Our latest thinking.
Like pilots before takeoff, we use checklists throughout our investment process in an attempt to prevent easy mistakes. At root, management quality is a question of business judgement. Our detailed checklist structures consistent, contextual, comprehensive evaluation of each management team. Before investing, our investment team uses a checklist to answer three basic questions to evaluate management’s fit with the business and with our investment strategy. The detailed checklist also guides on-going “trust but verify” monitoring, which we believe is an important step in manufacturing consistent long-term returns with limited fundamental downside. When surprises strike, the right management is a crucial in an attempt to mitigate downside risk and, ideally, able to exploit disruption to accelerate long-term value.
Is management aligned with shareholders?
Tell us how someone gets paid, and we can tell you what they are likely to do. For example, if incentive compensation metrics are tied to revenue growth, you can bet that management will do everything possible to grow revenue, even if the profits are lousy and it destroys capital in the process. Great incentive plans reward balanced growth, profitability and capital efficiency. A significant equity component aligns short and long term interests.
Is management straightforward and reliable?
The “Say/Do” Ratio—actions speak louder than words. We expect management to have realistic plans to increase business value, tied to drivers they can influence, with observable milestones for accountability. We make sure management does what it says it will by crosschecking with external evidence and rigorous financial statement analysis.
Is management the right fit for the job?
A hammer is not the right tool for every job. We want the right people, in the right place, at the right time. A CEO with a great turnaround track record may not be the right fit for an emerging growth company, and vice versa. A CFO with a great consumer staples background, accustomed to juicing ROE with debt, could be a disaster at a cyclical company late in an expansion.
Extra points: does management have an ownership mentality?
Ownership mentality goes beyond professional commitment with “skin in the game” to an intrinsic drive to create a better way of doing things. It is uncommon (and sometimes difficult to distinguish from madness), but when the concept is hard-to-copy and offers a superior customer value proposition at prices competitors cannot match, it can drive tremendous long-term value creation.
Why MGMT Matters
We believe great management makes for great returns. The MGMT ETF looks to leverage great management teams working for shareholders.
Why we believe management matters.
Just like the performance of athletes and pilots can be evaluated, we have analyzed the performance of companies with what we believe to be exceptional management. Factors such as high percentage of insider ownership are key indicators we look for and we believe this leads to better stock returns over the long-term.
Why we believe good management matters.
If you buy Index funds or Passive ETFs, we believe it is possible you may be exposed to companies with both good and bad management. In our opinion, your returns may reflect some average of the good and the bad. We strive to own companies that are expected to outperform their peers because of the management teams who we believe are great operators and allocators of capital.
Why we believe good management helps to reduce risk.
The great philosopher Mike Tyson once said, “everybody has a plan until they get punched in the mouth”. In our opinion, the ability to operate a company well in the good times, while also surviving and thriving in the bad, is essential when evaluating management. Stuff happens in life, and often when you least expect it.
Do you own companies with great management?
In our opinion, some companies have great management, while others do not. We put forth time, analysis, effort, and judgement to determine what a great management team is and whether each company held in MGMT has it.
We believe ACTIVE management matters. The MGMT ETF actively invests in a select group of stocks we seek to find and believe collectively, may provide a higher return potential compared to investing in a passive index
Why consider Active Management
If you put one hand in a bucket of ice, and the other in a boiling pot of water, on average you might feel fine. We believe this is the approach that a Passive or index strategy employs. While Passive ETF’s are a cost effective approach, we believe that over the long-term, an active approach that is designed to identify higher quality companies and managed by astute management teams, will potentially lead to generating a higher return while mitigating risk.
Consider Active Management
Our active strategy is highly selective seeking to capitalize on small and medium sized companies. There are companies too numerous to count making critical products you might not know even exist. Did you know commercial airplanes have printers in the cockpit? Or why?
Can Active management help to manage my investment?
We believe it does. The process for selecting stocks for MGMT includes actively seeking to reduce the risk of losses for each stock. In fact, taking aim at reducing risk in MGMT is critical in every step of our investment process.
Important Risk Information
The Fund is a new ETF and has a limited history of operations for investors to evaluate. The Portfolio Manager has prior experience managing a mutual fund. However, the Adviser has not previously managed a mutual fund or an ETF. As a result, investors do not have a long-term track record of managing an ETF from which to judge the Adviser and the Adviser may not achieve the intended result in managing the Fund. Market risk includes the possibility that the Fund’s investments will decline in value because of a downturn in the stock market, reducing the value of individual companies’ stocks regardless of the success or failure of an individual company’s operations. Securities of companies with small and medium market capitalizations are often more volatile and less liquid than investments in larger companies. Small and mid-cap companies may face a greater risk of business failure, which could increase the volatility of the Fund’s portfolio. The Fund is actively-managed and is thus subject to management risk. The Adviser will apply its investment techniques and strategies in making investment decisions for the Fund, but there is no guarantee that its techniques will produce the intended results. The Fund faces numerous market trading risks, including the potential lack of an active market for Fund shares, losses from trading in secondary markets, and periods of high volatility and disruption in the creation/redemption process of the Fund. The net asset value of the Fund will fluctuate based on changes in the value of the U.S. equity securities held by the Fund.
Investors should carefully consider the investment objectives, risks, charges, and expenses of the Ballast Small/Mid Cap ETF. This and other important information about the ETF is contained in the Prospectus, which can be obtained at www.mgmtetf.com or by calling (866) 383-6468. The Prospectus should be read carefully before investing. The Ballast Small/Mid Cap ETF is distributed by Northern Lights Distributors, LLC, member FINRA/SIPC. Northern Lights Distributors, LLC and Ballast Management are not affiliated.
The Russell 2500 Value Index measures the performance of those Russell 2500 companies with lower price-to-book ratios and lower forecasted growth values. Returns shown include the reinvestment of dividends and are based on data obtained from FTSE Russell.