An interview with The Wall Street Transcript: Choosing Quality Small- and Mid-Caps for a Smoother Ride, Better Performance
JEFF KAUTZ is Co-Founder, Chief Executive Officer and Portfolio Manager of Ballast Equity Management LLC. Prior to founding Ballast, he was with Perkins Investment Management from 1997 to 2015, where he held roles including CEO, Chief Investment Officer and Portfolio Manager. Mr. Kautz also served as co-manager of the Janus Henderson Mid Cap Value Fund and the Janus Henderson Value Plus Income Fund. Assets under management during his leadership at Perkins rose from $30 million to over $20 billion. Mr. Kautz began his career as a Market Maker and Specialist for GVR & Co. on the Midwest Stock Exchange. He earned a B.S. in mechanical engineering from the University of Illinois and an MBA with a concentration in finance from the University of Chicago. He is a Chartered Financial Analyst (CFA) charterholder.
RANDY HUGHES is Co-Founder, Chief Investment Officer and Portfolio Manager of Ballast Equity Management LLC. Prior to founding Ballast, Mr. Hughes was with Perkins Investment Management from 1995 to 2015, where he held roles including Director of Research and Analytics and Equity Analyst. Assets under management during his leadership at Perkins rose from $30 million to over $20 billion. Mr. Hughes began his career as a Registered Representative with First Investors Corporation. He earned a B.S. in finance from Southern Illinois University and an MBA from Governors State University.
SECTOR — GENERAL INVESTING
WST: Would you start by telling us about Ballast Equity, which you founded five years ago — a bit about its history and what the business looks like today?
Mr. Kautz: It’s hard to believe that Randy and I have been working together for over 20 years now. We had a great run at our prior firm, Perkins Investment Management, where Randy started in 1995 and I started in 1997. We had one product with $30 million in AUM when we started, and we ended up growing that to eight products with over $22 billion in AUM at the peak — so a pretty good run.
And I’d say we’ve worked in small entrepreneurial firms and large publicly traded firms, and I think we both prefer small entrepreneurial. So, when we were talking about launching Ballast, Randy and I really wanted to replicate what we had in those early years at Perkins, where it was 100% employee owned, a flat organization, ego-free culture, where you’re very close to the investors and really, it’s just a focus on investing.
In terms of where we stand today, we have three products with $50 million in assets under management; about $18 million of that are in our three main strategies — Small, Mid and Select — with the balance being friends and family money in balanced accounts.
TWST: Tell us more about your particular investment philosophy. Why the focus on small- and mid-cap value equities?
Mr. Hughes: Looking at it at a high level, we are focused on building portfolios consisting of high-quality small- and mid-cap stocks exhibiting strong balance sheets, stable and growing free cash flows, and high returns on invested capital that can be sustained through durable competitive advantages. We chose to focus on small- and mid-cap value because it’s what we know best, and we believe it’s where we can actually add value.
Even with the popularity of passive strategies and ETFs, we still can find inefficiencies in small- and mid-cap companies. These inefficiencies are much harder to find in the larger-cap names. We have a chart that we have been using for almost 20 years that shows the growth of $10,000, and small- and mid-cap stocks have consistently outperformed large-cap stocks over the long term. So the bottom line is we believe that small- and mid-caps offer the greatest opportunity to generate alpha for investors over the long term.
TWST: What would you add in terms of how that strategy tends to fare in different markets, and particularly where we are right now in the current market cycle?
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