Kirk McDonald

Kirk McDonald only ever wanted to do two things professionally: fly airplanes in the Air Force and be a portfolio manager. He's done both. McDonald went to the Air Force Academy for undergrad, spent a decade as a pilot flying the C-5 Galaxy (the biggest plane in the Air Force, "the exact opposite" of the fighter he originally wanted, since there were no fighter assignments from his pilot training class), and then transitioned into investment management at Argent Capital, where he's now a portfolio manager running their mid-cap strategy. He still flies in his spare time out of St. Louis, doing touch-and-goes at small airports around Missouri.

On this episode of Behind the Ticker, Kirk joins Brad to talk about AMID, the Argent Capital Mid-Cap ETF. It's a concentrated portfolio of 40 to 50 mid-cap stocks selected through a blend of quantitative screening and fundamental analysis, with about 20% annual turnover.

Finding "Enduring Businesses"

Argent Capital is 27 years old, founded in 1998 by a former financial advisor who wanted to build an investment manager that delivered both great performance and great client service. The firm's investment philosophy centers on identifying what they call "enduring businesses" across five strategies ranging from large cap to small cap. Every portfolio manager and every research analyst is looking for the same thing: a company growing cash flows, with a durable competitive advantage, managed by a team that's a good allocator of capital.

These companies have typically been in business for multiple decades, allowing the team to observe how management has managed different economic cycles and technology shifts. The test is whether management can continually find ways to create in-demand products and services, reinvest in the business, and maintain above-average return on assets. When they run out of good internal investment projects, they return excess capital through dividends and buybacks.

The Quantitative Screen and the Farm Analogy

The mid-cap fund starts with a quantitative model that screens for these enduring business characteristics. Kirk weights the factors dynamically, making slight adjustments monthly. He discovered something interesting about the model: the more he refined it to identify truly enduring businesses, the lower the turnover got. "I found the more I enhanced the model to find these types of enduring businesses we're looking for, really even the lower turnover that model gets."

Kirk described his portfolio management process with a farm analogy. Imagine a bunch of pigs at a trough, all eating and growing as fast as they can. Behind them, there's a group of younger, hungrier hogs pushing and shoving to get their turn. Every now and then, one of the established pigs gets comfortable and stops fighting for its spot. A younger, hungrier hog pushes it out. That's how names rotate in and out of the portfolio: when a holding shows up on the risk management process as losing its competitive edge, it gets replaced by a name from the watch list where the homework is already done. The firm was doing separately managed accounts for 24 years before launching ETFs to democratize access, since SMAs typically require $100,000 to $250,000 minimums.

The Case for Forgotten Mid Caps

Kirk made a compelling case for the mid-cap space that goes beyond his own fund. Mid-cap stocks represent about 25% of U.S. market cap but only 11% of investors' actual portfolio exposure. Over the long run, mid caps have been the best-performing group within domestic equities. But right now, everybody's talking about the Mag Seven and large-cap concentration. "On a relative valuation basis, small caps and mid caps are the cheapest they've ever been compared to large cap stocks," Kirk said. "Eventually the cycles do turn and those valuations mean revert. You just don't know when that's going to start."

Brad admitted he's been waiting for the equal-weight factor to come back for years. Kirk acknowledged the frustration but held firm on the thesis. The portfolio includes names like Copart and other mid-cap companies that most investors haven't heard of, which is exactly the point. These are solid businesses that don't get the attention of the large-cap names but have the fundamentals to deliver. Argent has also launched two additional ETFs: ABIG for large cap core and ALLL for small cap, with plans for more as they bring their full range of strategies into the ETF wrapper.

Key Takeaways

• AMID holds 40-50 concentrated mid-cap positions selected through a quantitative model with dynamic factor weighting, rerun monthly, with about 20% annual turnover.
• Mid caps represent 25% of U.S. market cap but only 11% of portfolio exposure. On a relative valuation basis, they're the cheapest they've ever been versus large caps.
• Kirk McDonald spent a decade as an Air Force pilot flying C-5 Galaxies before transitioning to portfolio management. He works out six days a week and still flies recreationally.
• Argent Capital is 27 years old with five strategies. They've launched three ETFs (AMID, ABIG, ALLL) with more planned, after 24 years as an SMA-only firm.
• The firm's risk management process continuously identifies holdings losing competitive edge, with a ready watch list of researched replacement candidates. The more the model focuses on enduring businesses, the lower the turnover.

Listen to the full conversation on Spotify, Apple Podcasts, or YouTube.