As indicated in some other threads, in 2009 the Bridgeway Ultra-small company market fund (BRSIX) lagged its primary benchmark (CRSP10) by 55%. The respective returns were 25.96% for BRSIX vs. 81.12% for CRSP10.
May be of interest - the lastest Bridgeway report has an analysis of the contributing factors (see pg 37 in attached link).
http://www.bridgewayfund.com/assets/pdf ... .12.31.pdf
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2009
BRSIX variance with CRSP10 Variance in Return
Rebalancing frequency -8%
Size effect -17%
Penny stocks -22%
Sidestepping model -9%
Other 1%
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Total -55%
Here's Bridgeway’s explanation of why they deviate from CRSP10 on the above issues:
RobertWhy don’t we rebalance our Fund more frequently? First, quarterly rebalancing would significantly increase the transaction costs of our Fund, hurting long-term returns. Related to this, more frequent rebalancing would increase taxes for taxable shareholders. Second, this additional return is sporadic and goes both directions. Over the last 85 years of data, Bridgeway estimates that the average annual return of quarterly versus annual rebalancing has generated approximately 0.40% per year more in return for the asset class of ultra-small companies. However, a huge portion of this was in a single year, 2009. Without last year the difference is only 0.22% annually, making it inappropriate to try to “chase” these extra returns with higher transaction costs. We also looked at the possibility of trying to time capture this effect—with no success. Third, we did, in fact, step up the rate of our rebalancing in the January through June 2009 timeframe, which did serve to dampen the negative impact of quarterly rebalancing. In summary, we don’t see a net advantage to stepping up our rate of rebalancing, and we do not plan to change our strategy with respect to rebalancing.
Why don’t we sell appreciated stocks as soon as they appreciate above the cutoff for ultra-small company size? Similar to the discussion of rebalancing in the paragraph above, we do steadily sell our more highly appreciated stocks to reinvest in ultrasmall ones. However, we do so at a steadier pace in order to reduce transaction costs and “let some winners run,” if one of the quantitative models we use in our more actively managed Ultra-Small Company Fund indicates strong continuing appreciation potential. Our modeling indicates that this adds value over time, but not in all years, and especially not in 2009, which had a rally led by financially distressed companies. Additionally, this problem was exacerbated in 2008 coming into 2009 by the fact that our Fund companies fell less than CRSP 10 in the downturn and much less than the CRSP “breakpoint” or cutoff for ultra-small stocks, which itself exacerbated the problem of too many of our stocks falling outside the CRSP 10 breakpoint. While we did step up the rate of selling highly appreciated stocks in the first half of 2009, we did not “dump” them wholesale, and would not expect to do so in the future. We would not expect this to affect our returns significantly in most decades, as was demonstrated by the fact that the Fund beat the CRSP 10 returns from inception in 1997 through 2008.
Why don’t we invest in penny stocks? Penny stocks accounted for an unusually high 12% of the CRSP 10 Index at the beginning of 2009, relative to 2% for our Fund. But since these risky stocks soared 187% in aggregate, they contributed 22% more return to the CRSP 10 return than to the Fund return. Why wouldn’t we just invest the same percentage of our Fund in these stocks? Over the long haul these risky stocks have been poor investments historically. Indeed, our analysis indicates that ultra-small penny stocks underperformed 63% of all years from 1961 to present and underperformed for the longer period, even when including the remarkable returns of 2009. We also tried a number of methods to time their outperformance with no “hits.” We feel it’s best to stay away from them.
One of our sidestepping models “blew up” in 2009; should we just stop using it? No. It served its purpose well in most years of our Fund and especially in 2008, helping us cushion the worst downturn since the Great Depression. Frequently, when a model is this far out of the historical bounds unfavorably, it makes up some ground coming back the other direction. Thus, we believe that “bailing” after an awful year like 2009 is a particularly poor strategy, which could lead to “whipsawing.” Whipsawing is where you underperform on the way down, trade out of what just hurt you—then change strategies just in time to underperform again on the way back up.
The factors working against us in the previous paragraphs were broad across the Fund, specifically in eight of ten sectors. Only in two sectors, consumer staples and financials, did our Fund stocks significantly beat those of the CRSP 10 Index.
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