Ragen Stienke

Ragen Stienke is the founder of Ballast Asset Management, and his investing career spans over two decades in institutional money management. He started at Arthur Andersen's valuation group in the mid-1990s, where he met one of his current business partners. He then moved to UBS in New York as a software analyst before shifting into strategy, where he met his other partner. In 2004, he was recruited to Westwood Holdings in Dallas, where he started and ran their mid-cap strategy, ultimately raising $3.5 billion in the primary fund plus another billion in a sister strategy. He left in 2015 to start Ballast, and three years ago launched what he believes is the first small-mid cap actively managed ETF, ticker MGMT.

On this episode, Ragen talks with Brad about Ballast's distinctive downside-first investment approach, their published management evaluation checklist, and why the coverage gap in small and mid-cap stocks creates the best environment for active management.

Buying Within 20-30% of the Worst Case

Ballast's investment process flips the typical pitch on its head. While most managers lead with the upside story, Ragen starts with the downside. The firm's goal is to buy stocks that are trading within 20 to 30 percent of the worst-case scenario they can envision, not just at a discount to some intrinsic value estimate. Once they've quantified the downside, they model the upside by forecasting the base business out three years and generating price targets. Then they marry those two pieces into what they call a "reward-to-risk ratio," requiring asymmetry of at least 3-to-1 before investing.

The downside analysis gets granular depending on the business. For a software company, they might model what happens if new product growth goes to zero and the company is just living on renewal revenue, or they'll note that comparable businesses historically get acquired for 3-5x recurring revenue. For banks, they stress test the loan book category by category against historical recession loss rates. They've even valued shipping companies by looking at what the fleet is worth in the secondary market during stressed periods. As Ragen puts it, "We are the firm that looks both ways when we cross the one-way street."

The Management Evaluation Checklist

Ballast publishes a management evaluation checklist on their website, organized around three pillars: alignment, track record, and fit. On alignment, they dig into how management gets paid (not how much), making sure the compensation metrics align with shareholder outcomes. Ragen gives a concrete example: a retailer whose CEO is compensated on revenue growth. The easiest way to grow retail revenue is to build more stores, but that may deliver terrible returns on incremental capital. If the comp plan rewards revenue but not capital efficiency, the incentives are misaligned.

On track record, they evaluate how well executives have performed in previous roles, not just in the current one. On fit, they assess whether the management team is right for the company's current lifecycle stage. An operationally focused CEO running an early-stage growth company, or a growth-obsessed CEO at a mature business needing cost discipline, would each be a mismatch. Importantly, a management change can move a company from their "no-fly list" to an active opportunity, because the wrong management team is often the biggest source of downside risk in their framework.

The Small-Mid Cap Coverage Gap

Ragen makes a compelling case for why active management adds the most value in the small and mid-cap space. Going back to the 1990s, stocks traded in fractions (16ths and 8ths) and commissions were 5-7 cents per share. Large brokerage firms used commission revenue from their trading desks to pay sell-side analysts. With commissions collapsing to half a penny or less over the past 20 years, the economics of covering smaller companies evaporated. Analyst coverage of small and mid-cap stocks has dropped dramatically, leaving a universe of companies with less institutional attention and more pricing inefficiency.

Position sizing in MGMT is driven by the reward-to-risk ratio: the greater the asymmetry between upside and downside, the larger the position, up to a 3% maximum. They overlay a proprietary risk management model that aggregates revenue and earnings data across all holdings, breaking it down by cyclicality and end-market exposure to maintain a complete picture of portfolio risk concentration. There's no mechanical rebalance schedule. Trading happens based on individual security analysis and when the reward-to-risk ratio shifts meaningfully.

Key Takeaways

• Ballast targets stocks trading within 20-30% of their worst-case scenario, requiring at least 3-to-1 reward-to-risk asymmetry before investing a single dollar.
• Their published management evaluation checklist focuses on how executives get paid (not how much), historical performance across prior roles, and fit for the company's current lifecycle.
• Sell-side analyst coverage of small and mid-cap stocks has dropped dramatically over 20 years as brokerage commissions collapsed from 5-7 cents to half a penny per share.
• Position sizing is driven by reward-to-risk asymmetry up to a 3% maximum, with a proprietary risk model aggregating cyclicality and end-market exposure across all holdings.
• Ragen raised $3.5 billion running the mid-cap strategy at Westwood before launching Ballast, bringing two decades of small-mid cap institutional experience to MGMT.

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