unstable

Bridgeway Capital Management: A Deeper Look at The Performance

unstable

Multi-factor investing is slowly becoming a more common investment strategy among professional investment management firms. These firms, more informally known as "quants," use statistical models to understand the common factors that drive performance in markets around the world. By structuring strategies that focus on these factors, managers can increase the expected return of their portfolios relative to traditional benchmarks.

We at IFA have been investing our clients' money this way since the founding of our firm, now 18 years ago. The earliest pioneer of multi-factor investing was Dimensional Fund Advisors. By following a passive and disciplined approach to structuring their strategies around the known dimensions of expected return, which include the market, size, relative-price, and profitability, they have been able to deliver excess returns over traditional benchmarks for their clients.

Investment management firm Bridgeway Capital Management also follows a quantitative approach to their own investment strategies. Their homepage even includes the tagline of, "statistically driven, evidence-based investing."

Founded in 1993 and based in Houston, TX, the firm currently manages $7.7 Billion (2017) in assets across 13 separate strategies that focus on the size and relative-price (value) premiums as well as attempt to capture the benefits of low volatility and momentum in separate strategies.

Today, we are going to take a deep dive into Bridgeway's performance to see how it stacks up against not only their Morningstar assigned benchmarks, but also their excess return once we adjust for their exposure to the market, size, and relative-price factors that have been shown to be priced risk factors (also known as betas) in the market. We will also do a comparison to Dimensional Fund Advisors. 

Fees & Expenses

Our analysis begins with an examination of the costs associated with the strategies. It should go without saying that if investors are paying a premium for investment management, then they should be receiving above average results consistently over time. The alternative would be to simply accept a market's return, less a significantly lower fee, via an index fund. At IFA we define an index fund as a set of rules of ownership that are held constant regardless of market conditions. 

The costs we examine include expense ratios, front end (A), level (B) and deferred (C) loads, and 12b-1 fees. These are considered the "hard" costs that investors incur. Prospectuses, however, do not reflect the trading costs associated with mutual funds. Commissions and market impact costs are real costs associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades taken by portfolio managers. We can estimate the amount of cost associated with an investment strategy by looking at its annual turnover ratio. For example, a turnover ratio of 100% means that the portfolio manager turns over the entire portfolio in 1 year. This is considered an active approach and investors holding these funds in taxable accounts will likely incur a higher exposure to tax liabilities to short term and long term capital gains distributions relative to those incurred by passively managed funds.

The table below details the hard costs as well as the turnover ratio for all 9 strategies offered by Bridgeway that have at least 3 years of complete performance history. 

Fund Name Ticker Turnover Ratio %

Prospectus
Net Expense
Ratio per
Morningstar

Global Category
Bridgeway Managed Volatility BRBPX 54.00 0.95 Long/Short Equity
Bridgeway Small-Cap Growth BRSGX 137.00 0.94 US Equity Small Cap
Bridgeway Small-Cap Momentum N BRSMX 184.00 0.91 US Equity Small Cap
Bridgeway Ultra-Small Company Market BRSIX 41.00 0.84 US Equity Small Cap
Bridgeway Omni Tax-Managed Sm-Cp Val N BOTSX 29.00 0.60 US Equity Small Cap
Bridgeway Small-Cap Value BRSVX 62.00 0.94 US Equity Small Cap
Bridgeway Omni Small-Cap Value N BOSVX 24.00 0.60 US Equity Small Cap
Bridgeway Ultra-Small Company BRUSX 101.00 1.27 US Equity Small Cap
Bridgeway Aggressive Investors 1 BRAGX 124.00 0.63 US Equity Mid Cap

Performance Analysis

The next question we address is whether investors can expect superior performance in exchange for the higher costs associated with Bridgeway's management. We compare each of the 3 strategies that have at least 3 years of performance history and against its current Morningstar assigned benchmark to see just how well each has delivered on their perceived value proposition. Benchmarks have no expenses, so we would expect all funds to underperform their benchmarks relative to those expenses and other factors such as trading costs and revenues from securities lending. We have included relative return charts for the period ending 2016 for each strategy at the bottom of this article. Here is what we found:

  • 33% (3 funds) have underperformed their respective benchmarks since inception, having delivered a negative relative return
  • 67% (6 funds) have outperformed their respective benchmarks since inception, having delivered a positive relative return
  • 0% (0 funds) have outperformed their respective Morningstar assigned benchmarks for the full year periods ending 2016, consistently enough to provide 97.5% confidence (based on t-statistics of the excess return in excess of 2)

Based on the historical performance of their strategies, it seems that Bridgeway has done quite well in terms of delivering outperformance for their investors. 2 out of every 3 funds produced an average return above their benchmark. But there has been much variability around their relative return, leading all of their funds to have a statistically insignificant outperformance relative to the Morningstar benchmark, which may not be the most appropriate benchmark.

Regression Analysis

How we define or choose the appropriate benchmark is important, especially for funds that are targeting the known dimensions of expected return. If we relied solely on commercial indices assigned by Morningstar, then we may lead to the false conclusions. Because Morningstar is limited in terms of trying to fit the best commercial benchmark with each fund in existence, there is, of course, going to be some error in terms of matching up proper characteristics such as average market capitalization or average price-to-earnings ratio.

A better way of controlling for these possible discrepancies is to run multiple regressions where we account for the known dimensions (Betas) of expected return in the US (market, size, relative price, etc.). For example, if we were to look at all of the US-based strategies from Bridgeway that have been around for at least the last 10 years, we could run multiple regressions to see what their relative returns look like once we control for the multiple factors that are being systematically priced into the overall market. The chart below displays the average relative return and the standard deviation of that difference for the last 10 years ending 12/31/2016.

As you can see, for all Bridgeway strategies with at least 10 years of performance history, the entire relative return diminished once we controlled for risk exposure to factors. None of the funds produced an excess return relative to the factors. 

Comparison with Dimensional

We have shown that Bridgeway's performance can be attributed to their overall exposure to the known dimensions of expected return. The last part of our analysis is to dissect their risk exposure in an attempt to highlight the difference in approaches to targeting risk premiums.  We have updated this article to include data from the inception of the fund to June 2018. 


Data Series Since Inception: 09/1994 - 06/2018

Data Series Symbol Annualized Return α (monthly) t-stat of (α) MKT-B SmB HmL Adj R�
Bridgeway Ultra-Small Company BRUSX 13.38 0.15% 0.88 1.06 0.83 0.29 0.80
DFA US Micro Cap I DFSCX 11.65 0.02% 0.30 0.98 1.01 0.28 0.97

 

Data Series Since Inception: 11/2003 - 06/2018

Data Series Symbol Annualized Return α (monthly) t-stat of (α) MKT-B SmB HmL Adj R�
Bridgeway Small Cap Value BRSVX 8.46 -0.15% -0.98 1.07 0.81 0.18 0.88
DFA US Small Cap Value I DFSVX 9.79 -0.05% -0.89 1.06 0.88 0.49 0.98

 

Data Series Since Inception: 09/2011 - 06/2018

Data Series Symbol Annualized Return α (monthly) t-stat of (α) MKT-B SmB HmL Adj R�
Bridgeway Omni Small-Cap Value BOSVX 14.51 -0.06% -0.58 1.03 0.90 0.68 0.97
DFA US Small Cap Value I DFSVX 13.88 -0.15% -1.85 1.06 0.83 0.53 0.98

 

Data Series Since Inception: 01/2011 - 06/2018

Data Series Symbol Annualized Return α (monthly) t-stat of (α) MKT-B SmB HmL Adj R�
Bridgeway Omni Tax-Managed Small-Cap Value BOTSX 11.56 0.00% -0.05 1.00 0.90 0.64 0.97
DFA Tax-Managed US Targeted Value Portfolio DTMVX 11.99 -0.07% -0.92 1.06 0.66 0.43 0.97

Omni Funds

(The following was taken from the Bridgeway website) "The Bridgeway Omni Small-Cap Value Fund uses a market capitalization weighted approach to invest in a broad and diverse group of small-cap stocks that Bridgeway Capital Management determines to be value stocks. This approach is sometimes referred to as "passive, asset-class investing." Use of the term "omni" in the name refers to the fact that the Fund intends to provide risk and return characteristics similar to investing in a basket of stocks in a specific asset class. The Fund is designed to be an excellent complement to core strategies used by advisors with a long-term evidence-based investing approach.

The Fund uses a market capitalization weighted approach to invest in a broad and diverse group of small-cap stocks that Bridgeway determines to be value stocks. For investment purposes, "small-cap stocks" are defined as companies that have a market capitalization generally in the lowest 15% of total market capitalization or smaller than the 1000th largest U.S. company, whichever results in the higher capitalization. "Value stocks" are those that Bridgeway determines are priced cheaply relative to some financial measures of worth, such as the ratio of price to book value, price to earnings, price to sales, or price to cash flow. This approach is sometimes referred to as "passive, asset-class investing." Use of the term "Omni" in the name refers to the fact that the Fund intends to provide risk and return characteristics similar to investing in a basket of stocks in a specific asset class. This strategy is designed to complement core strategies used by advisors who favor a long-term passive investment approach."

Based on the description above for the Omni funds, you would need long-term historical returns for the factors embedded in the funds to do a complete analysis.

Annual Relative Return Charts

Our t-stat analysis below is only comparing live data for Bridgeway funds with at least 3 full years of returns while looking at each full year's returns compared to the Morningstar assigned benchmarks, all for the period ending 2016. 

 

 

 

 

 

 

 

 

 


 

Here is a calculator to determine the t-stat. 

 

The Figure below shows the formula to calculate the number of years needed for a t-stat of 2. We first determine the excess return over a benchmark then determine the regularity of the excess returns by calculating the standard deviation of those returns. Based on these two numbers, we can then calculate how many years we need (sample size) to support the manager's claim of skill.