Masters in Business: Factor-based Investing with John Montgomery

Podcast Information:

• Title: Masters in Business
• Host: Barry Ritholtz
• Guest: John Montgomery, Founder of Bridgeway Capital
• Release Date: May 15, 2025

Introduction

In this engaging episode of Masters in Business, Bloomberg Radio host Barry Ritholtz welcomes back a distinguished guest, John Montgomery, founder of Bridgeway Capital. The conversation delves deep into Montgomery’s unique approach to factor-based investing, the philanthropic ethos of Bridgeway Capital, and the sophisticated investment strategies that have driven the firm's impressive performance over three decades.

John Montgomery’s Background and Career Path

John Montgomery’s journey is anything but conventional. With a BS in Engineering and a BA in Philosophy from Swarthmore, followed by graduate studies at MIT and Harvard Business School, Montgomery initially planned a career in urban development and transportation. Reflecting on his transition, he notes:

"[00:02:25] 'The career plan originally was urban development and transportation. So that was my first career was working with various bus and transportation companies to improve the quality of life in the cities.'"

Montgomery emphasizes the parallels between service industries and investing, highlighting his early interest in data analytics and optimization from his time as a research engineer at MIT.

Founding Bridgeway Capital and Philanthropic Vision

In 1993, Montgomery founded Bridgeway Capital in Houston, driven by a distinctive commitment to philanthropy—donating half of the firm's profits to nonprofit organizations. This ambitious goal stems from his upbringing:

"[00:08:29] 'We think business was a way to change the world and engage. My mother... was almost a professional volunteer. Giving back to the community.'"

Montgomery credits his wife for her unwavering support and practical concerns during the firm's inception:

"[00:10:28] 'Question one, can we still send our daughters to college? ... Question two, do I have to go to cocktail parties?'"

Over the past 31 years, Bridgeway Capital has donated tens of millions of dollars to various causes, primarily through the Bridgeway Foundation, focusing on ending genocide and preventing war atrocities.

Investment Philosophy and Factor-based Strategies

Bridgeway Capital is renowned for its factor-based investing approach, integrating quantitative, value, and quality metrics to drive portfolio performance. Montgomery explains:

"[00:19:10] 'We believe in value, quality, and sentiment are the three primary legs of the stool. ... putting them together in an efficient way gives you a steadier stream of returns into the future.'"

Value Investing with a Sophisticated Twist

Contrary to traditional value investing metrics like low P/E or price-to-book ratios, Bridgeway employs a proprietary mix of metrics to ensure stability and avoid value traps. Montgomery elaborates:

"[00:20:08] 'We believe in value, quality, and sentiment... mixing different measures to give a more stable return stream over time.'"

This nuanced approach ensures that Bridgeway captures the essence of true value without compromising on quality, as evidenced by their long-term outperformance.

Global Opportunities and Long-Short Strategies

One of Bridgeway’s standout strategies is Global Opportunities, a long-short fund that operates across a broader universe of approximately 9,000 stocks globally. This strategy aims for market agnosticism, reducing correlation to overall market volatility:

"[00:25:57] 'This is a big deal in terms of the design. ... we've done better than market neutral funds during downturns like 2008.'"

Montgomery highlights the competitive advantage of Bridgeway’s smaller size, allowing for deeper, more meaningful positions in less liquid markets, thereby enhancing returns and managing risks effectively.

Philanthropy and Measuring Impact

Bridgeway Capital’s philanthropic contributions are not just financial but also strategic. Their Bridgeway Foundation collaborates with organizations like Howard Buffett’s philanthropic initiatives to provide tangible aid in crisis zones, such as Ukraine. Addressing the challenge of measuring the impact of preventing atrocities, Montgomery draws parallels to investment metrics:

"[00:12:36] 'It's like the investment side... there's time series analysis. ... Shannon Davis wrote a book called "To Stop a Warlord" detailing this work.'"

This rigorous, data-driven approach ensures that their philanthropic efforts are both effective and accountable.

Company Culture and Accountability

Bridgeway Capital’s culture is deeply influenced by Montgomery’s personal commitment to accountability and purposeful work. Key elements include:

• Equal Pay Structure: The highest-paid employee earns no more than seven times the lowest-paid employee, fostering a sense of fairness and reducing hierarchical barriers.

• Personal Accountability Groups: The Firewood Group exemplifies this commitment, focusing on personal and professional accountability beyond the workplace.

• Transparent Reporting: Bridgeway publishes an annual report owning up to mistakes to foster trust and continuous improvement:

  "[00:35:03] 'You can't cut it both ways. You either have to own your mistakes, get them out in the open, and learn from them.'"

Montgomery underscores that culture is the foundational "housing" within which Bridgeway operates, emphasizing autonomy, mastery, and genuine caring as core values.

Navigating the Passive vs. Active Investment Landscape

Amidst a market shift towards passive investing, Bridgeway Capital distinguishes itself through:

• Continuous Research and Innovation: They persistently refine their strategies to add incremental value, staying ahead in a competitive industry.

• Early Adoption of ETFs: Transitioning some mutual funds to ETFs enhanced after-tax returns for shareholders and maintained positive fund flows.

• Constructive Engagement with Indexing: Rather than opposing passive strategies, Bridgeway leverages learnings to improve their own investment processes. For instance, their Blue Chip strategy offers a more diversified and less volatile alternative to traditional market-cap-weighted indices.

"[00:39:03] 'We're always trying to move back to sector neutrality... which should not add value but stabilizes returns.'"

Advice for Aspiring Investors and Reflections on Industry Evolution

When advising recent graduates, Montgomery emphasizes:

"[00:50:03] 'People scare you away when it's a declining industry or not declining, but where fee pressure is increasing... there are strategic opportunities.'"

He reflects on how understanding market dynamics and investor behavior would have been beneficial when launching Bridgeway, advocating for a long-term investment perspective:

"[00:51:06] 'Build your portfolio and learn how to not pay attention in the downturns. If it's long-term money, volatility in between is irrelevant.'"

Personal Insights: Books, Mentors, and Hobbies

John Montgomery shares his personal interests and the influences that shaped his career:

• Books: Currently reading "People Dare to Build an Intentional Culture" and Jason Sweig’s update on "The Intelligent Investor".

• Mentors: Influenced by Henry Grappi, MIT advisors, and Jack Bogle, focusing on respect, problem-solving, and cost-efficiency.

• Entertainment: Enjoys the South Korean series "Extraordinary Attorney Woo", appreciating its exploration of assumptions and human interactions.

Conclusion

John Montgomery’s multifaceted approach to investing, underpinned by a strong philanthropic mission and a culture of accountability, sets Bridgeway Capital apart in the asset management industry. His insights into factor-based investing, coupled with a commitment to societal impact, offer a compelling blueprint for both seasoned investors and newcomers alike.

For those interested in exploring more of Montgomery’s strategies and Bridgeway’s impactful work, this episode of Masters in Business is a must-listen.

Notable Quotes with Timestamps:

• John Montgomery on Career Shift: “[00:02:25] 'The career plan originally was urban development and transportation...'”
• Philanthropic Motivation: “[00:08:29] 'We think business was a way to change the world and engage...'”
• Measuring Impact: “[00:12:36] 'It's like the investment side... there's time series analysis.'”
• Culture and Accountability: “[00:35:03] 'You can't cut it both ways...'”
• Advice for Graduates: “[00:50:03] 'People scare you away when it's a declining industry...'”

This detailed overview captures the essence of John Montgomery’s conversation with Barry Ritholtz, highlighting the intersection of sophisticated investment strategies and a profound commitment to making a positive societal impact.