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[BRIDGEWAY LETTERHEAD]
April 25, 2000
Dear Fellow Aggressive Growth Shareholder,
While beating the returns of both of our quarterly market benchmarks, including
the S&P 500 by more than 10 percentage points, we took shareholders on quite a
roller coaster ride this March quarter. At one point, the Portfolio was up 32%
quarter-to-date before coming back into the atmosphere. I can't say that I like
the volatility, but I can't complain about the quarterly (or annual or
inception-to-date) returns. We beat the market; I'm happy.
Relative to other aggressive growth funds, we ranked 104th of 173 funds for the
quarter, 14th of 154 for the last year, and 5th of 79 over the last five years.
Over the last five years we have also ranked 16th of 1621 domestic equity funds.
I am most proud of our five-year record since we are trying to build an
attractive long-term record, rather than "shoot out the lights" in any one
quarter.
Performance Summary
TRANSLATION: As explained below, large, highly appreciated NASDAQ stocks
(mostly, but not entirely in technology companies) took us on a wild ride in the
March quarter. We continued trimming these companies during the quarter, adding
proceeds and new money into beaten up ("value") large companies, oil stocks,
banks, small value stocks, and small retail stocks. Each of these categories
helped our performance and dampened volatility. Nevertheless, our biggest
gaining and losing stocks were still among the NASDAQ technology wonders.
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 3/31/00(3) to 3/31/00 to 3/31/00 to 3/31/00(4)
------------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Aggressive Growth Portfolio 12.7% 127.9% 42.5% 38.9%
S&P 500 Index (large companies)(1) 2.3% 17.9% 26.7% 25.7%
Russell 2000 (small companies)(1) 7.1% 37.3% 17.2% 16.6%
Lipper Capital Appreciation Funds(2) 14.4% 66.6% 27.6% 25.8%
</TABLE>
(1)The S&P 500 and Russell 2000 are unmanaged indexes of large
and small companies, respectively, with dividends reinvested.
(2)The Lipper Capital Appreciation Funds reflect the aggregate
record of more aggressive domestic growth 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.
A Gradual Shift Away from our Previous High-Fliers
TRANSLATION: In spite of significant trimming before and after the beginning of
the March quarter, technology still comprised 43% of the Portfolio at the end of
the quarter. However, we added significantly to some less risky stocks during
the quarter. So far, this strategy has served us well.
At the end of the December quarter, our two largest positions, Qualcomm and JDS
Uniphase, represented 12.3% and 11.8% of the Portfolio, due to their previous
stellar record. You may remember from my last letter that we had already sold
56% of our original Qualcomm shares in the December quarter, including a large
block on the last day of the century. This sale took place one day before the
all-time high for Qualcomm; in retrospect it seems very well timed. During the
quarter we continued trimming to reduce
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risk and to give more diversification to our Portfolio. Qualcomm represented
"only" 4.5% of the Portfolio at the end of March, and JDS Uniphase - even after
tremendous appreciation and significant trimming - represented 6.9%.
With the proceeds from these sales and money from new shareholders, we added to
the large company value end of our spectrum (International Paper and Chase
Manhattan), oil (Belco Oil and Gas, Vintage Petroleum, and Chevron), less
expensive (well, we'll see) small company stocks (Comsat, Ben and Jerry's
Homemade, Jakks Pacific, and Salton), and especially small company retail stocks
that had really been hammered (Bebe's, Electronics Boutique, Spiegel, Chicos
FAS, and Children's Place). Lest you think we've abandoned the NASDAQ stalwarts
that made so much money for us in 1999, they still comprise almost half of our
Portfolio and usually account for the daily and weekly price changes of our
Portfolio. As you will remember from previous letters, however, Aggressive
Growth is not a pure portfolio. It is not an Internet portfolio, although we
have certainly owned some Internet stocks. It is not a technology portfolio,
although 43% of the Portfolio is still in technology. It is not a "mid-cap
growth" portfolio, although we own plenty and Morningstar (currently)
categorizes us with this label. We're just letting the models pick the stocks
and trying to manage the risk of having too many eggs in one basket.
Detailed Explanation of Quarterly Performance
TRANSLATION: Our technology stocks were among our biggest quarterly winners and
losers.
In spite of the changes explained above, technology still drove our quarterly
returns. Seven stocks gained more than 45% during the quarter. They were all
technology-related. (Actually, Network Appliances and SDL are telecommunications
companies, but the lines differentiating technology industries have become
greatly blurred.) These were our best stocks in the March quarter:
<TABLE>
<CAPTION>
Rank Description Industry % Gain
---- ----------- -------- ------
<S> <C> <C> <C>
1 Network Appliance Inc. Telecommunications 99.2%
2 PMC Sierra Inc. Electronics/Electric 65.2%
3 Advanced Micro Devices Electronics/Electric 58.7%
4 SDL Inc Telecommunications 55.4%
5 Creative Computers, Inc Data Processing/Software 49.6%
6 JDS Uniphase Corp. Electronics/Electric 49.5%
7 Qlogic Corp. Electronics/Electric 48.3%
</TABLE>
What this list doesn't show is the volatility we experienced along the way. At
one point in the quarter, Network Appliances had almost tripled from the
December quarter; then it fell by one-third. PE Corp.-Celera Genomics was up
almost four-fold before retreating to "just" a 24% quarterly return. Over the
last fifteen years of investing personally, I've seen plenty of instances of
volatility, but this is strong even by my standards.
On the other end of the spectrum, we had two companies that declined over 45%:
<TABLE>
<CAPTION>
Rank Description Industry % Loss
---- ----------- -------- ------
<S> <C> <C> <C>
1 Power Integrations Inc Electronics/Electric -47.8%
2 Hauppauge Digital Inc. Data Processing/Hardware -47.6%
</TABLE>
Fortunately, both of these were very small diversifying positions. Power
Integrations "gave back" a portion of its previous tremendous gains. Hauppauge
is an example of a high-flying company that announced it would report earnings
much lower than estimated. We sold it for a significant percentage loss (though
very small dollar loss), and the stock has continued to drop. (See the section
"We Got Unlucky" below.)
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Top Ten Holdings
Again, lest you think we've abandoned the mid and large NASDAQ growth stocks,
peruse this list:
<TABLE>
<CAPTION>
Percent of
Rank Description Industry Net Assets
---- ----------- -------- ----------
<S> <C> <C> <C>
1 JDS Uniphase Corp. Electronics/Electric 6.9%
2 Network Appliance Inc. Telecommunications 5.7%
3 Advanced Micro Devices Electronics/Electric 5.0%
4 Salton Inc Electronics/Electric 4.9%
5 Qualcomm Inc. Telecommunications 4.5%
6 PE Corporation-Celera Genomics Group Drugs-Generic and OTC 4.6%
7 PMC - Sierra Inc. Electronics/Electric 4.4%
8 SDL Inc. Telecommunications 3.8%
9 Siebel Systems Inc. Data Processing Software 3.5%
10 Vintage Petroleum Inc. Oil and Gas 3.2%
----
Total 46.4%
</TABLE>
Six of ten are listed on the NASDAQ exchange, and half are technology stocks.
With the top ten holdings comprising 46% of the Portfolio, I still consider
Aggressive Growth a "focused" fund; however, it is down from 55% last quarter.
We Got Lucky
Not all of the money we harvested from Qualcomm was invested outside of
technology. A good bit of it was invested in Advanced Micro Devices, which
appreciated 59%. This semiconductor company, which had been operating under
Intel's shadow for a number of years (and trading at a significant discount to
its peak price several years ago), announced a computer chip which clocked a
speed of 1,000 megahertz, almost double the speed of the computer on my desk.
Wall Street has really taken notice. We purchased this one at just the right
time.
We Got Unlucky
We've already discussed Hauppauge. Here's what a growth company looks like when
it falls off the cliff:
[Graph of Hauppauge Digital Inc. stock price from 4/99 - 4/00]
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We Almost Got Lucky
One unusual stock we own is PE Corp.-Celera Genomics. This company generates and
commercializes gene research applications; it's a "gene-mapping company." Wow!
On February 10 the company announced that it had completed the first
protein-interaction map for an entire model organism. It's hard for me to get
excited about something I know so little about, but suffice it to say it is a
major scientific breakthrough. Shares of the company, which had already doubled
in a short time, went ballistic. The company opened the quarter at $74.50 and
rose to almost $300. Then President Clinton and Prime Minister Blair of Britain
announced their desire to bring this kind of genetic research back into the
public sector, and the shares descended all the way back down to close the
quarter at $92. Unfortunately, the stock rose just short of where I would
normally start trimming it. Our Portfolio felt the full brunt of the fall.
[GRAPH OF PE CORPORATION-CELERA GENOMICS GROUP STOCK PRICE FROM 4/99 - 4/00]
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.
Is Big Better?--I don't think so
TRANSLATION: Among top-performing funds over the last five years, ours has the
fewest shareholders and lowest level of net assets around. Some fund families
boast their large size. I boast our small size, because it helps our performance
slightly. Although I don't think the point is a "big deal" for this Portfolio,
it is an advantage when we purchase smaller companies.
As I was studying a table of the best performing funds with a five-year track
record, I was struck by the following statistic: Bridgeway Aggressive Growth has
the smallest level of net assets among the top 35 best performing funds over the
last five years. We weigh in at $30 million. The median fund has about $2
billion.
So, which is better, a top performing $30 million fund or a top performing $2
billion fund? Is it better to buy a large fund (with many shareholders and
assets) or a small one? Could fund size be an important
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factor in choosing a fund? What can we conclude from these statistics? Let's
take these questions one at a time.
Which is better, a top performing $30 million fund or a top performing $2
billion fund?
Looking at historical performance, I don't see why anyone cares about size. If
I'm a shareholder, a 40% annualized return is a 40% annualized return. Why would
I care how many people are in the "same boat" with me? OK, in a bear market,
perhaps it's nice to have company.
What about the future? Is it better to buy a large fund (with many shareholders
and assets) or a small one?
To me, the best argument in favor of a large fund is that it tends to correlate
with a lower expense ratio. However, you can look up expense ratio statistics
just as easily as fund size, so why not just focus on expense ratio directly
(see the next section below) and ignore fund size?
The best argument against large funds is that they tend to be less nimble than
small ones. A "nimble" fund is one that can easily buy and sell shares of a
stock without significantly and adversely affecting the stock price. In other
words, a nimble fund can keep transaction costs low. Transaction costs are
commissions paid to a broker, plus the "spread" or premium paid to the firm
making a market in a stock. (The market maker is the firm that actually buys the
stock you sell or sells the stock you buy.) Overall, I believe transaction costs
are a "bigger deal" than the expense ratio when it comes to fund performance.
They are most important when investing in smaller size companies. Since this
Portfolio invests in companies of all sizes - large and small - I believe our
small asset size is an advantage. Although I attribute most of our recent
excellent performance to stock picking rather than cost management, I believe
that over the long term, cost management - including transaction cost management
- - can make a very big difference.
Should fund size be an important factor in choosing a fund?
For funds investing in small stocks, I believe it is very important, and I
believe small is better.
What should we conclude from these statistics?
Maybe I'd just conclude that Bridgeway doesn't spend a lot to market our
excellent historical performance. We're sticking with what we do
best--performance--and trying to take care of our current shareholders first.
Eventually, we think enough other people will figure this out by word of mouth
and performance tables and that we won't be the fund with the lowest assets on
the top-performing list.
"Hey, at Least It's Not Toasters"
Performance, it turns out is not everything. Amid the rip-roaring
gains of the stock market over the past several years,
mutual-fund firms have been enticing new customers with World
Series tickets, Palm-Pilot computers and jazz festivals in Aspen.
Hey, at least it's not toasters.
Wall Street Journal, November 11, 1999
The example that really astounded me recently was a fund family that gives
frequent flier miles for purchasing shares of their fund. Do these gimmicks
really attract new shareholders? Maybe so. I was under the impression that this
industry was about performance (including risk), costs, and service. Then again,
none of the other fund companies mentioned in the article above has a five-star
fund with a five-year track record among the top 35 funds and which has only
attracted $30 million in assets.
I doubt you'll ever get frequent flier miles from Bridgeway. We'll just try to
stick to the performance.
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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 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."
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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