Texas-based fundamental equity manager Ballast Asset Management has debuted its first ETF with the launch of an actively managed strategy targeting small- and mid-capitalization stocks listed in the US.
Ragen Stienke, Founder and Portfolio Manager of Ballast Asset Management.
The Ballast Small/Midcap ETF (MGMT US) has listed on NYSE Arca and comes with an expense ratio of 1.10%.
The strategy is based on the premise that small and mid-cap companies typically exhibit higher growth potential and greater price inefficiencies compared to their large-cap peers, characteristics that Ballast believes make the segment ideal for active management.
By the same token, Ballast argues that conventional passive ETFs tracking regular small and mid-cap indices may unwittingly invest in substandard and potentially distressed companies owing to their indiscriminate investment methodologies.
MGMT seeks to avoid such pitfalls by specifically seeking to identify and invest only in higher-quality companies based on balance sheet, cash flow, and return on capital metrics.
In addition to this, the strategy aims to focus on firms with strong management teams by scrutinizing compensation structures, assessing the alignment between management and shareholders, and evaluating responsible capital deployment.
Ragen Stienke, Founder and Portfolio Manager of Ballast Asset Management, commented, “Investing in great management teams has been a hallmark of our approach for years. Our team dedicates significant time toward building relationships with management teams who have demonstrated an ability to act in the best interest of shareholders.
“In today’s economic environment, we are particularly interested in executives who can understand and effectively respond to macroeconomic and industry shocks. First and foremost, we strive to minimize losses and downside volatility. Further, we seek to invest in such a way that our investors benefit when a company successfully pivots in the face of change.”
While the ETF is focused on the small and mid-cap segment, the portfolio is not constrained by market capitalization limits. This allows the fund to retain positions in fast-growing securities that have appreciated into large-cap territory in the time that the fund has held the stock.
“When our work indicates a company is poised for success, we want our investors to benefit as long as the reward to risk balance remains in their favour,” added Stienke. “We don’t want to be forced to sell simply because of a market capitalization limit. Other small-cap strategies are often required to sell their best performers before intrinsic value is fully realized.”
The fund will typically consist of around 50 holdings with individual weights ranging from 1% to about 3%.
Major positions presently include UFP Technologies (3.06%), Northern Technologies International Corporation (3.04%), STAG Industrial (2.87%), Coherent (2.72%), Teradata (2.55%), F5 Networks (2.44%), GrafTech International (2.37%), Wayside Technology (2.31%), Avid Technology (2.27%), and CIT Group (2.17%).
The fund is benchmarked for performance measurement purposes against the Russell 2500 Value Index.