John Montgomery, founder of Bridgeway Capital Management, tried a lot of marketing ideas in the early 1990s to get his upstart mutual fund company off the ground. All of them failed.

"We tried direct mail with some very fancy design work, business page advertising, affinity group marketing... and we knocked on doors," said Montgomery, a 42-year-old native of Houston, Tex. "We had a good story to tell, but we kept hearing the same answer: `You don't have a track record. Come back in three years.'"

Montgomery's story was small. Ultra Small. While an MBA candidate at Harvard, Montgomery had devised a quantitative-based stock-picking strategy that focused on the smallest publicly-held companies. He tested the system, picking his own stocks, and his annual returns exceeded 31 percent. Later, as a budget analyst for the Houston Transit Authority, Montgomery's investment income exceeded his annual salary.

So, he decided to sell his product and created the Ultra-Small Company Fund, which invested in the best of the tiniest companies, at least according to his investment models. But he quickly proved to be an inept salesperson and he decided to dispense with traditional promotion efforts.

"It was kind of expensive and we hadn't gotten a lot from the marketing," said Montgomery. "And then we withdrew from the NASD and saved money on state registration fees and freed ourselves from all the regulatory burdens that go with it."

At the same time, he started contacting editors of major national financial publications, particularly those with a focus on mutual funds. One national publication took notice and did an article about Bridgeway in May, 1996 -- at a time when the Russell 500 was outperforming the general market.

"The timing was perfect," said Montgomery. "We got 10,000 phone calls from the article."

Montgomery, with a background in finance and budgeting, followed up that success with a strategy he knew best. He cut every possible expense, with the goal of being among the leaders in his fund expense ratio. He also added to his mutual fund family, creating an Aggressive Growth Fund, Micro-Cap Fund, Ultra-Large 35 Index Fund, Ultra-Small Index Fund and Socially Responsible Fund.

"We had the smallest and the largest cap funds," said Montgomery. "And our Ultra-Large fund was at the top of rating agencies for expense ratio -- .15 percent."

Performance statistics for the Ultra-Small Company Fund, averaging 32 percent per year from inception through 1997, have been among the best of the small caps and Montgomery was recently recognized by a national publication as a "Micro-Cap Gold Medal Manager."

"Now, we were recognized as being among the leaders in expense ratio and performance," said Montgomery.

This has all lead Montgomery to question why he needs to market. Word of mouth will do, says Montgomery.

As evidence, he notes that the Micro-Cap Fund, introduced to investors this past July, drew $10 million in assets during its first week of sales. Today, Houston-based Bridgeway Capital Management has about $50 million in its six mutual funds, down from a high of about $65 million this summer, before the value of small caps took a beating along with most other stocks.

But Montgomery is undaunted. He points out that small caps, in the past 10 bear markets, have rebounded much faster than larger stocks.

And he is not giving up on affinity marketing. A couple of years ago, he tried to get a national, non-profit organization, which he declined to identify, to publicize Bridgeway funds to its "hundreds of thousands" of members. In return, Bridgeway would donate a portion of its advisors' fees to the organization. Montgomery came close to striking a deal.

"They told us to come back when we have more of a track record," he said. "So we'll be knocking on their door again."

"Ultra-small is an asset class that we have a monopoly on," says Montgomery. "It's a slam dunk, a great diversifier, particularly good for someone with a longer-term time horizon... ideal for a pension or an IRA.

"Someday, we'll be a $1 billion company," he says.

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