John Montgomery's computer programs triggered a change in the biggest holding for his Bridgeway Aggressive Investors 2 Fund, the best performer in its class, during the past two months.
Goodyear Tire & Rubber Co., a tiremaker that's recovering from three years of losses, has become the largest investment. The Bridgeway fund has about 5 percent of its $179 million in Goodyear.
The stake has more than doubled since the end of May, when Apple Computer Inc. was the largest position. The fund trimmed its stake in Apple, the maker of iPod digital music players, after software that Montgomery developed for himself suggested the move.
"We've got a plethora of 'buys,' " Montgomery, 49, said in an interview from his Houston office. "I've got company names that normally we would have in the fund that I don't have because we've scoured the fund so thoroughly for stuff to sell, and I like everything we've got."
Bridgeway Aggressive Investors 2 is the best performer during the past year of 238 "multi-cap growth" funds tracked by Bloomberg, with a 45 percent return. Funds in this category buy companies of any size and typically focus on growth in measures such as sales and earnings.
In the past three years, Montgomery's fund ranks sixth of 212 funds, with an average annual gain of 26 percent. The best performer was Hodges Fund, which averaged 35 percent a year. Donald and Craig Hodges run that fund.
Bridgeway Aggressive Investors 1, a similar fund that is closed to new investors, has about $370 million of assets.
Montgomery is among investors who rely on quantitative, or "black box," methods to pick stocks. Others include First Quadrant LLC of Pasadena, Calif., which manages $13 billion; Russell Investment Group, which runs a $2.6 billion quantitative fund; and Goldman Sachs Group Inc., with a $1.2 billion fund.
Bridgeway Aggressive Investors 2 isn't for investors who are put off by volatility or a lack of transparency, said Kai Wiecking, a fund analyst for Chicago-based Morningstar Inc.
"The only reservation that one could have about the fund is that we don't know anything about the inner workings of the quantitative models," said Wiecking, who works in Houston. "The fairly convincing reason given by Montgomery is, 'If I expose my models, that's it, they won't work anymore.' " Montgomery holds a master's degree in civil engineering from the Massachusetts Institute of Technology and a master's from Harvard University's business school.
At Harvard in the mid-1980s, Montgomery said he found a "clear opportunity to apply quantitative methods to investing." He formed Bridgeway Capital Management Inc. in 1993 and uses essentially the same investing formula as when he began.
For Aggressive Investors 2, he divides investments into five basic groups: three for growth stocks, including one for lower-priced shares; one for companies judged to be undervalued; and one based on technical criteria, such as changes in price and the amount of trading.
Taking a few representative stocks from each group, the fund is designed to outperform the Standard & Poor's 500-stock index with a similar level of risk, Montgomery said. Bridgeway shuns so-called fundamental research on a company and its management.
"We are very dedicated to following the models, and that takes emotion out of the process," he said. "Emotion is the biggest value destroyer in the whole investment arena."
Goodyear, based in Akron, Ohio, reported $2.2 billion of losses between 2001 and 2003. North America's largest tiremaker had net income of $114.8 million, or 63 cents a share, last year. The company also reported higher profit than analysts estimated in this year's first quarter.
The stock is "not a normal aggressive and growth-type name," Montgomery said, yet its price has jumped 64 percent in the past 12 months. It closed Friday at $17.41 a share.
"I think of it as a mature industry," he said. "How much sleepier can you get than tires? But it's done well for us."
Aggressive Investors 2's biggest moneymaker in the past year was Apple, based in Cupertino, Calif.
Apple generates one-third of its sales from iPods and shipped a record 6.2 million devices last quarter, about 1 million more than analysts had estimated. The company's shares have gained 35 percent in 2005 after tripling last year. They ended the week at $42.65.
"Whether I think iPods are the coolest thing around or they're at their absolute peak and it's time to get out, that doesn't figure into it at all," said Montgomery, who doesn't own the player.
Bridgeway and Montgomery were penalized $5.1 million by the Securities and Exchange Commission in 2004 for miscalculating performance-based management fees. Three funds, including Aggressive Investors 2, overcharged shareholders, the regulator said.
Montgomery, whose company gives 50 percent of profits derived from investment-advisory fees to charity, said the penalty was personally troubling.
"It scared the hell out of them," Morningstar's Wiecking said. Three of Bridgeway's 20 employees work to ensure that the firm complies with regulations.