Bridgeway Pays Shareholders to Invest, for Now

One fund company is paying its shareholders to invest in one of its funds and isn't charging a penny to invest in another--at least for now. Poor performance is the culprit.

 Bridgeway Aggressive Investors 1 (BRAGX) is expected to have a negative 0.51% expense ratio according the most recent prospectus. Meanwhile,  Bridgeway Micro-Cap Limited  is expected to have a 0.00% expense ratio.

The negative and zero expense ratios are possible because Houston-based Bridgeway levies a performance fee on top of its management fee. The funds have performed so poorly relative to their benchmark indexes that the fund's manager, instead of its shareholders, has to put money into the fund or waive its management fee to compensate shareholders until performance improves.

According to the prospectus, if performance continues to be poor, investors stand to be reimbursed $675 over the next 10 years if they had $10,000 in Aggressive Investors 1. Bridgeway has no plans to liquidate or merge either fund in order to avoid having to continue to lose money on the funds.

It's a rare situation in the industry. The performance fees of most other funds that levy them are structured in a way that makes a negative or zero net expense ratio mathematically impossible.

The struggles of the two funds have been pronounced. The closed Aggressive Investors 1 ranked in the bottom 10% of its Morningstar mid-cap growth category in 2008 and 2009, and, through Sept. 1, in 2010. The fund has lost an annualized 16.96 % over the last three years compared with the 6.53% loss experienced by the typical peer.

Micro-Cap Limited, which is still open for investment, has struggled since 2005. The fund falls in the bottom 1% of domestic small-growth funds over the previous five years with its 7.86% annualized loss.

Despite the recent underperformance, both funds have significantly beaten their respective benchmark indexes and peers over the last 10 years. While the performance of each fund leaves much to be desired, Bridgeway's commitment to pay the fees until performance improves is laudable.

Zero or negative expense ratios are rare but not unprecedented. In the late '90s a couple of online financial-services startups, including one launched by serial entrepreneur Elon Musk, offered free or subsidized index funds primarily for marketing purposes. Neither of them lasted.

Six years ago  American Century Giftrust  temporarily waived its fees due to dismal performance.

To see the document with the negative expense ratio projection, please click here.

Loomis Sayles Snags Wellington Credit Captain
On Sept. 13, Wellington's Chris Gootkind will join Loomis Sayles in a new role as director of credit research and credit strategist. Loomis Sayles' chief investment officer, Jae Park, has made several high-profile hires over the past year in an ongoing effort to enhance the firm's fixed-income management and research expertise across bond sectors and investment styles. In December 2009, he brought aboard veteran U.S. core-bond manager Bill Stevens, who led the Montgomery Fixed Income investment strategies at Wells Capital Management. Stevens' longtime colleague, Lynne Royer, joined Loomis Sayles shortly thereafter. In May, Park hired Tom Fahey, a former global-bond portfolio manager at Standish Mellon, to work as a macro strategist and co-lead a newly formed macro group alongside Teri Mason, the firm's former associate director of credit research. Over the past several years, Park has also gradually built out the firm's quantitative research and structured-products research teams.

Many of these hires add to the firm's intellectual heft in areas beyond the traditional focus of legendary bond manager Dan Fuss and his team's deep-value, corporate-credit-heavy style. Gootkind should contribute directly and immediately to those efforts, though. He joined Wellington as director of credit research in 2006 and also worked as a credit portfolio manager there. He assisted John Keogh on the fixed-income portions of  Vanguard Wellington (VWELX) and  Vanguard Wellesley Income (VWINX), and also worked on  Hartford Advisers (ITTAX) and Harford Advisers HLS (HADAX). As with other recent hires, Park was drawn to Gootkind's portfolio-management experience, which he believes will help facilitate better collaboration between research and the investment decision-making.

Joel Greenblatt to Launch "Magic Formula" Mutual Funds
Hedge fund manager and author Joel Greenblatt's Gotham Asset Management recently filed forms with the SEC to launch six mutual funds. The funds will follow Greenblatt's successful "Magic Formula" ranking system detailed in his popular book "The Little Book That Beats the Market."

Gotham will manage two U.S. funds, two international funds, and two global funds under the "Formula Investing" brand name. This is the same name as Greenblatt's separately managed account business that uses the same ranking system.

Greenblatt's ranking system focuses on earnings yield and returns on capital, and is relatively concentrated (30 holdings or fewer). While his mutual funds will follow the ranking system outlined in his book, they will be less concentrated and generally own larger capitalized stocks. For example, the most concentrated U.S. fund will normally invest in 75-120 securities according to the document filed with the SEC.

The fees for the funds will range from 1.00% to more than 2.00% depending on the share class.

For additional details, please click here.

Gross and Gundlach Back Away from Treasuries
PIMCO's Bill Gross and DoubleLine's Jeff Gundlach have reduced their exposure to government-backed holdings in recent weeks.

 PIMCO Total Return (PTTRX), the world's biggest bond fund with more than $200 billion in assets, had a 54% stake in government-backed bonds in July, down from 63% in June. The fund is up 8.63% in the year to date through Sept. 1. This result compares favorably to the Barclay's Aggregate US Bond Index's 7.5% return over the same period.

Gundlach's DoubleLine Core Fixed Income (DBLFX) fund is even more underweight in treasuries, with its 36.6% stake in government-backed bonds as of July 30. That fund, which launched on June 1, is up 5.41% over the previous three months. The Barclay's Aggregate US Bond Index is up 3.59% over the same period.

Both of these funds have benefited from their large Treasury stakes in recent weeks. The yield on the 10-year bond has fallen from 3.4% in early June to less than 2.65%, which has caused Treasuries to rally.

Hussman's First International Fund Opens
John Hussman's Hussman Strategic International Equity Fund  opened for new investments on Sept. 1. The fund launched in December of last year but has been closed while Hussman worked out the kinks in his first international fund.

The fund was up 0.80% from the beginning of this year through June 30 while the MSCI EAFE Index lost 14.72% over the same period, according to fund's annual report. That result ranks near the top of the Morningstar long-short and foreign-equity categories.

These results are partially due to the fund's hedging techniques, which have been successful at  Hussman Strategic Growth (HSGFX), Hussman's domestic equity fund.

The fund has a 2% expense ratio and a minimum initial investment of $1,000 ($500 for IRAs). The fund's first annual report is available here.

Templeton Global Opportunities Loses Veteran Manager
Alan Chua replaced Guang Yang as lead manager for  Templeton Global Opportunities  on Sept. 1. Yang's departure is a loss for the fund. He has been at the helm for nearly a decade, and the fund's 10-year return lands in the world-stock category's top quartile.

Yang, who is based in Hong Kong and had been the fund's China specialist, is leaving to start his own private-equity firm. Chua, who is based in Singapore, will be backed up by Templeton veterans Cindy Sweeting and Joanne Wong.

Chua has been with Franklin Templeton since 2000, but this will be his first experience managing a public fund. He has run a separate-account version of Templeton Income. He also heads Templeton's global equity team in Singapore. Prior to joining Templeton, he managed Asian emerging-markets funds. He also covered Asian banks and consumer stocks.

Colorado and New York 529 Fee Reductions Announced
Colorado and New York college savers have received a fee reduction just as the new school year kicks off.

New York said it cut the state's 529 College Savings Program Direct Plan fees by nearly 50% to 0.25% on Aug. 29. The program, run by Upromise and Vanguard, is now one of the lowest-cost college-savings plans in the country. The cut could result in nearly $20 million in annual savings for plan participants given current asset levels.

Colorado CollegeInvest, which features multiple asset managers, elected to waive its 0.10% administrative fee for one year, dropping the asset-based fee during this period to 0.42%.

Etc.
The Value Line Fund Board has rebuffed an offer from Guggenheim Transparent Value LLC, a unit of financial-services provider Guggenheim Partners LLC, to take over management of the funds according to a Wall Street Journal report. The Value Line funds have struggled to perform well and have faced outflows of over $300 million this year as the firm deals with the fallout of an SEC settlement.

Performance Trust Investment Advisors launched its first mutual fund product, Performance Trust Total Return Bond Fund (PTIAX), on Aug. 30. The firm specializes in residential mortgage-backed securities. Management expects the initial portfolio to be composed of nonagency RMBS, Treasuries, various agency issuances, and some cash. The fund is launching initially with an expense ratio capped through 2013 at 0.95%, with a minimum investment of $5,000.

The Board of Trustees for Rydex|SGI Global 120/30 Strategy  announced the fund will be liquidated by Oct. 1, 2010.

Viking Large-Cap Value  will liquidate all assets by Nov. 19, 2010.

Marco Pirondini replaced Piergaetano Iaccarino as portfolio manager of Pioneer Global Equity (GLOSX).

Sterling Capital Management no longer serves as a subadvisor for New Covenant Income (NCICX). Robert W. Baird & Co. and EARNEST Partners will continue to subadvise the fund.

Associate director of fund analysis Miriam Sjoblom, editorial director Kevin McDevitt, fund analyst David Falkof and research analyst Ben Alpert contributed to this report.