 Index — an unmanaged index of 2,655 ultra-small companies compiled by the Center for Research in Security Prices — was down 20.2% in the same time period. Three-year returns were 1.82% annualized vs. 3.2% for the CRSP index.
The quant manager is trying to move deeper into the institutional market at a time when some quantitative managers are getting beaten up by the credit crunch. Overall, the firm's long-term return numbers have held up well in part because of its multimodel investment strategy, said Marta Norton, mutual fund analyst at Morningstar Inc., Chicago. The Aggressive Investors 2 portfolio, for example, has seven independent models it uses to pick stocks. “(The models) are constructed to be uncorrelated,” Ms. Norton said. “One should be zigging when the other is zagging.”