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November 18, 1999
Dear Fellow Social Responsibility Shareholder,
During the September quarter, in the midst of the first market "correction" of
1999, our Portfolio declined 4.6%. While I never like seeing negative
performance numbers, I am pleased that our decline was not as steep as the 6.3%
decline of the S&P 500 Index. Our Portfolio ranked 93rd of 813 growth and
income funds for the quarter, according to Morningstar. The Portfolio continued
its recent trend by beating the S&P 500 Index this quarter, as it has for the
last two fiscal years, as measured by relative performance.
Performance Summary
The following table presents the SEC standardized performance for the September
quarter, one year, five years and life-to-date.
<TABLE>
<CAPTION>
Sept. Qtr. 1 Year 5 Years Life-to-Date
7/1/99 10/1/98 10/1/94 8/5/94
to 9/30/99 to 9/30/99 to 9/30/99(3) to 9/30/99(3)
---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Social Responsibility Portfolio -4.6% 33.7% 23.4 22.7%
S&P 500 (large stocks)(1) -6.3% 27.8% 25.0 24.6%
Lipper Growth and Income Funds(2) -7.6% 21.3% 18.7 18.3%
</TABLE>
(1) The S&P 500 is an unmanaged index of large stocks with dividends
reinvested. (2) The Lipper Growth and Income Funds reflect the
aggregate record of domestic growth and income mutual funds as
reported by Lipper Analytical Services, Inc. (3) Returns for periods
longer than one year are annualized. Past performance does not
guarantee future returns.
Explanation of Financial Performance
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TRANSLATION: Strong performance by our two biggest positions (Qualcomm and
Unify) offset weakness among our healthcare, food, and financial stocks.
A number of our stocks had a very poor showing in the September quarter.
Healthcare, food, and financial stocks were hit the hardest. The following
table presents the seven stocks that declined at least 25% during the fiscal
year:
<TABLE>
<CAPTION>
Rank Company Industry % Change
---- ------- -------- --------
<S> <C> <C> <C>
1 Pacificare Health Systems Health Care Facilities -39.9%
2 WRP Corp. Medical Equipment/Supplies -38.1%
3 Ben & Jerry's Food -38.1%
4 Gap, Inc. Retail Stores--Clothing -36.5%
5 Starbucks Retail Stores--Food -34.0%
6 Xerox Electronics -27.4%
7 MBNA Corp. Banking -25.5%
</TABLE>
Pacificare has fallen almost two-thirds since its peak price in early May. The
HMO industry has been under pressure, due to changes in the regulatory
environment, competitive factors, and worries about vulnerability to
malpractice lawsuits. In addition, Pacificare missed its earnings estimates by
three cents last quarter, and its chief financial officer left unexpectedly.
However, we think the stock is significantly oversold. On the bright side, the
rating company A. M. Best, recently upgraded the company from A- to A, citing
the company's "dominant market position, favorable operating performance, and
strong systems capabilities." The company also appears to believe in its future
prospects and has repurchased over 5% of its shares since the beginning of the
year. The stock price is less than five times next year's projected earnings.
At current prices, this may be a steal--or there could be bigger problems
beneath the surface. We're continuing to hold.
WRP Corporation, a manufacturer of latex medical gloves, has similarly seen its
stock price cut by close to two-thirds since its peak earlier this year.
Unfortunately, the company has seen a deterioration of earnings; at the same
time it has diluted these earnings with the issuance of additional shares. The
next quarter will determine whether the bad news is short-lived or not. We're
holding this one too.
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Enough of the bad news! Outstanding performance by our two largest positions
offset most of the carnage above. Unify, our second largest holding at the
beginning of the quarter, added 3.8% to our quarterly performance. You may
recall from our annual report that we purchased a position equal to 1 1/2% of
assets a year ago and watched it soar over five-fold last fiscal year. The
stock continued to demonstrate appreciation potential in the September quarter,
soaring another 58%. Separately, Qualcomm, our largest and newest position,
rose 32% since our purchase and added 2.3% to our quarterly performance.
Largest Positions
Our ten largest portfolio positions on September 30, 1999 continue to reflect
retail, technology, and finance as our leading sectors:
<TABLE>
<CAPTION>
Rank Company Industry % of Net Assets
---- ------- -------- ---------------
<S> <C> <C> <C>
1 Qualcomm Telecommunications 9.7%
2 Unify Corp. Data Processing--Software 9.6%
3 International Business Machines Data Processing--Hardware 5.8%
4 Visx Inc. Machinery--Medical 4.5%
5 Microsoft Corp. Data Processing--Software 4.2%
6 Home Depot, Inc. Retail Stores 4.1%
7 Vodafone Group Telecommunications 3.9%
8 Chase Manhattan Bank Banking 3.7%
9 Fannie Mae Finance 3.7%
10 Biogen, Inc. Drugs-Generic and OTC 3.6%
----
52.8%
</TABLE>
Although three positions above represent more than 5% of net assets, I believe
that the Portfolio is adequately diversified across sectors and industries. We
rarely put more than 5% of Portfolio net assets in any one company. Qualcomm
and Unify got there by appreciation, but we'll be looking to trim them back if
they get above 10% or if our models pull back from current strong "buy
signals." Our Portfolio is still weighted toward very large growth companies,
but the sprinkling of small companies and value companies has served us well
this year.
Home Depot Update
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You may recall that we reviewed the social record of Home Depot in our annual
report. We decided to sell it gradually, based on criticism of the company's
record on use of old growth lumber and on the marginal decline of the overall
social ranking in our database. Just as we came to press with this decision,
the company announced a comprehensive new policy to address the lumber issue.
We are satisfied that Home Depot is making a serious effort to address the
subject and are awaiting more current social data from the Council on Economic
Priorities before making a final decision.
Disclaimer
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The following is a reminder from the friendly folks at your fund who worry
about liability. The views expressed here are exclusively those of Fund
management. They are not meant as investment advice. Any favorable (or
unfavorable) description of a holding applies only as of the quarter end,
September 30, 1999; security positions can and do change thereafter.
New Prospectus
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TRANSLATION: Each year we print and mail to shareholders an updated prospectus
in compliance with federal securities laws. This year, our format has changed
dramatically in accordance with an effort to simplify mutual fund prospectuses
and make them more readable. We are interested in whether you think it is an
improvement. Please drop us a note, call or email if you have an opinion or an
idea.
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Enclosed is our updated prospectus, which is also our first "Plain English"
prospectus. The "Plain English" approach is an effort by the Securities and
Exchange Commission to take much of the "legalese" out of prospectuses and to
make them more "friendly" for people who may not have training in investments.
Bridgeway welcomed this new initiative. However, in order to maintain
accordance with SEC guidelines, we had to omit or restructure much of the
additional information on items that we wanted to include. In the final
analysis, we decided to discuss some of these items in our quarterly letters,
rather than in the prospectus itself. In this report we will highlight the two
subjects: distribution expenses and the tax efficiency of our Portfolio.
Distribution Cost--or I hate high expenses
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TRANSLATION: Bridgeway Fund shareholders pay no distribution expenses. They
never have. This cost is borne by the Adviser, Bridgeway Capital Management,
according to our contract. Any change in this policy would require a vote by
Fund shareholders.
On October 15, 1996, shareholders approved a 12b-1 distribution plan, whereby
the Fund serves as its own distributor; however, the Adviser, Bridgeway Capital
Management, continues to pay all of the distribution expenses. Distribution
costs are expenses related to selling the Fund. Since Bridgeway does
essentially no advertising, our distribution costs consist primarily of mailing
materials to people who request information about the funds. For instance, if a
non-shareholder friend of yours calls the "800" number at Bridgeway and asks
for a prospectus, the phone expense, personnel expense, prospectus cost,
envelope, any other enclosures, and postage are all expenses of the Adviser,
not the Social Responsibility Portfolio. A majority of mutual funds pay at
least a portion of the distribution costs from the fund itself. Bridgeway's
policy is in line with our focus on cost efficiency. You may remember that our
four business values are integrity, performance, cost, and service.
You may be wondering why I am raising this topic now. It is to avoid any
confusion about the presentation of annual expenses in the fee table on page 25
of the enclosed prospectus.
Since the inception of our Portfolio, even before shareholder approval of the
12b-1 Plan, the Adviser has paid all distribution expenses directly from its
own capital and profits. The Fund's management contract with its adviser,
Bridgeway Capital Management, clearly states that the adviser pays distribution
expenses. Therefore, they are not shareholder expenses, and we have previously
excluded distribution expenses from our fee table. The SEC has taken the view
that since distribution expenses are expenses of the Fund, even though they may
not be paid by the Fund, they must be presented in the fee table. The expenses
are then "backed out" in the line labeled simply "Fee Waiver." The new SEC
rules for plain English do not allow flexibility with the fee table
presentation. We can neither add that the "fee waiver" includes distribution
expense, nor can we include a footnote to the table to that effect. We disclose
it later on page 35 of the prospectus. My concern is that I don't want anyone
to think we reneged on our commitment in 1996 never to charge a 12b-1 fee
without shareholder approval.
Tax Efficiency
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TRANSLATION: Our first five years were quite tax-efficient, especially for an
actively managed fund. Tax efficiency means that you pay a smaller portion of
your Portfolio returns to Uncle Sam. However, this is irrelevant if you hold
your shares in an IRA or other tax-deferred account.
On October 31, Bridgeway became the first mutual fund, to my knowledge, to
highlight the relative tax efficiency of each of our portfolios in a separate
section of its prospectus (see page 38). For an actively managed portfolio,
Bridgeway Social Responsibility has a very good record, scoring 96.5% tax
efficiency over the last five years, according to Morningstar. This statistic
is the percentage of total returns that a shareholder would keep after taxes,
assuming the shareholder paid taxes at the maximum rate and held shares in a
taxable account. It excludes taxes incurred when you sell shares of the
Portfolio. Although the Social Responsibility Portfolio is not specifically a
tax-managed Portfolio, we do make decisions to minimize taxes when we feel it
would not hurt our overall Portfolio returns. Our five-year tax efficiency
record ranks in the top 5% of domestic equity funds. I am very proud of this
record.
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1999 Dividends
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In accordance with IRS requirements, the Board of Directors recently voted to
distribute the following dividends for the Social Responsibility Portfolio for
calendar year 1999:
Ordinary income $ .00
Short-term capital gains $ 0.00
Long-term capital gains $ 0.27
------
Total dividends $ 0.27
Based on a recent net asset value per share of $30.94 and year-to-date return
of over 30%, 1999 appears to be another very tax efficient year.
Green Mountain Coffee
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Of the small companies for which Bridgeway has conducted social screening,
Green Mountain Coffee is undoubtedly the most difficult to report on. When a
company has so many outstanding programs, it's just hard to choose which one to
highlight. The company began in 1981 as a small cafe in Vermont, serving coffee
made from fresh roasted beans. Visitors began to request that coffee be sent to
their homes; restaurants in the area wanted to serve it; and the mail-order
business was born. I encourage you to visit the web site,
www.GreenMountainCoffee.com.
The Stewardship Coffee program evolved from an environmental committee, which
was formed in 1989. This product line comes from small growers who carefully
monitor growing conditions and processing methods to ensure an exceptional
bean, use environmentally conscious methods such as synthetic fertilizers and
pesticides and erosion control, and provide programs to enhance living
conditions for workers and their families. For instance, the Guatemalan Finca
Dos Marias Estate deeded employees their own land and helped them establish a
union for access to a credit union, insurance, and staple food products at low
prices. The farm's workers have a 95% literacy rate.
In a press release announcing its June quarter financial results, the company
highlighted its social, as well as financial commitments:
Stiller concluded, "I personally am gratified by our financial success
at Green Mountain Coffee because it is a testimony to a public
company's ability to not only build value for our stockholders, but
also be socially and environmentally pro-active and responsible. As the
Company's CEO and largest stockholder, I care about building
stockholder value. As a concerned citizen and parent, I care equally
about the positive difference we are making, for generations to come,
in the communities where we do business, and the world at large."
Wall Street Transcript Interview
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On October 4, the Wall Street Transcript, a magazine for investment
professionals, published an interview with me on Bridgeway's strategies and
portfolios, including this one. Copies are too expensive to distribute with
this letter (sorry), but you can see the article in full on our web site at
www.bridgewayfund.com/910wall.htm.
Conclusion
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As always, we appreciate your feedback. We take it seriously and discuss it at
our weekly staff meetings. Please keep your ideas coming.
Sincerely,
/S/ JOHN MONTGOMERY
John Montgomery
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