A lot of people probably wonder why John C. Bogle Jr. isn't working at The Vanguard Group, preparing to take the reins of the mutual fund powerhouse his well-known and respected father, John C. Bogle Sr., built from the ground up.

Given different mindsets and ambitions on both sides of the generation gap, things might have worked out that way. But as early as age 10, the president of Bogle Investment Management and manager of the Bogle Small Cap Growth Fund, now 41, has had his sights set on other goals.

"My first ambition was to own a bicycle repair shop," says a casually-dressed Bogle in an interview at his firm's modestly appointed 2,200-square-foot office suite in Wellesley, Mass., an upscale Boston suburb. "I've always had sort of an engineering orientation, and I like to tinker."

In fact, none of Bogle's five siblings has followed him in the mutual fund footsteps of their famous father. Of four sisters, three are homemakers, and one is involved in raising capital for a dotcom startup. A younger brother, Andrew, works at a firm that distributes financial information over the Internet.

For Bogle, the path to Vanguard was far from clear-cut. "I think my father and I have always had an understanding, though mostly unspoken, that everyone would better served by me doing my own thing. To work directly for him would constantly raise the question of whether I was the appropriate person for the job."

Moving On

So instead, John C. Bogle Jr. has his name on the door of a boutique investment-management firm, and a small mutual fund that he hopes will finally put quantitative investing on the map.

Bogle founded Bogle Investment Management in early 1999, just after he left Numeric Investors, a firm he ran with friend and partner Langdon Wheeler for nearly 10 years. The move, both unexpected and well-publicized, left Numeric without a readily identifiable name to tie to its mutual funds and Bogle with a very long, uncharted road ahead.

Over the next several months, he kept a pretty low profile, emerging in May at a mutual fund industry trade conference to announce plans to open a mutual fund the following fall. He worked out of the basement of his home until the firm moved to its current location in September 1999. Even with its more professional surroundings, it remained a small organization with four professionals and no support staff.

Today, Bogle Investment Man-agement has the same number of employees, plus some $130 million in assets under management, with Bogle Small Cap Growth Fund accounting for about $30 million of that. Although its October 1999 launch date was more a matter of finally getting the paperwork approved than deliberate planning, the offering was well-timed.

For much of its life, Bogle Small Cap Growth Fund has benefited from a resurgence in the kinds of small companies with rapidly growing earnings in which it invests. From its inception through the third quarter of 2000, a period of one year, its total return was 71%, compared with 23.4% for its benchmark, the Russell 2000 Index. It has outperformed that benchmark every month, except for one, since its inception.

A Hard Sell

Despite a strong surge out of the starting gate and a name that should sell itself, Bogle's fund hasn't exactly rocked the mutual fund world in terms of its size. "We really didn't know what to expect when we started out," says Bogle. "We saw the fund having anywhere from $5 million to $100 million in assets after a year. Sure, a few new funds, like Tom Marsico's, grew much more quickly. But many more have fallen flat. We're happy to have reached the $30 million level, considering we've made no marketing effort."

Financial advisors have been a particularly hard sell, with institutional-class shares accounting for less than one-fourth of the fund's assets. "We haven't connected with financial advisors as much as we'd like," admits Bogle. "The retail public has been able to find us, and to make the leap of faith that we could add value for them."

Aside from a lack of marketing muscle, another reason for the fund's modest growth might be its quantitative strategy, which both advisors and individual investors can find hard to understand. It's an in-between approach that lacks the simplicity and rock-bottom cost of indexing or the pizzazz and story appeal of fundamental analysis and active management. Yet it is one in which Bogle strongly believes, and that he developed after years of experience in the investment-management business.

After graduating with a master's degree in finance from Vanderbilt University, Bogle went to work for State Street Global Advisors, where he initially helped manage the firm's index-oriented products.

"Soon after I learned the mechanics of running index money, my future partner, Langdon Wheeler, persuaded me that there were ways to exploit areas of the market with quantitative strategies that would add value," says Bogle. "To me, that was more of a challenge than running an index fund that would track a benchmark very closely." Bogle left State Street in 1990 to join Wheeler at his quant shop, Numeric Investors.

How did dad feel about the change of focus? "Quite honestly, it was my father who suggested I pursue quantitative investment management because he felt it fit better with my personality and orientation," says Bogle.

Adding Incremental Value

The composition of Bogle Small Cap Growth Fund reflects its manager's belief that picking stocks with the right quantitative characteristics can add enough incremental value above its benchmark, the Russell 2000 Index, to make a real difference in returns. Bogle keeps the 100 to 150 stocks in the fund within 3% to 4% of the benchmark's sector weightings.

However, he stresses, this isn't a quasi-index fund. "Those tend to track within a percent or so in the small-cap area. Our tracking error is in the range of 700 to 800 basis points. So we're sort of a middle ground between an index-fund manager and an aggressive, bottoms-up kind of stock picker."

Bogle's quantitative model involves screening through a universe of 1,700 small companies for three main characteristics: earnings and financial quality, earnings expectations and valuation. In the first screen, he looks for companies with the ability to generate free cash flow in the future above that of their peers.

His team sorts through financial statements to separate companies with sustainable growth characteristics from those that are "fighting to make the numbers" through costly acquisitions or by dressing up their balance sheets. "We're seeing more of these kinds of tricks as companies come under increasing pressure to exceed expectations," he says.

The earnings-expectations model evaluates upward and downward earnings forecast revisions by Wall Street analysts, and how investors are reacting to them. Because information about earnings surprise forecasts is much more widely available than it was just a few years ago, Bogle admits that this screen is "still viable, but less valuable than it used to be."

The valuation component of the quantitative screens compares stocks against those in their peer group for financial characteristics such as revenue, earnings, cash flow and book value. "Because our comparisons are made against a company's peer group, you can't really characterize this as a value or a growth fund," he says. "Although it's called a growth fund, there is really no significant bias relative to the benchmark."

Keeping It Small

Bogle strongly believes in keeping assets at a manageable level and plans to close Bogle Small Cap Growth Fund when it reaches $150 million in assets. But with the fund business getting harder to crack than a CIA code, don't expect a follow-on any time soon.

"The mutual fund business is very competitive, and distribution complicated and costly," he says. "This fund gives us a public track record, which helps open the door to more institutional business. But I don't anticipate starting another one."

Even so, he hasn't ruled out having his firm act as subadvisor for another fund company, provided the right deal comes along. He'd prefer to work on a quantitative mid-cap offering to avoid confusion in the marketplace with his own firm's small-cap fund.

"We've talked to some high-profile mutual fund firms, but opted not to pursue those options because of skepticism about inappropriately high fee levels," he says. "If we found the right partner-for instance, a Vanguard situation would be ideal-we'd obviously be willing to take a hit to our own fee to do business with an organization like that."

Dad, are you out there?

Portfolio Characteristics
As Of September 30
Bogle Small
Cap Growth
Russell 2000 Median Market Capitalization ($millions) $1,371.8 $893.0 Long-term Earnings Growth 21.0% 17.5% Price/Earnings Ratio 28.2x 21.0x Price/Forward Earnings Ratio 19.3x 15.4x Price/Sales Ratio 2.2x 2.0x

Source: Brill's Mutual Funds Interactive

Marla Brill publishes Brill's Mutual Funds Interactive (fundsinteractive.com).