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[BRIDGEWAY LETTERHEAD]
April 28, 2000
Dear Fellow Social Responsibility Shareholder,
We beat the returns of both of our benchmarks in the March quarter. We have
beaten the performance of the S&P 500 in each of the last three quarters and in
five of the last six quarters. I am quite pleased.
Relative to other growth and income funds, we ranked 210th of 848 funds for the
quarter, 18th of 830 for the last year, and 12th of 430 over the last five
years. I am most proud of our five-year record since we are trying to build a
consistent and attractive long-term record, rather than "shoot out the lights"
in any one quarter.
For the benefit of our new shareholders, we try to make it easy to skim our
rather lengthy quarterly reports. If you read only the first sentence of each
report and then recycle it, you'll know how you did financially in the most
recent quarter. If you want to skim the report, just read the short paragraphs
marked "TRANSLATION." Then you can spend more time on any section that interests
you.
Performance Summary
TRANSLATION: We had a good quarter, both in absolute terms (relative to
historical stock market standards), and relative to our performance benchmarks.
The table below presents our March quarter, one-year, five-year and life-to-date
financial results according to the formula required by the SEC.
<TABLE>
<CAPTION>
March Qtr. 1 Year 5 Year Life-to-Date
1/1/00 4/1/99 4/1/95 8/5/94 to
to 3/31/00(3) to 3/31/00 to 3/31/00 to 3/31/00(4)
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Social Responsibility Portfolio 3.8% 45.7% 30.1% 28.8%
S&P 500 (large stocks)(1) 2.3% 17.9% 26.7% 25.7%
Lipper Growth and Income Funds(2) 1.8% 13.3% 19.2% 18.9%
</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) Periods less than one year are
not annualized. (4) Periods longer than one year are annualized. Past
performance does not guarantee future returns.
Managing Risk: Striving for Improved Diversification Served Us Well in the March
Quarter
TRANSLATION: Risk management is an important part of this Portfolio. Our models'
attention to risk, as well as our internal diversification guidelines, have
helped keep the historical market risk of this Portfolio below that of the S&P
500 market index and also below the average of our peer group of funds. In other
words, when the market has declined, our Portfolio has tended to go down
slightly less.
As highlighted in the last two shareholder letters, our Portfolio had previously
become overconcentrated in two stocks, Qualcomm (a telecommunications firm) and
Unify (a software firm concentrating on Internet applications). We worry a lot
about diversification and risk in this Portfolio, and controlling risk is part
of the investment objective. So when a single stock really takes off, I take a
hard look at the risk involved. This strategy is part of both our
diversification guidelines and also our quantitative stock-picking model
structure. Let me give two recent specific examples, one a small stock, and one
a large stock.
Unify was the first concentrated position to hit my radar screen. This stock
rode the Internet wave of 1999, appreciating from $2.70 (our purchase price in
1998), all the way to $17.70 at the time we sold 61% of our shares. In
retrospect, this sale was about a month too early for the peak, but it saved us
a lot of volatility in the March quarter. In February we sold a second portion
at $25.44, equal to 19% of our original shares.
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This brought the position back down to a manageable size for a small technology
stock, and helped cushion the decline in the recent market downturn.
[GRAPH SHOWING THE SHARE PRICE AND BRIDGEWAY'S PURCHASE AND SALES POINTS OF
UNIFY CORPORATION.]
Qualcomm was our largest holding both at the beginning of the December quarter
and at the beginning of the March quarter, when it represented 18% of our
Portfolio - much too high. (It represented less than 5% of the Portfolio when
purchased, but it more than quadrupled over the next half year.) As Qualcomm's
stock price and risk climbed remarkably last December, we sold one-quarter of
our shares within one day of the peak. It's rare to time such a sale this close
to the absolute peak. Shares plummeted in January on profit-taking and worries
of slowing growth. We sold another 43% of our original shares in February on a
partial recovery. Our model still likes this stock, but it represented a more
reasonable 4.9% of the Portfolio at the end of March. Here's the picture on
Qualcomm:
[GRAPH SHOWING THE SHARE PRICE AND BRIDGEWAY'S PURCHASE AND SALES POINTS
OF QUALLCOM INC.]
This kind of risk management has helped keep the volatility of the Social
Responsibility Portfolio below that of the market overall during the last five
years. Here are the statistics. One measure of market related risk is beta, a
statistical measure of the degree to which a fund cushions or magnifies the
overall risk of the
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market. On this basis, our Portfolio has had 84% of the risk of the market, 16%
less than the full amount. This does not mean that we have been less risky than
the market in all environments, however. Nor does it mean we will necessarily be
so in the future. But we will try.
A second measure of risk is "downside volatility," or the amount a fund goes
down in a down market. By this measure, our Portfolio has had 87% of the risk of
its peer group of funds. Morningstar rates Bridgeway Social Responsibility
Portfolio's historical risk as "below average" risk among its peer group of
funds.
Top Ten Holdings
TRANSLATION: We completed trimming our largest holdings in the March quarter.
By trimming our largest positions and purchasing stocks in other industries, we
have recently improved the diversification of the Portfolio. Last quarter, our
top ten holdings represented 52% of the net assets, and two holdings represented
more than 5% of net assets each. At the end of March, the top ten represented
40% and no single holding represented as much as 5%.
<TABLE>
<CAPTION>
Rank Description Industry % of Net Assets
---- ----------- -------- ---------------
<S> <C> <C> <C>
1 Bank of America Corp. Banking 4.9%
2 Qualcomm Inc. Telecommunications 4.9%
3 Applied Materials Inc. Electronics/Electric 4.5%
4 Chase Manhattan Corp. Banking 4.3%
5 Corning Inc. Telecommunications 4.1%
6 American Express Company Finance 3.8%
7 Corsair Communications Inc. Telecommunications 3.7%
8 Home Depot Inc. Retail Stores 3.5%
9 Siebel Systems Inc. Data Processing/Software 3.4%
10 AES Corp. Services 3.3%
----
Total 40.3%
</TABLE>
New Portfolio Additions
TRANSLATION: We added 16 new companies since late December. So far, they have
performed quite well as a group.
With the money we received from trimming Qualcomm and Unify, in addition to
money received from new shareholders, we tried to increase diversification. We
still have strong exposure to technology and telecommunications, but I feel our
Portfolio is now more "well-rounded." Here are the companies we added from late
December through the end of the March quarter:
<TABLE>
<CAPTION>
Company Industry
------- --------
<S> <C>
AES Corp. Services
Applied Materials Electronics/Electric
Colgate-Palmolive Household Products
Comdisco Computer Services
Corning Inc. Machinery/Glass Products
Firstfed Financial Banking
Hawaiian Electric Industries, Inc. Utilities-Electric
International Paper Paper
Kimberly Clark Household Products
Lincoln National Corp. Insurance
Merrill Lynch And Co. Inc. Finance
New York Times Publishing
Salton/Maxim House Household Appliances
Tasty Baking Co. Food
Toyota Motor Corp. Automobiles
</TABLE>
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The total return of these companies through the date of this letter is 16%,
significantly above the market. Our efforts to diversify not only helped our
risk, it helped our quarterly return.
Best Performers in the March Quarter
TRANSLATION: We had a handful of stellar performers in the March quarter, but
these were mostly smaller diversifying positions. They helped offset the decline
of Unify and Qualcomm (above), as well as some of our healthcare stocks.
Four of our stocks appreciated by at least 50% in the quarter:
<TABLE>
<CAPTION>
Rank Description Industry % Gain
---- ----------- -------- ------
<S> <C> <C> <C>
1 Corsair Communications Inc. Telecommunications 135.4%
2 Starbucks Corp. Retail Stores 84.8%
3 Adobe Systems Inc. Data Processing/Software 65.5%
4 Green Mountain Coffee Inc. Food 61.9%
</TABLE>
Three of these (Corsair, Starbucks, and Green Mountain) were smaller positions
in small companies we added last year when we thought small companies seemed far
cheaper than our staple of large ones. They helped offset the poor performance
of some of our healthcare stocks, including VISX, which we sold in January for a
loss. After the company lost a patent infringement suit (which had previously
protected its near monopoly on lasik eye surgery), the stock price dropped from
its December high of $88 to $31.5 (our sale price). Since then it has fallen to
about $15.
Disclaimer
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, March 31, 2000;
security positions can and do change thereafter.
I Hate High Expenses--or Just Say No
TRANSLATION: Our policy of avoiding soft dollar commissions (higher brokerage
commissions that pay for research, terminals, and news services) continues to
save the Portfolio money. It also helps us focus on what is really important.
At the beginning of the current fiscal year, I committed to our Board of
Directors to continue to improve our accounting controls, specifically to
prepare for being a fund company three times larger than we are currently. One
project that we have completed this quarter is installing new hardware and
software for placing trades (purchasing stocks). The new system is improving the
efficiency of our trading process, helping us to eliminate paper, and increasing
our capacity for growth. The software is rather costly, and I got a very
interesting reaction from our vendor when it was time to talk about payment.
Most investment advisory firms pay for these items with soft dollars.
Specifically, according to a survey by TheStreet.com, only six of the largest
thirty mutual fund families could represent to a journalist that they don't use
some form of soft dollars. "Soft dollars" aren't the less crisp kind that have
been in circulation a few years and don't stick together in your wallet. Really,
soft dollars means your money, money right out of the shareholder's own pocket.
Here's the way soft dollars work.
The SEC requires a fund family to get the best deal for its clients when
shopping for a broker. That means the lowest commission cost commensurate with
the best execution--with one exception. The fund can pay a higher commission if
the broker is also giving the fund something that adds to shareholder value. The
most frequent example is research. Other examples are data and information, for
example news services, Bloomberg terminals, and--you guessed it--trading
software like we just purchased. When I discussed paying for our trading
software, the salesman couldn't believe I was actually going to write a check
from
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the investment advisory firm when I could have our fund pay for it through soft
dollar commissions. Here is Bridgeway's position on soft dollar commissions:
Our shareholders pay Bridgeway Capital Management a management fee, which is up
front and fair. It is based on performance. We make more when our shareholders
make more. This helps us focus on Portfolio performance rather than asset size
and revenues to the management firm. We pay for our own expenses related to
investment management: Bloomberg terminals, computers, news services, and
trading software. Period. This strategy 1) gets us out of a lot of games played
between brokers and investment advisors, 2) significantly simplifies my job, and
3) reduces your expenses. If Bridgeway did soft dollar commissions, I would make
(through my ownership in Bridgeway Capital Management) about $30,000 more in
2000, but I would have to spend my time keeping accurate, auditable records of
what we used the soft dollars for and who benefited. I'm just not going to do
it. A big part of our competitive advantage is cost efficiency and focus on
performance. They're related, and I think it shows up in both our expense ratio
and our Portfolio performance. When it comes to soft dollar commissions,
Bridgeway "just says no."
Joanna's Report on Lincoln Financial Group
As many of our shareholders know, aside from financial analysis for the
Portfolio, we like to provide information of a social nature on the companies
that we own. We have written about various interesting highlights from footbaths
and leisure time for Horizon cows to Green Mountain Coffee's effect on the
literacy rate in its coffee plantation community. So when John came to me with
Lincoln National's excellent scores on social criteria, perfect in 8 out of 9
applicable categories, my reaction was, "What can possibly be interesting about
an insurance company?" In the meantime, we have had our first "Bridgeway baby."
What I mean is, the first member of our Bridgeway staff has had her first baby
girl. Providing support and benefits to enhance the experience for her family
has enlightened and enriched our commitment to the part of our mission
statement, "value the family."
I found a great many excellent programs while combing through Lincoln's website,
but being selected among the top ten best companies for working mothers shone
above all the rest. In fact, 1999 was the 13th year to be selected as a "best
company." The benefits cover a wide range. For example, the "mid-day flex-time
policy enables employees to take up to three hours off work in the middle of the
day to attend to personal business such as checking on a sick child or attending
a child-teacher conference." There are near site child care centers and
lactation centers; support groups and brown bag lunches; adoption assistance;
elder care resource and referrals. John Boscia, president and chief executive
officer of Lincoln Financial Group says, "Lincoln is committed to recruiting the
best and brightest individuals and is working hard to create a culture and
environment that provides work-place policies that support our employees'
needs."
In a broader sense, strong employee work/life programs recognize that employees
highly value the chance to work on their own terms. Lincoln work/life and
wellness manager Carol Rolland says, "These policies help us to be a lot more
competitive...meeting business needs in an industry with global round-the-clock
demands. If you want to start work at five a.m., take an overnight shift, or
split your day in two via 'midday flex,' Lincoln is the company for you." Gone
is the concept that women's pay merely supplements their husband's; gone are the
"pink-collar ghettos of clerical work" and "Girl Fridays." Enter the age of
partnership and creativity, enhancing the definition of family and making great
places to work. And I learned that not only is Lincoln much more than an
insurance company, but also that it is a dynamic world leader in benefits for
all employees, especially working mothers.
Conclusion
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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