John Montgomery, manager of such funds as Bridgeway Ultra-Small Company Market and Bridgeway Aggressive Investors 1, spent the bulk of Friday's keynote speech decrying the damage to investors' returns wrought by the short-term focus of shareholders, the fund industry, and the financial media. He also advocated contributing to nonprofit organizations.
Montgomery pointed out
that the skills people use in the rest of their lives work against them when choosing mutual funds. For example, shoppers attempting to choose a refrigerator often seek out the repair history of a certain model, but place heavy emphasis on its recent record. Unfortunately, he said, using the same approach when picking a fund typically results in poor returns. He cited the purchase and redemption activity in one of his own charges, Bridgeway Ultra-Small Company, as evidence that a fund can have great long-term performance, but many shareholders can still lose money by buying or selling it at the wrong time. "That's highly disturbing to me," he said.
Avoiding volatility
Investors receive no assistance in their efforts, he asserted, from fund companies that aggressively advertise hot short-term performance and introduce volatile offerings. (He blamed himself for engaging in the latter practice, too.) Montgomery also took financial journalists to task for featuring funds with hefty recent returns.
The way for investors to avoid throwing cash at such offerings, he says, is to develop a long-term asset allocation plan, select funds that meet their needs without exposing them to an intolerable level of risk, and invest only with shareholder-friendly fund firms. Montgomery defined the latter as fund complexes that boast consistently solid long-term performance and reasonable costs, close their small-cap offerings at a low level, and attempt to educate investors through their advertising and marketing materials. (Bridgeway, which doesn't advertise, otherwise possesses all these traits.) Once investors have performed these tasks, he says, they should fight the urge to tinker with their portfolios and avoid financial news.
Montgomery, who caps his salary at seven times that of Bridgeway's lowest-paid employee and donates half of the firm's profits to charitable causes, closed by encouraging attendees to donate a portion of their income to those less fortunate. "There's a low correlation between money and happiness," he noted.
Greg Carlson is a fund analyst with Morningstar.com. He can be reached at greg_carlson@morningstar.com.
This article originally appeared on www.morningstar.com on June 26th.
