Ryan Thomes

Ryan Thomes started in investment consulting at Slokum and Associates (now part of Mercer Consulting), where one of his primary responsibilities was conducting due diligence on equity asset managers. Hotchkis & Wiley was one of the firms he researched, and he was impressed by the people, culture, process, and leadership. He ended up advocating that his consulting clients use them. When Hotchkis & Wiley came looking to add someone to their team, Thomes joined in 2008. He became co-portfolio manager on their small cap diversified value strategy alongside Jud Peters, who had been the sole PM for a decade. The two have been running it together for over 10 years, and more recently started two additional strategies: an international small cap and the SMID diversified value strategy that just launched as HWSM.

On this episode of Behind the Ticker, Ryan walks Brad through HWSM, the Hotchkis & Wiley SMID Cap Diversified Value ETF. It combines quantitative screening with deep fundamental research from one of the most research-dense firms in the industry.

A Research-First Culture, 45 Years Deep

Hotchkis & Wiley was founded in 1980 by John Hotchkis and George Wiley, both of whom retired in the mid-1990s and have since passed away. The firm manages between $30 and $35 billion across value equity strategies and a high-yield credit business. It's majority employee-owned and classified as a research firm for good reason. Add up the research team, research associates, and trading team, and that's more than half the firm's headcount. "I've been here 17 years and I'm pretty confident I've never been the smartest person in the room," Thomes said. "I've been in a lot of meetings."

How the Quant-Plus-Human Process Works

HWSM starts with a quantitative model that screens the SMID universe for value characteristics. But what sets it apart is the human overlay. Analysts provide financial adjustments to the model outputs: tweaking assumptions, flagging things the model misses, incorporating qualitative factors that don't show up in the data. They also assign fundamental risk ratings on a 1-to-5 scale across three pillars: quality of the business, strength of the balance sheet, and quality of corporate governance.

The better these scores, the higher the valuation the team is willing to pay. Worse scores require a steeper discount to be investable. If the fundamental risk ratings are flat-out bad, they won't own the stock at any price. Brad asked how much weight the human judgment carries versus the model output. Thomes framed it clearly: "It's really the human adjustments that we're after. The models are almost a research prioritization tool for our analyst team." The models tell them where to look efficiently across a diversified portfolio. The analysts tell them what to think.

Fishing in Less Efficient Waters

The SMID space is where Thomes sees the richest opportunities for active management. Less Wall Street coverage, less buy-side attention, more stocks that are overlooked. But within that universe, there are plenty of names you don't want to own: negative earners, subpar businesses, excess financial leverage, management teams that aren't shareholder-friendly. "Active management is of course about what you own, but it's also about what you don't own," he said, "because we are compared to passive indexes."

This is the core argument for active SMID value: passive indexes in this space include everything, including the junk. An active manager with the right process can systematically avoid the worst names while concentrating on the best opportunities that the market has overlooked. The fundamental risk rating system is explicitly designed to keep the portfolio out of value traps where cheap stocks are cheap for good reason.

Positioning and Distribution

For an advisor building a diversified portfolio, Thomes positions HWSM as a core long-term holding. For investors looking to simplify their lineup and not have separate small and mid allocations, HWSM combines both. It pairs naturally with a mid-cap growth manager for balance. The track record from the small cap diversified value strategy provides 20 years of evidence for the process, even though HWSM itself is newer.

When Brad asked about the ETF launch and distribution, Thomes was honest: "Our marketing folks could answer this better than I could." The firm's focus is on large RIAs, bank trusts, broker-dealers, and individual DIY investors. It's early days, literally months old, and too soon to have clarity on where the interest will settle. But the 17-year depth of the team and the 45-year history of the firm provide a foundation that most new ETF launches don't have. Ryan's personal time is split between golf, the outdoors, and being a competitive dance dad for his 10-year-old daughter.

Key Takeaways

• HWSM combines quantitative screening with fundamental analyst overlays, including proprietary risk ratings across business quality, balance sheet strength, and corporate governance on a 1-to-5 scale.
• Hotchkis & Wiley has managed value equity strategies for 45 years with over $30 billion in AUM. More than half the firm's headcount is dedicated to research.
• The process prioritizes out-of-favor, under-followed SMID stocks where less Wall Street coverage creates pricing inefficiency. Active management avoids the junk that passive indexes must include.
• Fundamental risk scores directly impact position sizing: better scores allow higher valuations, poor scores require steep discounts or exclusion entirely.
• Ryan Thomes joined the firm after researching it as an investment consultant and advocating his clients use it. He's been co-PM on the small cap value strategy for over a decade alongside Jud Peters.

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