Kirk McDonald

Okay. I'm really incredibly fortunate in that the only two things I wanted to do professionally were fly airplanes in the Air Force and be a portfolio manager. And I've been able to do both of those things. So I went to the Air Force Academy for undergrad and spent a decade as a pilot in the Air Force. And then I'm incredibly fortunate. I got into this industry and now I'm a portfolio manager here at Argent Capital Management.

So what planes did you fly? Because, I've always had an infatuation with the Air Force. I think it's really, really cool. So what were you flying around in?

So I actually, I wanted to be a fighter pilot, but that ended up not being a choice. There was no fighter assignments from my UPT class, my pilot training class. So I went and flew the C-5 Galaxy, which is the exact opposite. It was the biggest plane in the Air Force, huge transport plane that just dwarfs the 747. And, I loved it. I had the time of my life traveling around the world, really working on all different types of missions for the country and loved it.

Very cool. I don't know if you could tell, I've got my Top Gun Maverick hat here, helmet behind me. Oh, yeah. I hadn't noticed that, but that's cool. Yeah. It was my wedding gift from all the guys, my best men in the wedding. They bought me a full replica helmet and I've carried it along with me for the last, I don't know, we'll guess going on 11 years on Friday.

So. Yeah, that's cool.

So I guess to, any hobbies, apparently you love to fly. You and I were actually talking about how miserable our flight experiences have been trying to fly commercial, but any other hobbies while you're not working?

Yeah. So obviously my big one is flying. I'd love to fly in my spare time. And my wife and I and my kids, sometimes they're both in college now, but we take trips so we can avoid the airlines. That's a nice perk. It's a very nice perk. And sometimes after work, I just go up and fly for no reason and just fly around Missouri. I live in St. Louis and do touch and goes at different little airports. So that's my main one. But I work out, six days a week and just push my body to the limit. And my job, it's an all intellectual job. So I love the physicality of sports. And my wife and I play a ton of golf too.

Love it. You and I share a lot of the same hobbies. Although I was forbidden after having children to go and get my pilot's license, but maybe when they're older and in college, maybe I can go get it.

That's the time. I didn't, admittedly, when my kids were young, I couldn't go fly. There's just no way.

So why don't you kind of give us a quick overview of Argent Capital and maybe how are you helping clients? What are all the things you guys do? And maybe talk about, the overarching kind of investment mantra that kind of lives through the firm.

Yeah. So Argent Capital is 27 years old now. We were started in 1998. And we were started by a person that was a financial advisor. And one thing in his practice, he gave great client service. That was a hugely important thing for him. But with the investment managers that he was using, you might get pretty good investment performance, but you did not get good client service. So he really wanted to create an investment manager that not only gave great investment performance, but also great client service. So that's how Argent Capital was formed. And our investment philosophy is based on what we call identifying enduring businesses. So we have five strategies at Argent ranging from large cap to small cap.

Yeah. So when I was doing a little bit of my due diligence, I kept seeing this compounding cash flow growth. So what does that really mean in practice as you guys are trying to select stocks? Yeah.

So what that means is typically the companies we invest in have been in business for multiple decades. So we're able to look back over time through different types of economic cycles, different types of technology cycles and technology development eras, and watch that management team continually find ways to create products and services that are in demand and then reinvest back into the business and maintain some sort of a competitive advantage. So while they're reinvesting or in the business, they're also able to maintain really above average return on assets. So that's generally what it means.

So, what has really inspired you guys as a firm to kind of jump into what we kind of call the ETF Thunderdome, right? It's a very crowded space. There's a lot of products out there and it's growing every day. So you've been around for a long time. What was kind of the precipice of saying, okay, let's put our foot into the ETF game?

Yeah. So when we started out for 24 years, we were focused on separately managed accounts. Um, and then we, we needed another vehicle to give more people access really to the, our investment management services. And when you're doing separately managed accounts, you need, a hundred thousand dollars to $250,000 at a time. But if we created either a mutual fund or an ETF, people could just do it, for a few dollars at a time. And ETFs, when we, when you look at it, they are tremendously advantaged over mutual funds in terms of there's no capital gains. Whenever I trade a stock within the portfolio. That doesn't happen in an ETF. So you can postpone any capital gains until you finally sell the ETF years down the road.

Yeah, no, I love it. It also adds a ton of efficiency for an advisor who, wants to use multiple SMAs, um, kind of in a single registration. So that's why we're seeing a lot of people kind of move to the ETF space, but we're here to talk about one of your products specifically, which is the Argent Midcap ETF, ticker AMID. So kind of at a really high level, how would you describe this fund? And really what is the unique edge you guys are bringing to the Midcap space?

Okay. So the AMID, AMID, um, the Argent Midcap ETF. So I would describe this fund as a really a concentrated low turnover fund. So there's 40 to 50 securities in there right now. There's 43. Um, and the turnover over long spans of time is about 20% a year. So we're looking for these enduring businesses and we want to own them as long as we possibly can and really take advantage of that compounding cash flows over time. And I think our edge over, uh, other Midcap portfolio managers out there is this combination of quantitative and qualitative or fundamental investing that we do. And I can, I'm happy to get into that if, uh, if you want me to.

Kirk, you walked me right into my next question, perfect, which was going to be, how would you, um, really describe this, this unique process between fundamental and quantitative research and how those two approaches kind of integrated together, give you that edge

You're looking for. Yeah. So a little bit more about my background. Uh, I, when I first got into investing, I got into it on the quantitative side of things. So I was a quantitative research analyst and then a quantitative portfolio manager as building models of factors. Um, and for people that are familiar, a factor is essentially a balance, a, a, uh, financial ratio, like from the income statement or balance sheet, the simplest one would be like price to earnings ratio. Um, but it's a, it's a financial ratio that correlates with stocks that outperform the market over time. So I was building these models and managing purely quantitative portfolios. And when I came over to Argent 14 years ago, they hired me to build them a stock selection

Yeah, I think, when I talked to, I've talked to a handful, number of managers, probably hundreds of managers now, and I love that kind of like quantumental approach where you can look at the numbers and then really figure out the business use case. And I think it makes for, a very unique investment offering. And one of the things you guys do, as you said earlier, is it's a pretty highly concentrated portfolio, right? You're holding 40 to 50 stocks. And so what kind of drives that high conviction? I'm sure it has a lot to do with that quantitative and fundamental approach. But why really choose that concentrated portfolio type? that's, is that where your alpha is really coming from? Is that stock selection and trying to stay concentrated rather than maybe just kind of

Yeah. So over time, our alpha is generated by, 80 to 90% stock selection. So that's part of the reason to be concentrated. The other reason is it's really hard to find these truly enduring businesses. So let's, I'd be hard pressed to find, 150 mid caps that would fit that definition at any given time. So that's part of the reason is to stay concentrated is it forces us to be very, very proactive, very, very diligent to make sure we truly understand these businesses and have done a deep dive and watch them for a while before we buy them. So that concentrated approach, it fits in really nicely with just the difficulty of finding these companies.

And you mentioned as well, you got about a 20% turnover. How often are you kind of rerunning your screens and, deciding whether you want to add or remove anything from the portfolio? Yeah.

So we rerun the screens actually every single month and update them. Um, and so there's slight changes. We weight these factors I talked about dynamically. So there are weights and importance in the model. It changes just a tiny bit each month. So we rerun those each month, but the, the model is built to really align with our investment philosophy of low turnover, owning these companies for a long time. So the model scores don't change that rapidly either. Um, and I found the more that I enhanced the model to find these types of enduring businesses we're looking for really even the lower turnover that that model gets. So for us, we're, uh, we're always considering trades. I have a really always a list of names that, um, through our risk management process have

No, I love, I love the analogy and let's talk about a couple of the holdings, um, in the portfolio. I was just kind of looking, uh, just specifically, what do you kind of like about a couple of these names? So I've, I've picked, really two here. There's Copart and then there, which I've never heard of. And then, uh, you might have to help me with this. Is it Fortinet? Fortinet? Yeah. Fortinet.

Yeah. You got it. And so those are two long-term holdings, uh, and very different types of businesses. So Copart, uh, their, um, whole auto auction, uh, like salvage company. So, uh, they were started in, um, in Sacramento, California. And, uh, initially, auto auctions when the cars get totaled, they would just tow it to a field and then people would auction that off in the field. And it didn't matter. The weather could be incredibly hot, could be raining on you, could be snowing on you. Um, and the person that, uh, that owned Copart had this great idea of, well, it's actually son-in-law who was working with them had this great idea in 1998 when this, this thing called the internet was invented and came out and started to get bigger.

Yeah, no simple business. I love the story. Um, and so your benchmark here is the Russell Midcap index. Um, so kind of over, over a full market cycle, you're really trying to find some outperformance there. So are there certain types of environments that are probably more favorable for you? Or is it just, um, the luck of the, no, I shouldn't say the luck, the skill of the stock pick. Yeah. I never, I don't, I never say luck. Yeah. I took that back. I can delete that from the episode, but the, the skill of the stock picking, um, is that, uh, is that really where you're, where you're, the, the secret sauce is, or are there certain, like I said, cycles that might make a little bit more sense to own, aim it?

Yeah. So for us, the, the time that's least advantageous for us are most difficult for us to outperform what will typically underperform for two or three months. Is that a change in a cycle? So it could be a change from a bull market to a bear market or a bear market to a bull market. That's typically where we underperform for two or three months, uh, pretty strongly while that change is happening. Um, we don't necessarily turn, turn over our portfolio or change it at that point in time, but that's the, that's the signal when we'll underperform for a few months. But then once the cycle reasserts itself, whichever direction, uh, we tend to outperform for, the next several months until the next change happens.

So having kind of relatively number of small holdings, can you talk a little bit about the risk management process? Is that almost inherently embedded in the monthly kind of reallocation of capital a little bit, or how do you view risk management? Yeah.

So that actually goes back to my air force days where risk management was invented for aviation. And so we started the risk management process when we were planning a mission. So it, so we do the exact same thing with the Argent mid cap strategy, uh, risk management is built in throughout. Now, so when we're considering even adding a name to a portfolio throughout the research process, we're always thinking, uh, what are its exposures to different risk, uh, characteristics. And we have two different risk models. We use an in-house risk model that we call the Argent risk model, uh, that I built as, as well as the Bloomberg risk model. We're going to make sure when we fit that, that stock into the portfolio, does it keep

So when, uh, your sales team or you guys, you were talking to, an advisor or an RAA, they've got an existing kind of diversified model portfolio already put together. Where are you positioning a med, uh, for a seat in that portfolio? How are you kind of talking to them about it and how it fits and why they need to be adding it?

Well, generally I'd like to describe the mid cap stock is, uh, really like the forgotten asset class. So it's sort of like the middle has a negative connotations. Like nobody wants to get stuck in the middle of nowhere. your career gets stuck in middle management and you can't get, get to upper management. Um, so oftentimes, and if you look at the data, mid cap stocks are about 25% of the U S market cap, but they're only 11% weighted to people's expo, uh, portfolios. So that's really how we persist position it. And then mid cap stocks, this group of stocks from roughly, uh, 4 billion to, $60 billion now they've gotten pretty big is over the long run, the best performing group of

Well, I would almost argue now, uh, or in this type of environment, we've been so focused on large cap. Everybody's been chasing large cap, specifically market cap weighted large cap. It almost like mid cap and small caps have kind of been forgotten and left behind.

That that's exactly right. Everybody just is talking about the mag seven and all that. And right now people talk about it more with small caps, but it's the same with mid caps come on a relative valuation basis. Small caps and mid caps are the cheapest they've ever been compared to large cap stocks. And eventually, the cycles do turn and those valuations mean revert. You just don't know when that's going to start.

Yeah. That's, that's the tricky part, right? It's knowing when it's going to start. I've been hoping equal weight factors would be coming back, uh, for us, uh, over the last handful of years and it continues, uh, the large cap, uh, mag sevens continue to dominate. So you have a couple other ETFs as well. So what areas are they focused on? What are the tickers there? And, and really, I would assume they all kind of work together in some way, shape or form.

Yeah, they do. So we just opened two new ETFs. In addition to a mid, we have a big, a big, which invest in large cap stocks. It's our large cap core strategy and a lil, a L I L, which is our small cap strategy. So they're just exact clones of our SM separately managed accounts that with fairly long track records in those two asset classes. Um, and we're positioned there. Essentially we have two more, um, um, investment strategies here at Argent, um, a high yielding, um, portfolio as well as a, uh, a SMID cap. And we'll eventually have ETFs for them as well. So people have the opportunity to invest in our full suite of investment services.

Yeah, no, that's exciting. So before I can let you go and Kirk, I really appreciate the time and you sitting down and talking to me about a mid, but where can people learn more about Argent? Where can people learn more about your ETFs? Okay.

So Argent, uh, we're at Argent capital.com that's A R G E N T capital.com as well as Argent ETFs.com. And that's ETFs.com. And that's specifically focused on our ETFs.

Well, again, Kirk, thank you so much for being here with me. Oh, I really appreciate the opportunity. Brad. Nice meeting you.