Small-Cap Growth

Objective

In managing small-cap growth portfolios, we take a strictly quantitative, bottom up approach to stock selection, combined with top down risk management in portfolio construction. Our objective is to exceed the return of the Russell 2000 Growth Index by more than 3% per year over trailing periods of three years or longer.

Investment Process

Investment Universe
Bridgeway defines small-cap as the 3000 most liquid stocks on the U.S. stock exchanges below the top 500 in market capitalization, using average volume multiplied by share price to gauge liquidity. We divide this universe into growth and value companies based on common financial measures such as price-earnings ratio, price-book ratio, and dividend yield, leaving us with 1500 small cap-growth stocks to consider for investment.

Security Selection and Weighting
The 1500 small-cap growth stocks are run through eight different computer models to determine stock selection. The models are proprietary, but some of the general factors are the Growth, Growth at a Reasonable Price, Momentum, and Value attributes for each stock.

Once a model identifies a security for inclusion in the portfolio, security weighting is a function of several factors as follows:

• The model under which the stock was selected
• Sector and industry diversification considerations
• Absence or presence of similar holdings within that industry or sector
• Liquidity considerations

Sector Weightings
While sector exposures are monitored closely, there is no absolute standard for acceptable under- or over-weighting of sectors. Instead, we attempt to manage risk by modeling the relative performance of various sectors under different market conditions.

Sell Decisions

Factors which may result in the sale of some or all shares of a particular security include:

• Relative attractiveness of new model recommendations
• Deteriorating financial strength in underlying company
• Portfolio risk considerations (sector, industry diversification)
• News of a merger or other external  factor that may drive future price movements

All sales are executed subject to tax efficiency and liquidity considerations.

Additional Considerations

• We seek to be 100% invested in small-cap growth stocks at all times.
• Initial position weights are usually 1-2% of assets; trimming may occur if a sector or industry becomes overweighted or if the market cap of a holding falls below the size of our charter.
• Portfolio turnover for this style is relatively low, generally in the 25% to 35% range annually (plus any tax loss harvesting)
• Foreign stock exposure is limited to a maximum of 10%. Only securities traded on U.S. exchanges are considered to ensure consistent GAAP reporting.
• Options and other derivatives are generally not used in these accounts.

Available Investment Vehicles

	Mutual Fund	Separate Account
Name	Small-Cap Growth Fund	Small-Cap Growth Portfolio composite
Inception	10/31/03	07/01/02
Symbol	BRSGX	NA
Minimum Investment	$2000	$10,000,000
Sales Load	0.00%	NA
12-b1 Fees	0.00%	NA