[STRADLEY RONON LOGO] Stradley Ronon Stevens & Young, LLP 1220 19th Street, NW Suite 600 Washington, DC 20036 Telephone (202) 822-9611 Fax (202) 822-0140 October 20, 2005 VIA Edgar and Email Brion Thompson Division of Investment Management U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Bridgeway Funds, Inc. (File Nos. 33-72416 and 811-08200 - Response to SEC Comments on Filing Pursuant to Rule 485(a) Dear Mr. Thompson: We are responding to your comments, provided via telephone, related to the filing made by Bridgeway Funds, Inc. (the "Fund") pursuant to Rule 485(a) on August 24, 2005. Please note that any changes to disclosure indicated below will be made in a post-effective amendment that the Fund plans on filing pursuant to Rule 485(b) no later than October 28, 2005. Each of your comments and our response to each comment is set forth below. For convenience, the Fund and each of its series are referred to individually as a "Fund" and collectively, as the "Funds." In connection with our responses to your comments, we acknowledge, on behalf of the Fund and each of its series, that: |X| The Fund is responsible for the adequacy and accuracy of the disclosure in the filing; |X| Staff comments or changes to disclosure in response to staff comments in the filing reviewed by the staff do not foreclose the Commission from taking any action with respect to the filing; and |X| The Fund may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. Prospectus Comments 1. Comment: For each Fund, if the investment objective is not fundamental, include disclosure that the objective may be changed without shareholder approval as required by Item 4(a) of Form N-1A. Response: Each Fund's investment objective is not fundamental. Therefore, we have added the following sentence to the end of the "Investment Objective" section for each Fund: "The Fund's investment objective may be changed by the Board of Directors without shareholder approval." 2. Comment: Because Aggressive Investors 1 Fund and Aggressive Investors 2 Fund invest in foreign companies, include risk disclosure related to such investments. Response: We have added the following risk disclosure to the "Principal Risk Factors" section for both Aggressive Investors 1 Fund and Aggressive Investors 2 Fund in response to your comment: "Investments in foreign companies can be more volatile than investments in U.S. companies. Foreign securities have additional risk, including exchange rate changes, political and economic upheaval, the relative lack of information about the companies, relatively low market liquidity and the potential lack of strict financial and accounting controls and standards." 3. Comment: Because Aggressive Investors 1 Fund and Aggressive Investors 2 Fund utilize futures, options and leverage, include risk disclosure related to such techniques. Response: We have added the following risk disclosures to the "Principal Risk Factors" section for both Aggressive Investors 1 Fund and Aggressive Investors 2 Fund in response to your comment: "The Fund's use of futures and options to manage risk or hedge market volatility are subject to certain additional risks. Futures and options may not always be successful hedges and their prices can be highly volatile. They may not always successfully manage risk. Using futures and options could lower the Fund's total return, and the potential loss from the use of futures can exceed the Fund's initial investment in such contracts. Also, the Fund's use of leverage may cause the Fund's portfolio to be more volatile than if the portfolio had not been leveraged because leverage could exaggerate the effect of any increase or decrease in the value of the securities held by the Fund." 4. Comment: Current disclosure in the "Principal Risk Factors" section for Aggressive Investors 1 Fund and Aggressive Investors 2 Fund related to investing in a small number of issuers should be moved to the investment strategy section while leaving the risk disclosure regarding focus investing in the "Principal Risk Factors" section. Response: We have moved the referenced disclosure from the risk section to the investment strategy section for both Aggressive Investors 1 Fund and Aggressive Investors 2 Fund. 5. Comment: A footnote to each Fund's fee table states that "The Adviser pays all distribution (12b-1) fees." However, page 54 of the prospectus indicates that the Adviser will reimburse the Funds for all distribution costs. Please reconcile this difference. In other words, if the 12b-1 plan is a reimbursement plan, then each Fund's fee table should include the actual 12b-1 fee and show an offsetting waiver rather than showing zero for the 12b-1 fee. Response: We have reviewed the Funds' 12b-1 plan and determined that the plan is not a reimbursement plan. The plan has been structured so that the Adviser directly pays for all distribution costs. As a result, the footnote to each fee table is correct. In addition, we have revised the disclosure related to the 12b-1 plan on page 54 of the prospectus to be consistent with the footnote. 6. Comment: A sentence in the "Principal Investment Strategy" section for Ultra-Small Company Fund, Ultra-Small Company Market Fund, Micro-Cap Limited Fund, Small-Cap Growth Fund, Small-Cap Value Fund, Large-Cap Growth Fund and Large-Cap Value Fund indicating the market capitalization range of stocks invested in should be revised for clarity. Response: We have revised the applicable sentence in each such Fund's "Principal investment Strategy" section in response to your comment. An example of the revised sentence is as follows (example is for Ultra-Small Company Fund): "On September 30, 2005, each of the stocks in this group had a market capitalization of less than $313 million." 7. Comment: Each Fund that has a policy of investing 80% of its "net assets" in certain types securities should include a parenthetical of "plus borrowings for investment purposes." Response: We have included the parenthetical "(plus borrowings for investment purposes)" immediately following the words "net assets" for each applicable Fund. 8. Comment: Each Fund that has a policy of investing 80% of its net assets in certain types of securities should add disclosure that the 80% policy can be changed without shareholder approval upon 60 days' notice to shareholders if such 80% policy is non-fundamental. Response: We note that each applicable Fund's 80% policy is non-fundamental. As a result, we have added the following disclosure in the "Principal Investment Strategy" section for each applicable Fund: "The Fund will notify shareholders at least 60 days prior to any change in its policy of investing at least 80% of its assets in the types of securities described above." 9. Comment: The "Principal Investment Strategy" section for Ultra-Small Company Fund indicates that the Fund may engage in frequent trading. As a result, the impact of higher portfolio turnover on Fund performance should be disclosed as required by Item 4(b), Instruction 7. Response: We have added the following disclosure as the last sentence in the "Principal Investment Strategy" section for the Ultra-Small Company Fund in response to your comment: "In addition, higher trading costs may negatively impact Fund performance." 10. Comment: The Blue Chip 35 Index Fund should revise the disclosure related to its 80% policy to indicate that it will invest 80% of its assets in securities included within the index. Response: We have revised the disclosure related to Blue Chip 35 Index Fund's 80% policy as follows in response to your comment: "The Adviser normally invests more than 80% of the Fund's net assets (plus borrowings for investment purposes) in blue chip company stocks included within the Index." 11. Comment: The "Index Composition" section for Blue Chip 35 Index Fund notes that 35 or 36 companies make up the Index, excluding tobacco companies. Please reconcile the reference to 35 or 36 with the name of the Index or clarify the disclosure. Response: We have clarified the disclosure in response to your comment. As a result, the first sentence of the "Index Composition" section for Blue Chip 35 Index Fund is deleted in its entirety and replaced with the following sentence: "The long-term objective of this roughly equally weighted Index is to hold 35 "blue-chip" companies, excluding any tobacco companies and ensuring reasonable industry diversification. At times however the Index may hold more or less stocks as a result of corporate actions such as spin-outs or mergers and acquisitions." 12. Comment: The "Index Composition" section for Blue Chip 35 Index Fund notes that as of Index rebalancing in December 2004, the Index included all 23 of the largest U.S. companies, excluding one tobacco company. Please clarify this disclosure. Response: We have revised the sentence to read as follows in response to your comment: "At the time of Index rebalancing in December 2004, the Index included many of the largest U.S. companies, excluding tobacco companies." 13. Comment: The Balanced Fund is required to invest at least 25% in equities and 25% in fixed income securities. The Balanced Fund indicates that it invests at least 25% in fixed income securities and up to 75% of its assets in options. Please explain how the current disclosure meets the SEC's position that a balanced fund should invest at least 25% in equities and 25% in fixed income instruments. In addition, explain supplementally how an equity option is the economic equivalent of a direct investment in equity securities. Response: We have the revised the "Principal Investment Strategy" section of the Balanced Fund in response to your comment. As a result of this revision, we do not believe that a response to the economic equivalent issue is necessary. The revised disclosure is as follows: "Up to 75% of Fund assets may be invested in common stocks and options. The Adviser may write covered calls and/or secured puts. Both of these strategies are used to accomplish the same objective. At all times, at least 25% of the Fund's assets will be invested in equities." 14. Comment: The "Principal Investment Strategy" section of the Balanced Fund indicates that the Fund invests in futures. As a result, risk disclosure related to such investments should be included in the "Principal Risk Factors" section. Response: We have added the following risk disclosure to the "Principal Risk Factors" section for the Balanced Fund in response to your comment: "The Fund's use of futures to manage risk or hedge market volatility are subject to certain additional risks. Futures may not always be successful hedges, their prices can be highly volatile and they may not always successfully manage risk. Using futures could lower the Fund's total return, and the potential loss from the use of futures can exceed the Fund's initial investment in such contracts." 15. Comment: The "Principal Investment Strategy" section of the Balanced Fund indicates that the Fund invests in U.S. Government obligations. As a result, risk disclosure related to the varying levels of support provided by the U.S. Government to different types of government obligations should be included in the "Principal Risk Factors" section. Response: We have added the following risk disclosure to the "Principal Risk Factors" section for the Balanced Fund in response to your comment: "U.S. government obligations vary in the level of support they receive from the U.S. government. They may be: (i) supported by the full faith and credit of the U.S. Treasury; (ii) supported by the right of the issuer to borrow from the U.S. Treasury; (iii) supported by the discretionary authority of the U.S. government to purchase the issuer's obligations; or (iv) supported only by the credit of the issuer." 16. Comment: The section entitled "Who is the Investment Management Team?" appears to indicate that the Funds are team managed. However, biographical information is only provided for two portfolio managers. If other members of the team are primarily and jointly responsible for the management of the Funds, then disclosure regarding those other team members should be included. In addition, please ensure that at least 5 years experience is included for all team members required to be disclosed pursuant to this requirement. Response: We have revised the entire section as follows in response to your comment: "All Funds Except for the Balanced Fund Investment decisions for each Fund except for the Balanced Fund are made by an investment management team. The investment management team is comprised of eight investment professionals on the Adviser's staff including the trading team. The following individuals are jointly and primarily responsible for the day-to-day management of each such Fund's portfolio: John Montgomery is the portfolio manager for all of the Bridgeway Funds except for the Balanced Fund and has held that position since each Fund's inception. John founded the Adviser in 1993 and currently holds the title of President. In addition to the Funds, John manages separate accounts for high net worth individuals, endowments and other institutional investors. Elena Khoziaeva began working at the Adviser in 1998. Since 1999, her responsibilities have included investment management research and analysis as well as quantitative model maintenance and operation for the Adviser. Elena earned a Bachelor of Economic Sciences degree from Belarussian State Economic University in Minsk and graduated with highest honors from the University of Houston with an MBA in accounting. Mike Whipple, CFA, began working at the Adviser in 2002. Since then, his responsibilities have included investment management research and analysis as well as quantitative model maintenance and operation for the Adviser. He holds a BS in Accountancy and Finance from Miami University in Ohio. A Certified Public Accountant and Certified Internal Auditor, Mike worked in auditing from 1996 to 2000 before attending the University of Chicago from 2000 to 2002, where he earned his MBA. Mike earned his CFA charter in 2003. The Balanced Fund Richard P. Cancelmo, Jr. ("Dick") has been the portfolio manager of the Balanced Fund since its inception in 2001. Dick has been employed by the Adviser as a portfolio manager since February 2000. He was employed by Cancelmo Capital Management, Inc., the investment adviser to West University Fund, prior to joining the Adviser. Additional Information About Portfolio Managers The Bridgeway Funds' Statement of Additional Information provides information about each portfolio manager's compensation, other accounts managed by the portfolio manager and the portfolio manager's ownership of Fund shares." 17. Comment: Regarding the 12b-1 plan disclosure on page 54 of the prospectus, disclose whether the Adviser's payment of all distribution costs is contractual. Response: We have revised the disclosure to indicate that the Adviser's payment of all distribution costs is a contractual provision in the 12b-1 Plan. 18. Comment: In the section entitled "Policy Regarding Excessive or Short-Term Trading of Fund Shares," disclose whether the bullet pointed risks of excessive trading are applicable to all of the Funds. If there are particular risks more applicable to certain Funds, include disclosure regarding those Fund-specific risks. Response: The bullet pointed risks are applicable all of the Funds. However, certain Funds are more susceptible to such risks. As a result, we have added the following disclosure immediately following the bullet points in the relevant section. "Certain Funds such as Ultra-Small Company, Ultra-Small Company Market, Micro-Cap Limited, Aggressive Investors 1, Aggressive Investors 2, Small-Cap Growth and Small-Cap Value Funds, may invest in equities that have low liquidity and therefore may be more susceptible to these risks. Others Funds such as Blue Chip 35 and Ultra-Small Market Funds are designed to track certain indices or markets and also may be exposed to greater risk due to short-term and excessive trading." 19. Comment: In the section entitled "Selling Shares" on page 57, explain how the term "Delays" complies with Section 22(e) of the 1940 Act. Response: We have revised the section to clarify that any such "delays" would be no more than 7 days. 20. Comment: In the section entitled "Redemption of Very Large Accounts" on page 59, please delete the word "business' in the phrase "seven business days." Response: We have made the change as requested. 21. Comment: On the back cover page, please indicate what is meant by the term "incorporated by reference" as it relates to the SAI. In addition, the disclosure on the back cover page regarding how shareholders may obtain more information about the Funds from the SEC should be revised to comply with Item 1(b)(3) of Form N-1A. Response: We have added the phrase "and is legally part of the prospectus" to the last sentence of the first paragraph to clarify that the SAI is legally part of the prospectus. In addition, the disclosure regarding information from the SEC has been revised to provide the correct SEC phone number (i.e., 202-942-8090) and the correct website and zip code for the SEC. SAI Comments 22. Comment: Confirm whether the directors' share ownership table on page 17 provides information separately for each Fund. Response: The Fund ownership table includes share ownership information separately for each Fund. 23. Comment: In the section entitled "Disclosure of Portfolio Holdings" address the following issues: (a) indicate who authorizes the disclosure of holdings information for legitimate business purposes to third party service providers, the frequency of such disclosure and whether there is any lag time; and (b) indicate whether and if so, with whom, there are ongoing arrangements for disclosure of portfolio holdings information. Response: The first sentence of the relevant paragraph has been revised to indicate that such disclosure is only made if approved by the Chief Compliance Officer. In addition, we have added the following two sentences immediately after the first sentence: "Such disclosure is generally made on a quarterly basis and is subject to a 15-day lag time. The Funds currently have ongoing arrangements to disclose portfolio holdings information to Standard & Poor's Inc., Thompson Financial, Bloomberg, The McGraw-Hill Companies, Inc., Vickers Stock Research, Merrill Corporation, ALPS Mutual Fund Services, Inc., Russell, Morningstar, Inc. and Lipper, Inc." 24. Comment: The current disclosure in the "Description of Compensation Structure" section indicates that John Montgomery's and Dick Cancelmo's compensation is based in part on "investment performance." As a result, in compliance with Item 15(b) of Form N-1A, disclosure should be added regarding whether such investment performance is pre-tax or after-tax and what benchmarks or peer groups are used for comparison purposes. Response: We have revised the disclosure on page 66 of the SAI to address your comments. In addition, we have now included disclosure about two other portfolio managers (who were added to the prospectus in response to Comment # 16 above). As a result, the first five paragraphs on page 66 have been completely revised. The revised disclosure is as follows: "The objective of the Adviser's compensation program is to provide pay and long-term compensation for its employees (who are all referred to as "partners") that is competitive with the mutual fund/investment advisory market relative to the Adviser's size and geographical location. The Adviser evaluates competitive market compensation by reviewing compensation survey results conducted by independent third parties involved in investment industry compensation. The members of the Investment Management Team, including John Montgomery, Richard Cancelmo, Jr. ("Dick"), Elena Khoziaeva, and Michael Whipple, participate in a compensation program that includes base salary, bonus and long-term incentives. Each member's base salary is a function of industry salary rates and individual performance as measured against yearly goals. These goals typically include measures for integrity, communications (internal and external), team work, leadership and investment performance of their respective funds. The bonus portion of compensation also is a function of industry salary rates as well as the overall profitability of the Adviser relative to peer companies. The Adviser's profitability is primarily affected by a) assets under management, b) management fees, for which some actively managed Funds have performance based fees relative to stock market benchmarks, c) operating costs of the Adviser and d) tax rates. Fund performance impacts overall compensation in two broad ways. First, generally assets under management increase with positive long-term performance. An increase in assets increases total management fees and likely increases the Adviser's profitability (although certain Funds do not demonstrate economies of scale and other funds have management fees which reflect economies of scale to shareholders). Second, Aggressive Investors 1 Fund, Aggressive Investors 2 Fund, Micro-Cap Limited Fund, Small-Cap Growth Fund, Small-Cap Value Fund, Large-Cap Growth Fund and Large-Cap Value Fund have performance-based management fees that are a function of trailing five-year before-tax performance of each Fund relative to its specific market benchmark. Should the Fund's performance exceed the benchmark, the Adviser may make more total management fees and increase its profitability. On the other hand, should the Fund's performance lag the benchmark, the Adviser may experience a decrease in profitability. Finally, all investment management team members participate in long-term incentive programs including a Simplified Employee Pension Individual Retirement Account (SEP IRA) and ownership programs in the Adviser. With the exception of John Montgomery, investment team members (as well as all of the Adviser's partners) participate in an Employee Stock Ownership Program and Phantom Stock Program of the Adviser. The value of this ownership is a function of the profitability and growth of the Adviser. The Adviser is an "S" Corporation with John Montgomery as the majority owner. Therefore, he does not participate in the ESOP, but the value of his ownership stake is impacted by the profitability and growth of the Adviser. However, by policy of the Adviser, John Montgomery may only receive distributions from the Adviser in an amount equal to the taxes incurred from his corporate ownership due to the "S" corporation structure. Historically, the Adviser has voluntarily disclosed the annual compensation of its two primary portfolio managers: John Montgomery and Dick Cancelmo. The following table summarizes John's and Dick's annual compensation. These figures are based on the Adviser's unaudited financial records and individual W-2 forms." 25. Comment: The section entitled "Other Managed Accounts" should only include information about accounts other than the Funds managed by each portfolio manager. Response: We have revised the section to only include disclosure about accounts other than the Funds managed by each portfolio manager. In addition, we have added similar information for the two new portfolio managers that we disclose in the prospectus in response to Comment # 16 above. * * * Should you have any questions or concerns regarding any of the above, please contact me at (202) 419-8417. Best Regards, /s/ Prufesh R. Modhera Prufesh R. Modhera, Esq. cc: John Montgomery Michael Mulcahy Linda Giuffre Michael O'Hare
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CORRESP Filing
Bridgeway Funds CORRESPCorrespondence with SEC
Filed: 20 Oct 05, 12:00am