John Montgomery's computer programs triggered a change in the biggest holding for his Bridgeway Aggressive Investors 2 Fund, the best performer...
John Montgomery’s computer programs triggered a change in the biggest holding for his Bridgeway Aggressive Investors 2 Fund, the best performer in its class, during the past two months.
Goodyear Tire & Rubber, a tire maker that is recovering from three years of losses, has become the largest investment. The Bridgeway fund has about 5 percent of its $166 million in Goodyear.
The stake has more than doubled since May, when Apple Computer was the largest position. The fund trimmed its stake in Apple, the maker of iPod digital music players, after his self-developed software suggested the move.
“We’ve got a plethora of ‘buys,’ ” Montgomery said from his Houston office. “I’ve got company names that normally we would have in the fund that I don’t have because we’ve scoured the fund so thoroughly for stuff to sell, and I like everything we’ve got.”
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Bridgeway Aggressive Investors 2 is the best performer during the past year of 238 “multicap” growth funds tracked by Bloomberg, with a 45 percent return, as of July 26. Funds in this category buy companies of any size and typically focus on growth in measures such as sales and earnings.
For the past three years, Montgomery’s fund ranks sixth of 212 funds, with an average annual gain of 26 percent. The best performer was the Hodges Fund, which averaged 35 percent a year.
Montgomery holds a master’s degree in civil engineering from the Massachusetts Institute of Technology in Cambridge, Mass., and a master’s from Harvard University’s business school.
At Harvard in the mid-1980s, Montgomery said, he found a “clear opportunity to apply quantitative methods to investing.” He formed Bridgeway Capital Management in 1993 and uses essentially the same investing formula as when he began.
For Aggressive Investors 2, Montgomery divides investments into five basic groups: three for growth stocks, including one for lower-priced shares; one for companies judged to be undervalued; and one based on technical criteria, such as changes in price and the amount of trading.
Taking a few representative stocks from each group, the fund is designed to outperform the Standard & Poor’s 500 Index with a similar level of risk, he said. Bridgeway shuns so-called fundamental research on a company and its management.
“We are very dedicated to following the models, and that takes emotion out of the process,” Montgomery said. “Emotion is the biggest value destroyer in the whole investment arena.”
Goodyear, based in Akron, Ohio, reported losses of $2.2 billion from 2001 to 2003. North America’s largest tire maker had net income of $114.8 million, or 63 cents a share, last year.
The company also reported a higher profit than analysts had expected in this year’s first quarter.
The stock is “not a normal aggressive and growth-type name,” Montgomery said, yet its price had jumped 64 percent in the past 12 months, as of July 26.
“I think of it as a mature industry,” he said. “How much sleepier can you get than tires? But it’s done well for us.”
Bridgeway and Montgomery were penalized $5.1 million by the U.S. Securities and Exchange Commission last year for miscalculating performance-based management fees. Three funds, including Aggressive Investors 2, overcharged shareholders, the regulator said.
Montgomery, whose company gives 50 percent of profits derived from investment-advisory fees to charity, said the penalty was personally troubling. Three of Bridgeway’s 20 employees work to ensure the firm complies with regulations, he said.