Ragen Stienke

Into the position that you are today? Sure. So I'll go back a little ways. I think it will be helpful to offer some of how I got my start. So my first job out of college was with Arthur Anderson, and this is the mid-90s, and I was in the business valuation group there. I like to say that's where I learned to value things in the real world as opposed to an academic perspective. It's also where I met one of my business partners, Jason Hanya, and I've known each other for just 30 years now and worked on and off together. Then went to UBS in New York, was a software analyst initially, and then moved into the strategy role. There I worked with my other business partner today,

Through today. Yeah, that's great. And before we jump into that, I always like to ask everybody, what interests or hobbies do you have outside the office when you're not, behind the

Computer screen running money? Sure. Well, I'll tell you, I have four children that are all relatively young. And so I guess one of my interests and hobbies is coaching them and youth sports. I've spent a lot of time doing that. But outside of God, I'm a big outdoorsman. I love running and fishing and I love sharing that hobby with my children. Yeah, no, that's great. I'm actually, you're from,

You're in Dallas. So are you, are you still in Dallas? I am. I am. Yes. Yeah. I might be adopting the Cowboys as my team this year because the Steelers are just awful. So. Well, I will tell

You to be careful. The, the, the Cowboys are certainly good at breaking hearts on with a regular

Occurrence. Yeah. I, yeah, they've, they've had some high expectations and have not done what they probably should have been doing over the last couple of years, but they're my team this year. And yeah, I, I also coach you sports and it's, it's very fulfilling and fun. And I got a couple of kids, so I definitely know where you're coming from and can relate. So let's talk about, ballast asset management. I know you have the ETF, which we're going to talk about. You guys, did you start out running SMAs and then converting SMA assets into the ETF? Is that kind of how you got

Your start? We did start out running SMAs and continue to run SMAs today. The, the way I think about ETF, it's the, the same strategy. It's just a different vehicle for accessing, same strategy. We, we have a single strategy. This is all we do. Done it for going on 20 years now.

And so, yeah. So let's dive into MGMT, which is your small and mid cap ETF. Can you give kind of a high level overview of what the strategy is, is trying to accomplish and what it's designed to do?

Sure. What the highest level, what we are trying to accomplish is to turn alpha generation into a manufacturing process rather than a process that is relying on either my or any of my teammates' ability to be right all the time. And that really starts with a, with a focus on quantifying downside. That's really the cornerstone within our process. And it, I'll take just a minute to, to explain because there's a, I think an important distinction between buying something with, at a discount to its intrinsic value or with a margin of, of safety, sort of the common buzzwords you often hear. And, and, and what we do, we're ultimately trying to buy within 20 to 30% of the worst case scenario that we can envision. And once we quantify that downside, then we'll look at the upside where

Against those behavioral mistakes. Yeah, no, it's definitely important. I'm a big believer in behavioral finance and trying to avoid those pitfalls. everything we do is systematic as well. But before we dive into kind of like the investment process, I want to know, I want to get your take on why that small and mid-cap space offers such a unique opportunity, specifically for finding kind of alpha generating companies and higher growth. What is it about that space that you find attractive? And what is it about those companies or maybe the management team specifically that allows

You to drive and generate that alpha? Sure. There's a couple of things. One that I don't often hear talked about, but it's actually become worse, I guess, better for active managers over the last 20 years. And I'll take you back to the 90s when these stocks traded on fractions, 16th and 8th, whatever point, we moved into the early odds and we went to decimalization. And initially, those commissions were five or seven cents. commissions are down to a penny or half a penny a share in a lot of instances these days. And the reality is that many of the large brokerage firms that use commissions from their trading desks to pay sell-side analysts to cover these stocks just don't cover these because they just, they don't trade enough, generate enough dollars to pay

So let's talk about kind of the investment selection. I know you talked about, the risk and reward ratio. are you looking at that through like a fundamental screening process? Like how are you drilling down and finding opportunities?

Sure. So we really starts with eliminating things that we just know we're not interested in. We have valuation frameworks that we're not willing to pay more than, let's call it, 12 or 13 times EBITDA for a business. We want our businesses to have operational leverage and generate returns through financial leverage. So we're extraordinarily focused on sheets. We don't mix, again, cyclicals with financial leverage. We are exceedingly focused on management teams that are capable of deploying capital at very high attractive rates of return and who get paid based on their success or lack thereof and doing that. So that's really, kind of step one for us. Super focused on free cash flow. Having worked again at Arthur Anderson early in my career, I can tell you that companies are able to manufacture earnings through accounting

So you briefly touched on, looking at management. What specific qualities are you trying to identify that makes a great management team that you're comfortable with and taking an investment in their company?

Right. Hold on. Just for your listeners, I'll tell you, we actually wrote a white paper on this. It's on our website if you want to get deeper, but we've got, kind of a management checklist and it goes into a couple of things. First and foremost, we want to make sure that management is aligned with our customers. And we do that by really digging into how they get paid. And notice I said how, not how much. We want to make sure that the metrics that are used to determine what they get paid are aligned with when they win our customers. So just as a quick example, if you are a retailer, a CEO of a retail company, and you get paid based on revenue growth, the easiest way to grow revenue as a retailer is to just build more stores. Well,

So that's interesting. So you could be excited about a company's financial metrics, but maybe not excited about the management team. And if there's a shakeup or a change in management, would that take something off of kind of a no-fly list and put it on a fly list for you?

Yes, absolutely. And it's happened a number of times in the past where we have found a business that we are interested in, but where there is a misalignment of interest with the management team. And oftentimes that'll be either the wrong CEO in place or the wrong compensation structure. And when we'll see that change, you bring in a new CEO and change just as a friend's compensation structure being focused on getting revenue or earnings targets. And then all of a sudden, there's a return component, whether it's return on events account or return on equity, et cetera. And that will be a catalyst for us to reevaluate, perhaps take a position of that.

Yeah, that's interesting. So you talk about risk management being paramount. How are you quantifying what the downside risk is? Through a fundamental analysis and obviously looking at management, how are you identifying and quantifying the risk of the downside? Because it's a lot easier to be optimistic, I think, in finding what the growth opportunity is. But sometimes the other side of the equation is a little bit more difficult. Can you talk about that process a little bit?

Sure. And this really goes back to Jay and I's day at Arthur Anderson, or days at Arthur Anderson at the business evaluation group. We look at it in a number of different ways, and it will change somewhat depending on the business that you're looking at. So let's take a software company as a friend. Those business models have changed somewhat over the last decade. But if you think about a software company, we'll look at the component of recurring revenue of that business and just say, okay, let's say their new product growth goes to effectively zero, and we've got a renewal rate on this recurring revenue. What does that look like if we just sort of liquidate that into the future? Or we've got hundreds of examples that those types of

We won't invest. Yeah, it's an extremely interesting process and completely well thought out in design. I talked to a lot of ETF managers and you guys are definitely taking the extra step of really looking into management and looking to see what the downside risks are. I'm curious, when you start to identify, you run your whole process, you find your investment selection. How are you then compiling the portfolio in terms of position sizing? It's not equal weight, is it? Or you're putting, you're kind of moving chips around and overweighting some things and maybe

Underweighting some others? Yeah, you're right. It's not equal weight. And so we use all else equal, that reward to risk ratio that I mentioned. We use that in order to size positions. So very simply, the greater the asymmetry versus downside, the larger the position size to imagine a 3% purchase. So the way to think about this is that, over time, as a stock goes up and the reward to risk ratio falls, we'll use that to cut back positions. And then we overlay, I said all else equal, but we overlay on top of that, we have a proprietary risk management model that we employ to help guide us in putting those different positions together. And we say an analyst's job is to paint perfect stroke

So when, does MGMT have a, I know it's an active ETF, but does it have a set rebalance schedule when you're kind of rerunning screens and reposition sizing, or are you guys doing everything on the fly over there and things could change day to day? Yeah. There is no set rebalance schedule. The

Rebalancing occurs purely when we're either buying or selling positions on a position by position basis.

So when you guys are out there talking to RIAs or advisors or institutions, and they have kind of a model portfolio framework already existing in the firm, where are you positioning MGMT as a, as a holding to kind of encompass or fit in that over, uh, overall model portfolio?

Sure. So it's really two things, either a, as, um, a replacement to, uh, passive ETFs. Uh, um, and a lot of, uh, many of the, uh, the ETFs out there, uh, within that are competitors for us are either or quantitative or just pure, pure passive. And, uh, we are, are very fundamental and I think, uh, certainly in times like this, where, uh, there's a lot of, uh, uncertainty that, uh, that's where real value comes into play. Uh, and, and, the other is just, uh, purely in, in allocations. Uh, we've seen over the last 10 years, large cap growth, it's, uh, obviously dramatically outperformed, uh, small cap value. And our perspective is that the, uh, the next 10 years is unlikely to look like the last 10 and, uh, that, that one should, uh,

Having experience in both the SMA world and the ETF world now, can you talk about just how you see the sales process differently for maybe going out and trying to, uh, have an advisor utilize your SMA versus, having a publicly traded process or a publicly traded product, um, and getting kind of ETF allocations is, is the sale process, the sales process the same? Is it different? can you talk about distribution a little bit?

Sure. It's, uh, I would say it's very different, uh, within the SMA world, particularly on the institutional side that we had historically focused on, that is very consultant. So, the process is to, uh, get approved by the, the major consultants, uh, the Cowans and Russells and any of these of the world. And, uh, that's a process in and of itself, uh, that can take, uh, years, many instances, but, uh, once you're approved there, then, then you're able to get included in searches. Anytime there's a movement, a public plan or corporate plan needs to replace or a manager, you're able to be included in those searches. That's very different. What we've learned within, um, the ETF space

It seems like running an ETF these days, you've, you've got to be front and center almost every day, um, and, and getting that brand recognition, but, Reagan, I really, really appreciate your time. Um, very, very interesting product that I think is well thought out. I think deserves a spot, um, in that model portfolio process, as you said, just especially with kind of the environment we may be entering in here over the next, uh, next few years and next decade. But before I let you go, where can people learn more about ballast? Where can they learn more about the ETF and get all

The information on your firm? Sure. So you can learn more about the ETF at MGMTETF.com. And you can learn more about the ETF at B-A-L-L-A-S-T-A-M.com. And we put, uh, all of the, uh, material that we write and, uh, articles on, uh, both the firm and the fund are on either of those two, uh, websites. So I would, uh, would encourage you to go there first. Um, very much appreciate you having us, uh, on the call. And I will tell you where I've always told people when they ask me to sum up in a single sentence, I would tell you that we're the firm that looks both ways when we cross a one way street.

That's perfect. Well, Reagan, again, thank you so much for your time. I appreciate all the information and hope to have the opportunity to meet you in the future and learn more about you and the firm. Absolutely. Thank you, Brad. Thank you.