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What's smaller than small-cap funds? Ultra-small ones.

Ever hear the old adage about how great gifts come in small packages? Sometimes the same is true on Wall Street.

Look at the long-term performance numbers on common stocks and you'll find that small-cap stocks have outperformed their larger company cousins throughout the decades. In fact, according to Ibbotson, the Chicago-based securities research company, from 1926 through year-end 2000, large company stocks had an average annual total return of 11% while small-caps returned 12.4 percent.

But that's not news to John Montgomery. He's portfolio manager of a passively managed index fund named the Bridgeway Ultra-Small Company Tax Advantage Fund, ( 800-661-3550). And, is a quant guy who takes small-cap fund investing one step further: It's not small-cap stocks this fund is interested in, it's the really really small ones.

"Here's the deal," says Montgomery, founder of Houston-based Bridgeway fund family. " If you believe in the small firm theory and small-cap investing at all, ultra- small stocks are the only place to be." Why? Because, he says, of the big kick in returns.

When looking at the ultra-small cap market over long periods of time, it's not possible to precisely define market cap sizes because they've changed over time and what was considered small-cap 50 years ago is different than it is today. So, to calculate returns, number crunchers divide the market into 10 deciles-- the 10th representing the tiniest companies. And, from 1926 through 2000, the average annual total return on that bottom 10 percentile is 13.1 percent.

Keep in mind, getting the "big kick" kinds of returns that Montgomery speaks of means taking on more risks. Risks that involve those relating to market-cap size, fund management, and market cycles.

With that in mind, year-to-date, the Bridgeway Ultra-Small Company Tax Advantage fund was up 12.13 percent as of July 13, according to Morningstar. At year-end 2000, it was ahead 0.7 percent; in 1999, up 31.5 percent; and 1998, the fund was down 1.8 percent.

Here's more about the Bridgeway Ultra-Small Company Tax Advantage Fund (BRSIX):

Q: You know John, it's not easy talking with quantitative guys about their funds because everything is numbers driven. I can't ask what companies you like, don't like and why. Or, about the companies you've visited because that's not what you do. Plus, this fund is a passively managed index one to boot. Where's the story?

Montgomery: (Laughing) Well, maybe the story is in what I don't do.

But I am a quant guy and all I like to do is numbers and statistics. To drive that point home, I have made exactly one company visit in my entire lifetime. So, I don't do the normal stuff. I feed numbers and statistics to computers.

Q: That means how well this fund performs depends upon the model you've created and how flexible it is?

Montgomery: The only modeling that's going on in this portfolio is trying to replicate the index. We're not going out and trying to pick great companies. We're tying to go out and buy representative companies of the index and then rely on the asset class to take care of the returns.

Q: Which index does this fund try to replicate?

Montgomery: The Center for Research and Security Prices Cap Based Portfolio 10 Index, (CRSP).

It's run out of a center at the University of Chicago, so it's academic research on security prices. They have the same methodology of looking at returns of stocks by size as measured by the 10 deciles of the New York Stock Exchange.

Q: How many companies are in that universe?

Montgomery: Under 2000. At the end of June, it was 1970.

They are all U.S companies and the index has screens. So we don't invest in any foreign stocks, no unit investment trusts, no closed-end mutual funds, or real estate investment trusts, just corporations.

Q: Where will I find the value-added in this fund?

Montgomery: One is the asset class itself. On a risk return basis, it's off the charts. Number two is keeping the cost management of the fund low. Trading is also a huge portion of the value added---we've learned a lot about buying these companies at the right price. And finally, tax-management. The fund hasn't distributed a capital gain since it began in 1997.

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