Visitor: Liz Simmie is the co-founder of Honeytree Funding Administration, an asset administration agency based mostly in Toronto, Canada.
Recorded: 12/13/2023 | Run-Time: 52:11 
Abstract: In in the present day’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising corporations which can be stakeholder ruled, function pushed, and make a web optimistic affect on the world. Then she shares some scorching takes on the state of each ESG and energetic administration. As we wind down, Liz talks concerning the technique of launching an ETF with our pals at Alpha Architect and shares recommendation for anybody enthusiastic about launching one themselves.
Feedback or strategies? Thinking about sponsoring an episode? E-mail us Suggestions@TheMebFaberShow.com
Hyperlinks from the Episode:
- 1:15 – Welcome Liz to the present
- 1:46 – Launching BEEZ
- 7:11 – Discovering accountable development and being ‘quantamental’
- 10:19 – Energetic administration and index hugging
- 15:14 – Primary components that filter out sectors and corporations
- 21:30 – Overview of stakeholder governance
- 25:16 – How energy balances inform Liz’s funding philosophy
- 34:56 – Place sizing
- 38:44 – What it’s like to start out an ETF
- 44:24 – Episode #318: Perth Tolle, Life + Liberty Indexes
- 46:23 – Beliefs Liz holds her that her friends would disagree with
- 49:11 – Liz’s most memorable funding
- Study extra about Liz: Honey Tree Make investments; X
Transcript:
Welcome Message:
Welcome to The Meb Faber Present, the place the main focus is on serving to you develop and protect your wealth. Be a part of us as we talk about the craft of investing and uncover new and worthwhile concepts, all that will help you develop wealthier and wiser. Higher investing begins right here.
Disclaimer:
Med Faber is the co-founder and Chief Funding Officer at Cambria Funding Administration. As a consequence of trade rules, he won’t talk about any of Cambria’s funds on this podcast. All opinions expressed by podcast contributors are solely their very own opinions and don’t replicate the opinion of Cambria Funding Administration or its associates. For extra data, go to cambriainvestments.com.
Meb:
Hey, hey everyone. A enjoyable present once more in the present day. Our visitor is Liz Simmie, co-founder of Honeytree Funding Administration, which just lately launched an actively managed ESG-focused ETF ticker BEEZ. In in the present day’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising corporations which can be stakeholder-governed, purpose-driven and make a web optimistic affect on the world. And she or he shares some scorching takes on the state of each ESG and energetic administration. As we wind down, Liz talks concerning the technique of launching an ETF with our pals at Alpha Architect, and shares recommendation for anybody enthusiastic about launching one themselves.
Please take pleasure in this episode with Liz Simmie.
Liz, welcome to the present.
Liz:
Thanks for having me.
Meb:
The place do we discover you in the present day?
Liz:
Toronto, the nice white north up right here.
Meb:
I heard an A in your diction earlier. Are you initially a Canadian?
Liz:
Yep, born and raised in Toronto my entire life. I’ve by no means gone wherever else. Really I went to Montreal for college after which got here again and can by no means depart this nice metropolis and nation.
Meb:
Superior. I adore it up there. We’re going to speak about lots in the present day. One of many subjects listeners, which you in all probability actually need to stick round for is this idea of beginning ETFs. I get a variety of questions. Day by day individuals need to begin an ETF, they bought an concept for an ETF. We’re going to speak about somebody who’s accomplished it very just lately, placing out their first fund in November with our loopy pal, Wes Grey and crew. So we’ll undoubtedly get into just a little little bit of that later. However I need to speak just a little bit about you, your concepts, your course of. Give us just a little background.
Liz:
I’ve an economics diploma, economics and historical past diploma, and I needed nothing to do with this nice trade of ours as a result of I needed to make the world a greater place and do cool stuff. So I ended up in market analysis, so client insights, so testing model technique for PNG and massive financial institution, new account, all these cool analysis initiatives, quantitative and qualitative.
After which my dad began an rising supervisor. So my dad’s a bootstrapped US fairness supervisor based mostly in Toronto, they usually had this third man who was American and he bought divorced. So while you get divorced and also you’re right here on a spousal visa, you get despatched again to the US, which it’s what it’s. So my dad wanted a 3rd particular person to come back in. I begrudgingly mentioned, “Positive, it feels like an attention-grabbing concept,” having actually no idea of the funding trade past just a little little bit of publicity right here and there.
And I used to be fortunate. I joined a bootstrapped dividend development fairness supervisor at about 10 million AUM and was there till about 1.5 billion AUM after which left to start out Honeytree. And to be tremendous clear, it’s ’trigger my dad was a founder. There’s a complete pile of privilege in there, but when I had gone the standard path to be a portfolio supervisor at a much bigger store or a pension or no matter, it’d be a really completely different expertise that wouldn’t essentially set you as much as going to bootstrap your personal rising supervisor.
The agency’s referred to as Bristol Gate for folk who need to google issues. We launched ETFs in 2018, and I had met my co-founder on the identical time, and we thought all these people are attempting to launch ESG methods they usually’re all lacking what we expect the tip shopper for these ESG merchandise need. And this, to be tremendous clear, is lengthy solely fairness universe, not alter hedge funds or something like that.
And so in 2018, we set out, which is similar 12 months we launched the ETFs up right here. 2018, we got down to discovered Honeytree. We had been registered in 2019. It takes lots longer up right here to get accepted by the regulators. We began our monitor information in 2019 for our world fairness technique. We did that in order that we didn’t have to launch a car off the bat as a result of automobiles value some huge cash they usually take a variety of effort to distribute. They take a variety of consciousness and all these things.
In any case, we had at all times meant to launch a retail car. We didn’t ever need a non-public fund. Lengthy-only boring methods undoubtedly don’t make sense in non-public funds in Canada or the US and we thought we’d have a Canadian car first. So we went round. There’s not as many white label choices up right here, and those that they’ve are, we’ll name it not pretty much as good, however we thought we’d launch a subadvised Canadian car up right here.
After which we met Wes. And Wes determined that we wanted to get ourselves right into a US ETF. After which we realized, wait a second, US, the US market’s greater, there’s simply as a lot if no more demand for ESG merchandise. One main distribution distinction between Canada and the US is in Canada, no one cares that we’re lady owned. We’re the fifth or sixth public markets asset supervisor owned by lady in Canada. That’s what number of there are up right here. So there’s no supervisor variety initiatives up right here institutionally or from advisors, whereas everyone is aware of within the US, plenty of states have various supervisor initiatives at their pensions and issues like that.
So we thought, if we’re going to do that car, let’s do it within the US, let’s do it as an ETF and let’s do it with Wes. And growth, November seventh, we launched our first ETF and the ticker is BEEZ, B-E-E-Z, ’trigger branding issues and it’s a US giant cap and it’s centered on accountable development.
So it’s the identical funding thesis we’ve been engaged on our whole agency historical past, which is responsibly rising corporations, stakeholder-governed, purpose-driven corporations who handle their stakeholders outperform in the long term.
What’s actually attention-grabbing is we didn’t like every of the prevailing ESG frameworks. We thought, and I might discuss for 10 years concerning the issues with present ESG and funding frameworks, however we threw out a variety of the scores and present fashions and present assumptions about ESG. And we took what my dad had constructed, a quantum psychological mannequin for Bristol Gate and we introduced in ESG information on equal footing with the monetary information all through your entire course of.
What we’re identified on is ESG integration. So full ESG integration, which implies we deal with ESG information as elementary firm information in safety choice, not right here’s our monetary mannequin over right here on one aspect and right here’s our ESG mannequin and evaluations over right here on different aspect. We deal with the ESG information that we use as elementary firm information when selecting these corporations for the portfolio.
Meb:
So let’s dig in on the method as a result of numerous the phrases you used might imply a variety of various things. ESG means a variety of various things to a variety of completely different individuals. So let’s hear just a little bit about y’all’s course of. You’ve a pleasant deck. If we will embrace it within the present notes, listeners, we actually will on the method, which I feel could be very useful. However why don’t you stroll us by way of it. How do you guys discover accountable development? What does that imply? And after we hit a few of these phrases, let’s attempt to give y’all’s interpretation of what you assume it means to you as properly.
Liz:
So quantum psychological means we’re not purely elementary and we’re not purely quant. We use each processes. And for folk on the market who will not be deeply steeped in fairness, elementary fairness land, elementary is taken into account deep dive qualitative analysis and quantitative analysis into an organization versus quant processes are typically extra quantitative, much less deep dive into an organization sort measures. And there’s many alternative managers who do each. We do each.
And what that appears like in our course of is we begin with the entire index, no matter index that could be. On this case for the ETF, it’s the US. And we run 25 qualification standards. And most of these are quantitative information factors. We don’t do a fancy-schmancy predictive complicated quant like a few of people may assume quants are. However we’ve got 25 qualification standards that’s making an attempt to get us right down to a consideration set about 50 corporations.
And what that qualification standards appears like is there’s some practical stuff. Can we purchase it in custody in North America 5 billion minimal market cap? Some monetary. If we’ve got a dividend, it must be rising funding above funding grade credit standing. Then there’s a variety of conventional ESG exclusions. So conventional ESG exclusions are type like the unique spiritual investor exclusion as a result of ESG has its roots in spiritual investing. So no weapons, no weapons, no playing. We don’t exclude pot, however no pot corporations make our display screen. We exclude fossil gasoline manufacturing.
Meb:
That’s sacrilege up there in Toronto. Man, no marvel you’re launching this within the US. There’s all of the basic Canadians, man, the mining and power, they’re in all probability identical to, “Liz, what are you speaking about?”
Liz:
Nicely, it makes it very attention-grabbing up right here as a result of we’ve got all the key pensions are deeply dedicated to ESG and deeply dedicated to power funding. And I prefer to level out to people who the power corporations are actually good at DEI and reporting way more so than tech corporations and asset managers, however that’s a special story. However we exclude fossil gasoline.
There’s a few causes we exclude fossil gasoline. We by no means held an power firm at Bristol Gate as a result of power corporations are just a little too cyclical to have excessive constant dividend development. So from becoming in into qualifying and moving into the portfolio, they’re prone to fail anyway. So it’s sort of only a bit simpler to display screen them out ’trigger you understand they’re not going to make it. We additionally don’t have any renewable power corporations in our portfolio.
Meb:
Nicely additionally, I imply while you transfer from a universe of 1000’s right down to 50, you’re invariably going to kick out all types of issues and areas and sectors and industries, whether or not it’s from the broad standards, whether or not it’s from the secondary form of standards as properly. In order that’s the entire level of energetic administration. You need a concentrated portfolio as a result of for those who’re charging greater than zero, you need it to have a look at bizarre and completely different.
Liz:
Yeah. And it’s humorous ’trigger I’ve by no means understood why people don’t need it to look bizarre and completely different. It’s one among my large points with energetic administration index hugging.
Meb:
It’s quite simple. They need it to look bizarre and completely different when it’s going up. They need it to look bizarre and completely different if it’s happening and also you’re not happening. However primarily it creates a bizarre precept agent downside as a result of a variety of the big asset managers, as soon as they get to scale, after you have 10, 50, 100 billion, 500 billion, you don’t need to look that completely different as a result of there’s solely draw back danger. The cash is already captive. And we all know that cash as soon as it’s sitting someplace, doesn’t prefer to go wherever except it will get abused or does very poorly. Should you have a look at a variety of the old-fashioned hedge funds too, their early years the place they did 150% or these large returns and now all of them do 7% with 10% volatility.
Liz:
They usually’re all chasing FANG shares and it’s like, what are you doing? However the index hugging factor, individuals like to choose on ESG for index hugging. Energetic is index hugging all the best way. I imply, I’m an enormous believer that a variety of energetic underperformance comes from not taking dangers and never having excessive energetic share and index hugging and making a bunch of silly choices as a part of that.
However you’re proper, our qualification course of kicks out entire sectors. Once we run our world, we exclude dictatorships in our world fairness technique. So we’re okay not having exposures to a bunch of issues, whether or not they be sectors or nations or sort of corporations.
In our non-traditional ESG qualification standards, we have a look at board variety past gender. So we embrace racial variety of board members, 33% or extra. So we received’t have a look at an organization who has not discovered how you can put a pair token variety hires on their board but, largely as a result of for those who haven’t discovered how to try this from a governance perspective, you’re not very competent.
Meb:
I imply, does that display screen alone kick out half of the universe it looks like?
Liz:
No, individuals are a lot … Within the US, particularly the US boards are fairly various. Canada’s fairly dangerous, however clearly we’ve bought none of these within the ETF. However even after we began, if we had a 40% bar, it will kick out plenty of people. It’s humorous ’trigger actually it finally ends up kicking out cool tech renewable power boards that you just … not typical stuff that we maintain in our portfolio like boring industrials and boring retailers and semiconductors as a result of they’ve all been engaged on these things for some time. So it doesn’t kick any of these out.
Funding grade credit standing may kick out extra corporations. Should you have a look at the final cohort of our qualification course of, there’s in all probability extra boards that fail or extra corporations that fail on funding grade credit standing or fraud points and issues like that, lawsuits, than on the board variety. Why? ‘Trigger everyone’s slowly figuring it out. And to be tremendous clear, we’ve elevated that 33% from 30, so ultimately it’ll be 35 and we’ve got to cope with the universe as it’s. ‘Trigger our aim is to get from the universe right down to a manageable consideration set that we will cowl from a elementary deep dive perspective in essentially the most environment friendly approach potential.
And we run that consideration set as soon as yearly. So we’ve accomplished it 5 instances now. So did 2018 until now and it evolves, however it doesn’t change that a lot. It completely spits out obese IT, obese industrials supplies. We by no means have any banks. We now have some monetary stuff. We typically don’t have actual property, and we’re okay with that.
And one factor you’ll discover, for those who have a look at our portfolio, there’s a variety of manufacturing concerned corporations. And that’s the place the semis sort of pop in. It’s ’trigger these corporations who’ve needed to handle labor, handle manufacturing amenities, handle worker security, you possibly can think about there could also be just a little few steps forward of a West Coast tech firm when it comes to enthusiastic about their workers and reporting ESG stuff and employee security and issues. So it’s attention-grabbing the way it nets out.
Meb:
Yeah, I’m saying this from a podcast whose listeners are in all probability 90% male. I imply, I bear in mind giving a speech in New York to Quantopian crew they usually did a dwell viewers and it was like 95% male. However the enterprise capital has to me, essentially the most outsized. I imply, I feel girls get 2% of enterprise capital {dollars}. It’s some extremely low quantity that’s nowhere close to 50. However anyway. Okay, so we’re getting just a little off-topic.
All proper, so we’re beginning with numerous these components. You bought a variety of them. What do you assume are the primary drivers of those that form of filter out essentially the most issues? Are there any of the 25 or so which can be significantly extra outstanding?
Liz:
Checked out it year-over-year they usually are typically, I imply clearly participation exclusions. You already know what I might say? There’s a complete bunch they usually’re all fairly equal. And that want for dividend development, the funding grade credit standing, the variety, the trade participation, the standard ESG exclusions, even glass door ranking, it’s sort of simply an equal. You’d assume it was greater in among the areas. Aside from dropping entire industries, it’s a really attention-grabbing sort of balanced course of.
Once we did it at Bristol Gate, it was the S&P 500, removed all of the non-dividend payers, removed everyone under funding grade credit standing, and based mostly on subsequent 12 months’s predicted dividend, we selected the highest 50 and did the elemental deep dive on these. And what we’re getting with the identical however a special course of ’trigger bear in mind, what we’re chopping out isn’t, we will’t simply have the very best dividend growers as a result of if we simply regarded on the highest dividend growers to get the ESG growers too, or the accountable growers too, we’d should sort of go just a little bit additional than the highest 50 excessive dividend growers.
And that’s why we altered or optimized this course of that my dad constructed as a result of we needed the identical issue publicity. So these excessive constant dividend growers who’re well-managed and well-governed and centered on the long-term, we needed them, however with barely increased degree of ESG. And to be tremendous clear, for those who have a look at the Bristol Gate ETF, it has a better ESG ranking than most ESG managers and methods on the market as a result of boring, excessive, constant sustainable dividend growers typically have excessive ESG scores ’trigger they often don’t do a complete bunch of silly stuff that will get you pushed down within the rating with controversies or behind on the instances when it comes to board variety, all this stuff that make up ESG scores.
And also you’ll discover I didn’t point out we use ESG scores as a result of we don’t use ESG scores at any half in our course of. And ESG scores, simply ’trigger I do know individuals hate ESG and scores, ESG scores are the identical as purchase/promote scores, proper? So it’s simply exterior sourced analysis {that a} portfolio supervisor should buy or not.
And so we run that qualification as soon as yearly. That will get us to about 50-ish corporations. After which we do our elementary deep dive. And what we do is we take all of the financials we did at Bristol Gate, which skews debt capability, how conservatively they’re managing their debt, earnings development, dividend development, aggressive market share, and we usher in ESG information and put it equally beside that monetary elementary information. And we purposely manage it beneath pillars in order that they’re equally weighted. So it’s not like, “Hey, the monetary half will get 66% weighting and the ESG half will get … ” We don’t divide it like that and nor can we simply to be tremendous complicated, can we consider measures as E, S and G. Each ESG enter that we use, we contemplate elementary to the corporate. And I’ll offer you some examples.
So turnover. Turnover prices you cash. It’s an ESG measure, however the increased turnover you have got, the extra it prices to rent new individuals. Water use, if it can save you the associated fee that you just spend on water, it’s a monetary factor. It’s undoubtedly an ESG factor, however it’s tied to the operations and the prices of an organization. It’s not a separate consideration. Waste is a good instance. It prices plenty of cash to get rid of waste.
And you then get into the stuff that’s just a little extra complicated to grasp the way it’s tied to the underside line, like gender and management year-over-year, racial variety and management year-over-year. So at first look, oh, that’s only a really feel good measure. Nicely, corporations that we’re searching for and that we personal perceive that the extra girls you have got in management roles, the larger your pool of candidates you must recruit from. So it truly will increase the various optimistic advantages to the corporate of doing this fundamental stuff that some would say is silly DEI stuff. However the corporations that we’re holding are doing it for operational and enterprise causes, not as a result of it makes them look good on a questionnaire.
We have a look at science-based targets, that are net-zero associated. We have a look at parental depart. We have a look at what information we will discover that’s comparatively systematizable throughout the consideration set of corporations.
So if you consider it, we’re in all probability, of the 50 corporations we’re doing this deep dive on, we’re among the prime ESG reporters and scoring issues. So we truly can run comparatively customized information units throughout this 50-ish group of corporations like racial variety and management year-over-year, three-year change in that, three-year change in water depth, three-year change in water use. As a result of you possibly can’t get it for the entire S&P 500 for instance as a result of a complete bunch of these corporations aren’t reporting that degree of knowledge but. However as a result of we’re this type of extra superior ESG-esque pool of corporations, we’re getting all these information factors that we’d not be capable to purchase from an index supplier who’s promoting ESG information throughout their index.
In the end, we’re constructing a excessive energetic share, 25 positions, tremendous concentrated ETF of essentially the most boring, sustainably rising, responsibly rising corporations. And in a nutshell, these corporations that we’re holding perceive that the optimistic impacts that they make on all of their stakeholders, so their workers, their clients, the area people, their shareholders, they perceive that the optimistic impacts they make on these teams drives their backside line. So it’s not separate from their backside line. Doing good by their workers or their clients is core to their mission and core to their function.
And these corporations are based on that and it doesn’t matter what their political opinions are. Nicely-managed, long-term centered corporations which can be stakeholder-governed and purpose-driven will outperform in the long term. And that’s our funding thesis and I ought to in all probability outline a few of these phrases.
Meb:
Positive, let’s hear it.
Liz:
So stakeholder governance. So anyone steeped in investing has been typically educated that shareholder primacy and shareholder governance is the position of an organization. So an organization’s job is to manipulate on behalf of their shareholders and make their shareholders cash. The issue with that’s workers and clients and a complete bunch of different components affect an organization’s potential to earn a living.
So stakeholder governance, which isn’t one thing I invented, I might argue authentic governance was stakeholder governance, however that’s a extra complicated subject. Stakeholder governance is only a firm that claims, “You already know what? Our workers and our clients and all this stuff should be thought-about in our governance and our administration processes. Why? As a result of they affect they usually’re impacted by our choices. And we’ll do higher if we’re partaking all of our stakeholders and serving to and supporting and never screwing over primarily all of our stakeholders.”
So there’s tons of corporations on the market that consider in a stakeholder governance framework. So as a substitute of being our solely aim is to return returns to shareholders. That turns into simply one of many roles of the board. And so we’re searching for these corporations the place there’s proof of their metrics, no matter these metrics could be, that they’re contemplating their stakeholders. ‘Trigger you possibly can’t simply say you or your stakeholders are ruled and also you care about all these things identical to you possibly can’t say you care about variety. Saying you care about variety or the setting is nice, however what you truly do in your online business and the modifications that you just make and the outputs which you can see within the enterprise let you know whether or not one thing’s caring about any of these things.
So stakeholder governance is, I feel it’s one thing companies do extra naturally. I feel it’s within the funding trade I feel a variety of our conventional finance idea assumes that stakeholders don’t matter. And so what you see in ESG is you see conventional monetary fashions over right here and also you see individuals making an attempt to suit all this local weather and variety into these fashions they usually don’t match as a result of the standard fashions assume shareholder primacy and shareholder governance. The one approach ESG works in an organization is when its core to their operations and core to their function, not as a separate exercise on the aspect.
Our corporations will not be doing ESG stuff to really feel good or to look good. They’re doing it as a result of it’s a part of their function and their core, and it’s how they had been at all times based and the way they’ve at all times operated. And purpose-driven is basically complicated as a result of it’s one thing I realized lots about in governance coaching and in advertising and marketing, which is it’s actually tough to speak constantly to individuals.
And so these corporations that we’re searching for know that it’s actually onerous and know that sharing, having a shared function, getting a complete 1000’s of workers to work collectively in direction of the identical aim constantly and speaking that aim is a tough exercise that they as a board and a administration crew have to work on. And that shared function isn’t solely having a transparent function for the group, however serving to all of your workers, all your stakeholders, all your clients perceive why you’re there and what you’re doing makes for a extra environment friendly ship if one may need to say. When you have got disparate objectives and disparate concepts in a corporation about the place one ought to go, it’s much less environment friendly, and folk get confused and don’t perceive as clearly what they’re imagined to be doing.
That is all management and governance science that’s simply within the early levels of academia when it comes to quantifying and analyzing all these things. However I feel everyone can agree that if everyone’s working round with their head reduce off and no one is aware of what they’re doing at an organization, it’s lowering productiveness. And the extra everyone may be on the identical web page when it comes to long-term objectives, the extra effectivity which you can obtain.
Meb:
As you consider governance, there’s areas that you could be or might not be concerned, however you possibly can converse to it. I’m pondering of issues like within the US, significantly with among the tech corporations this previous cycle who’ve been very form of me-focused, that means like stock-based compensation that’s simply outrageous, a ton of dilution to shareholders, perhaps twin shared lessons, all these type voting issues which have gone on.
Do these play any position in any respect in your numerous screens and the way do you consider this push-pull story as previous as time with the steadiness of energy between boards and C-suite and compensation? How does that play into what y’all do?
Liz:
There’s like 100 subjects there they usually’re all tremendous fascinating. I’m going to start out with a narrative. So Google again, should’ve been 2018, 2019 after we began, had two senior dudes sexually harassing a complete bunch of their workers and the board discovered this out. After which the board spent 12 or 14 months debating what they need to do with them. And the one lady on Google’s board mentioned, “In all probability we should always inform individuals and fireplace them, in all probability we should always try this.” They usually all simply sat there and twiddled their thumbs.
And that is all extremely certified group of people who find themselves CEOs and on a complete bunch of boards they usually’re professionals at this, but one of many largest corporations on the planet sat there and twiddled their thumbs. After which ultimately they gave the fellows 50 million every and paid them off and triggered an enormous controversy with all their workers, all stuff that they may have been averted. It’s not their fault they bought a bunch of sexually harassing dudes. The board’s job is to rent and fireplace the CEO. And when the CEO’s not hiring and firing the dude sexually harassing people, that’s a governance problem.
The primary time we constructed the portfolio, our world fairness technique, two of the boards had just lately fired their CEOs for sleeping with their secretaries and numerous different issues. And that exhibits practical governance.
The reply to your query is what’s practical governance? Is it a complete bunch of impartial board members? Nicely, that’s what the ESG scores would let you know is sweet governance. The issue is 10 impartial extremely certified people don’t create good governance. Good governance is created by a governance tradition, by a shared function, by individuals truly working collectively on governance points.
So you possibly can have good governance with bizarre compensation and all this type of stuff on the identical time, completely. However I might argue a variety of that large tech is poorly ruled. We don’t have any financial institution shares in our portfolio for a cause. And it’s not ’trigger they get excluded for producing fossil gasoline. However there’s a sturdy perception that non-independent administrators will not be ESG. We don’t essentially share that perception. Whereas we’d favor … Clearly we search for audit committee independence for instance. That’s one among our necessities. We received’t put money into an organization. However that ship’s sailed. Everyone is aware of how you can make their audit committee impartial at this level and there’s no magic bullet on compensation.
And simply going again to CEO compensation, individuals hear lots about CEO compensation, and there actually are a variety of extremely paid CEOs. The issue is we don’t have any good measures proper now to actually assess CEO pay. And what I imply is what we’re typically utilizing proper now’s common employee pay to CEO pay. So it actually will depend on what trade and which set of knowledge that you just’re utilizing. And what issues extra is, to me, who cares concerning the CEO pay. What issues extra is the baseline worker pay. What issues extra is pay fairness. So for those who’ve bought a person and a lady in senior management roles and the lady simply because she’s had decrease incomes all through her profession is getting paid much less, and that is stuff that corporations can repair.
What issues is Walmart’s base pay versus one other retailers base pay, not essentially the ratio of what their executives make versus what that pay is. As a result of an organization paying a low quantity to executives doesn’t naturally imply it’s doing higher for the world. And executives value plenty of cash. So it’s a very attention-grabbing, messy subject, however the way forward for ESG is us with the ability to get this information on the proper granularity.
We have already got exec comp. So exec comp clearly was already at all times there. It’s just a bit extra standardized in ESG reporting now. What we’re quickly going to have is management comp divided by group, proper? So we’re going to have lady in management’s comp, males in management’s comp even damaged down by racial variety as a result of the way forward for ESG reporting is the Division of Labor variety information being put in monetary statements as required disclosure, and that features gender and race by degree, and that’s going to finish up together with turnover. It’s going to finish up together with pay and pay fairness, together with bonuses. It’s very attention-grabbing as a result of wage versus bonuses will get very messy when it comes to pay fairness. It’s going to be a shock to everyone and everyone’s going to hate it apart from the businesses which have been reporting this already.
Meb:
How do you guys cope with shifting sands over time? Not on issues which can be as apparent perhaps as variety on boards, however issues like, hey, we’re going to exclude, you talked about hashish, alcohol, like opioids. I don’t know, a decade in the past individuals had been like, “These are the perfect factor ever.” And now they’re like, “Oh my god, these are accountable for lots of misuse and issues like …” I imply we wrote an investing paper some time again on the investing pyramid, however the instance we gave was the meals pyramid from my youth, which is such as you actually ought to simply be consuming pasta and frosted flakes and muffins. Your base of meals ought to be carbs and the very last thing you need is fat or protein, no matter it was, and in the present day it’s inverted.
In order information change and shifts, how do you guys cope with that? I do know you mentioned it’s an annual course of, however do you form of replace these standards and concepts as they grow to be extra accepted? How do you consider a few of these subjects?
Liz:
I prefer to level out nearly all the things we do kills individuals and folk within the ESG aspect of the stuff give particular sectors a go, like prescription drugs for instance. We now have no pharma corporations in our portfolio. We now have a variety of well being tech although, like medical gear and issues like that. One of many causes we’ve got no pharma corporations is ’trigger all of them have worth fixing scandals. And so no matter their potential to kill people with their product or no matter, which is clearly don’t even get me began on the opioids and the Sacklers as a result of that may very well be a complete different podcast, the worth fixing, which is they only, I don’t know, all of them simply determined to do that previously 5 years, all of the executives simply working for costs or no matter after which the large congress factor.
However right here’s what occurs in ESG and affect, and I say ESG and affect as a result of affect scores occur in public markets too. Generally individuals after they discuss affect investing, it’s simply non-public markets, however for essentially the most half we’ve got affect scores on these corporations. The issue with affect scores is they often are based mostly on the SDGs, so the sustainable improvement objectives that are developed for nations by the UN.
So an organization to be impactful in line with this framework, and I’ve bought a complete bunch of air quotes right here for people who find themselves not watching my try to framing the sarcasm, to be impactful an organization wants to deal with an SDG. And so what occurs is all of the pharmaceutical corporations get 100% affect ranking as a result of they make a drug that’s serving to individuals. They don’t get any unfavorable ranking for worth fixing.
And so we’d not be solely involved concerning the opioid disaster. We’d be involved with the entire Sackler governance shit present catastrophe that was them creating the opioid disaster. For anyone who has not learn the lengthy, I feel it’s the Atlantic piece on your entire historical past of the advertising and marketing behind that, ’trigger once more, the meals pyramid that you just talked about, are you aware who paid for that? It was not the FDA. It was the cereal corporations simply to be tremendous clear. There’s a complete bunch of analysis that company pursuits … That is one among my passionate areas. Tariq Fancy was the previous CIO of BlackRock, ESG at BlackRock, and he give up and he went on an enormous, large talking tour of the world to say, “Firms don’t make an affect. Solely governments and nonprofits could make an affect.”
However the Sackler household in an organization by way of a complete bunch of promoting choices and a necessity to earn more money began and created an enormous unfavorable affect far past their product, proper? With all of the lies and the paying off docs and continued points, they created a unfavorable affect that no authorities or nonprofit might cease.
And so the reply is corporations make big, big impacts, optimistic and unfavorable. What we’re making an attempt to purpose for on this portfolio is corporations making a web optimistic affect. So corporations who’re lowering their unfavorable externalities as a result of they value cash, they damage individuals, they appear dangerous from a PR perspective, a complete bunch of the reason why you would cut back your unfavorable affect on the world whereas rising your optimistic affect. So whether or not that’s higher first rate pay, safer work circumstances, higher high quality merchandise, extra revolutionary that clear up issues, discount in packaging so it prices much less, all these unfavorable and optimistic impacts.
Meb:
So so far as portfolio building, you get down to those small group of names, 25 whatnot. Do you have got some form of sector composition display screen so it’s not all 25 in MedTech for instance, or how do you guys do any form of place sizing on this ultimate portfolio?
Liz:
Yeah, so they’re equal weighted, so we take away the place measurement decision-making. My dad at all times mentioned it was so that you didn’t have a bunch of PMs combating over place measurement. We run a correlation evaluation, however it’s sector agnostic. We used to personal McDonald’s and KFC in my dad’s technique. And folks would say, “Aren’t they the identical firm?” And while you have a look at the geographic income of them, they had been utterly reverse. And identical factor, there’s plenty of corporations that look very related and appear very related on this giant cap house that aren’t essentially.
So while you have a look at our portfolio, we bought a complete bunch of comparable stuff in there. And that’s the character of 1, we’re being actually selective. Two, we’re kicking out a complete bunch of stuff, however we undoubtedly don’t care about what the weights of the index are at any level in our resolution making.
And we all know we’re going to be obese tech and industrials and often supplies and each client issues relying on. However we’re agnostic to that. And these are equal weight bets, so we’re placing the identical weight on a mega cap as we’d be on a small cap within the portfolio.
After which that’s a part of the energetic share. We’re okay not holding the highest 30 one thing p.c of the index. We now have not one of the faux shares. You possibly can’t have excessive energetic share for those who’re holding a bunch of these corporations. And everyone else, I imply everyone’s going to have these of their portfolio anyhow. However it’s actually, we’re searching for the 25 most responsibly rising corporations out of that 50-ish set of corporations that we’ve got. It turns into our bench too. So the following set of ranked corporations in there are who will use when we have to fireplace an organization, whether or not it’s for quarterly earnings or doing one thing silly on the ESG aspect or the non-ESG aspect.
However once more, a variety of our stuff is annual information. Whereas annual reporting and experiences come out midyear and issues like that, a variety of our board variety modifications after they change any person on a board, and we’ve got fired an organization for going under our threshold, however you possibly can think about the businesses that we’re holding are very cognizant of not, for those who’ve bought 76% board variety, in fact you possibly can put a complete bunch of white dudes in your board, however for those who bought 31 and each investor that exhibits up is partaking with you in your board variety or one thing, you’re going to be cognizant of it.
And that’s what’s so humorous about ESG. The entire world tries accountable BlackRock and the funding trade on ESG. They’re the laggards on this. The pensions for essentially the most half do a variety of the engagement round and many managers to be tremendous clear, ESG managers do a variety of pushing on variety and environmental stuff and governance and all these sorts of issues, however it’s the businesses themselves who understand that it’s a advertising and marketing profit, it’s a recruiting profit. It’s their large 4 accountants saying that they’ll audit this information and serving to them manage it. It’s the companies driving ESG. It’s not BlackRock driving ESG. It’s not … undoubtedly not Vanguard driving ESG stuff. Actually Vanguard is simply being referred to as into congress for pushing local weather change narrative, which is the funniest factor in your entire world for a passive store.
The oil sands corporations up right here in Canada are working, doing much more work than most asset managers on variety and lowering their emissions. Why? As a result of they’ve a complete bunch of traders who care they usually may very well be foundations, pensions, people who care about progress on these things and workers who care about progress on these things.
Meb:
Give us a behind-the-scenes have a look at what it’s like to start out an ETF. We get this query lots. Lots of people see the pot of gold on the finish of the rainbow. There’s clearly a variety of work that goes into it and also you guys are comparatively new launch, so congratulations. However inform us just a little bit concerning the expertise, the way it’s been, have you ever made it right down to Puerto Rico but? What’s the general agony and ecstasy of being not solely a founder however a cash supervisor and now a ETF issuer as properly?
Liz:
And a wholesaler and a marketer and all that sort of stuff. I feel it’s fascinating that folks assume ETFs are like concepts. I feel there’s a lot room for innovation on this trade. I feel it’s going to look completely-ish completely different in 20 years, however I feel there’s some stuff that’s not going to vary.
I feel there’s at all times going to be public markets traders and personal markets traders and folk who do each. I feel individuals are at all times going to assume geographically when it comes to allocation in sure issues. I feel there’s actually a spot for thematics. If you launch a product, it doesn’t matter what it’s, this SMA mannequin, ETF fund index ’trigger that’s a complete attention-grabbing aspect of the enterprise, you must know who’s going to purchase it regardless of how cool the concept is, and you must know the way it’s going to get distributed.
The nice factor with an ETF car is individuals should buy it, common individuals should buy it, and advisors should buy it in a bunch of locations, however there’s a complete bunch of restrictions and issues. They make issues extra sophisticated than simply launching an ETF. Just like the crypto ones, for instance, you in all probability are pals with all Eric Balchunas and all of the crypto-obsessed ETF people, they usually’re going to regardless of the spot Bitcoin ETF goes to launch. Nicely, many of the warehouse cabinets are locked within the US.
Curiously up in Canada, not one of the warehouses locked their cabinets to Canadian or US listed ETFs. So any advisor in Canada should buy any ETFs besides the crypto ones. The massive banks up right here has put a particular ruling on crypto ETFs, they usually principally mentioned to advisors, you can not purchase them. You possibly can solely purchase them in case your shopper indicators an enormous waiver and it will get a excessive danger ranking of their portfolio.
So despite the fact that these are probably the best, most talked about ETFs in your entire, whole world, a complete bunch of Merrill Lynch and UBS and Citi people will not be going to have the ability to purchase them of their accounts anytime quickly as a result of they’re going to should get accepted, they’ll in all probability create inner ones in order that they’ll, ’trigger there’s a pay to play facet there too, that folk want to grasp. You may get your ETF on Schwab or no matter for free-ish. Getting your ETF on US platforms requires time and cash and a bunch of random stuff.
So this crypto one’s actually attention-grabbing ’trigger these ought to be, there’s going to be like, I don’t know, what number of are there? 18 now, all the large asset managers, they usually’re going to look at and a few of them are going to get on some platforms, however a complete bunch of them are going to get locked off a bunch of platforms. So despite the fact that it looks like an ETF is a magic bullet when it comes to wrapper for these merchandise, there’s a complete bunch of different concerns.
In order that’s simply my rant to inform everyone that your product concept is nice. Who’s going to purchase your product and the way they entry it’s in all probability greater than 50% of the consideration that you need to make earlier than spending a complete bunch of cash to launch an ETF.
For retail platforms, once I say retail platforms, I imply advisors utilizing platforms to handle their fashions, an ETF is turning into an more and more higher possibility than a mutual fund as a result of one, you’re often going to cost it decrease. Two, they’re altering all of the charges and value constructions of how ETFs and funds and commerce prices and issues like that. And so that you see an enormous transfer in direction of arguably less complicated ETF fashions, and that’s why we didn’t go along with Wes ’trigger we love Wes. We went with Wes as a result of we undoubtedly weren’t going to do a mutual fund, and he has a terrific white label ETF platform and has demonstrated. I imply, I met Perth first and that’s how we met Wes. Perth is my hero.
Meb:
I do know. Nicely, I observed your dictator’s remark earlier, and so I mentioned that feels like any person we all know.
Liz:
And I simply assume it’s so fascinating. Perth’s in all probability one among my favourite examples clearly, of constructing a profitable product. She knew there was a scarcity of rising market systematic merchandise that she knew there was none that excluded dictatorships and that there can be a complete host of advisors throughout the US who can be completely superb with their rising market slice of the pie to not embrace Chinese language holdings or Russian holdings or Qatari holdings or no matter as a result of there’s sufficient rising markets corporations on the market to get the publicity. And yeah, you’re not going to appear to be the index. However who cares? Plenty of people are searching for systematic or energetic choices, not the entire index. We’re by no means going to persuade a bunch of passive people to make use of this as a core possibility, even when we’re the perfect on the planet. You possibly can’t change the patron conduct.
So Perth actually constructed a product to unravel the tip person’s wants. And I imply, she bought a tremendous timing with the Russian invasion, however she was already doing the work of discovering the market match and getting groups to construct her into the mannequin lengthy earlier than that occurred. And so everyone ought to simply go study all the things about Perth as a result of if you wish to launch an ETF, actually simply go watch all Perth’s movies.
Meb:
Perth has been on the present. She’s an alum. She, listeners, runs the Freedom ETF, FRDM, which is closing in on a billion {dollars} in property. So go Perth. That’s rad.
Liz:
Perth is wonderful. She’s simply the proper instance of you should discover who’s going to purchase your nice concept earlier than going and determining how you can make your nice concept. And perhaps you had been an advisor, perhaps you labored as a wholesaler, perhaps you labored someplace within the distribution of the trade, however particularly for those who’re a pure portfolio supervisor otherwise you’re exterior of the trade, do some work on who and why and who’s shopping for this product and the place are they going to place it, since you want a few of these fundamental solutions earlier than you make a bunch of selections which can be going to value you cash that you just’re going to wish to go change.
The best way to launch an ETF is to have a complete bunch of cash and be keen to spend it, I feel is one of the best ways. Launching a car, whether or not you might be BlackRock or a startup, is a little bit of a coin toss.
I used to be speaking to my buddy who works at a pretty big asset supervisor, and he was like, “Yeah, any new fund we’ve got, we spend the entire time worrying about who’s going to be the primary 20 million in.” So you bought to go discover sort of the place that first 20 million is, after which it’s by no means going to come back as quick as you need it to come back, and that’s why you should have cash. But it surely actually is, you have a look at the checklist of … any checklist of ETFs and also you go to the underside ones. And it’s not identical to 30 little startup corporations you’ve by no means heard of. It’s actually 90% big asset managers who’ve bought automobiles from 2 to $10 million.
I like telling people, Cathie Wooden launched an ESG ETF in, I don’t know, 2000 after which closed it 18 months later ’trigger she couldn’t increase cash in ESG ETFs. So actually you may be essentially the most well-known human being on earth. You continue to want to seek out the distribution connection between the product that you just’re wrapping and the necessity, after which you should not screw up the efficiency and all that sort of stuff.
Meb:
In relation to, you’ve bought a variety of completely different takes on this house, however one of many questions we’ve been asking many of the friends is, for those who sit right down to espresso or lunch with a bunch of advisors which can be form of in your world, what’s a perception you maintain that say for those who sat on the desk, 75% of the attendees would shake their head and say, “Liz, I disagree with you,” on funding associated, portfolio associated, ESG, DEI associated, something come to thoughts?
Liz:
Yeah, lots. I might go two instructions right here, so …
Meb:
Identify them each. Do each of them. We bought time.
Liz:
So I don’t consider you possibly can predict the market. As any person who was raised in a really evidence-based quantum psychological store the place we did no predicting of the market, it’s fascinating to see this entire ecosystem of oldsters yelling about shares all day, daily and guessing the place macro goes to go and all this stuff. I don’t assume it’s 75% of oldsters don’t consider in market. And to be tremendous good it’s predicting the timing of the market too.
I feel there’s danger in timing. I feel all of the research recommend that the timing danger of energetic safety choice is without doubt one of the largest issues. That’s why we’re macro agnostic. We’re all the things aside from responsibly rising agnostics regardless of the fixed barrage on Twitter or CNBC or wherever. This concept that folks simply sit on TV yelling about future numbers and what they’re going to foretell pushes cool, certified math expertise individuals away from the trade. In order that’s my basic take.
My ESG take, and I hear this lots, is ESG information isn’t standardized and may’t be standardized. And while you have a look at the businesses that we maintain within the portfolio, greater than half the portfolio has externally assured environmental information. And so not solely is it standardized, not solely are they reporting by way of the identical framework. They’re getting exterior auditors to overview their emissions information and a bunch of their environmental information. And the Division of Labor is reviewing their variety information.
Whereas 5 years in the past for certain, it undoubtedly regarded like stuff was not standardized when it comes to ESG information, all the businesses we’re have moved in direction of this. It’s referred to as the GRI template. There’s like a billion completely different frameworks in ESG, however for those who go into any giant cap sustainability report, apart from a Tesla or all the oldsters who refuse to report fundamental ESG stuff, which is a really small group now, the overwhelming majority, in all probability like 400 of the S&P 500 corporations are reporting this framework. Are they reporting year-over-year? No. You possibly can return to their earlier report and a few are laggards and a few are forward, however we’re ready to have a look at three 12 months information for many of those metrics for many of our corporations.
Meb:
As you look again in your profession, what’s been essentially the most memorable funding? Good, dangerous, in between?
Liz:
In all probability beginning the agency, however I’m going to say this ETF largely as a result of it’s public. I imply, while you’re working in separate accounts, we might share stuff with what we’re doing, however now it’s like, hey, we’re on the market. Efficiency has been fairly good since we began, which is a coin toss to be tremendous clear. We identical to the product. We just like the branding. We like Wes. We just like the US market. It’s nice. There’s so many alternatives. I imply, Canada’s nice too, to be tremendous clear, however we love what number of of you there are, 10 instances as many people. There’s random 4 billion RIAs in the course of states that no one’s ever heard of, which might be the twelfth largest RIA or asset wealth store in Canada.
And so I bought to say, our ETF BEEZ is my favourite funding. We don’t love our corporations one after the other. We consider them as a crew. We’re fielding a crew of gamers. I imply, we don’t play favorites. We simply need to choose a great crew. So it’s, I’ll by no means reply a single safety as being a great funding or my favourite ’trigger once more, that’s simply not how we method portfolio building.
Meb:
Proper on. The place do individuals discover out extra data? The place do they go? Comply with you, comply with the agency, the fund, all that.
Liz:
So we’ve got an ETF web site, which is honeytreeinvestetfs, which is all that formal one. After which we’ve got honeytreeinvest.com, which is our common one which has tons of blogs. Should you simply google Honeytree Funding or Honeytree ETF, you’ll see plenty of articles and podcasts and issues like that.
I, regardless of Twitter or no matter people need to name it present shit present, I’m nonetheless on there. I’ll be on there till it goes down for quite a lot of completely different causes. ‘Trigger I like the neighborhood and there’s plenty of nice people there, and it’s how we met Wes and all this stuff. So Liz Simmie on Twitter, in order for you obnoxious, occasional ESG takes. I largely simply rant about how BlackRock isn’t woke and other people shouldn’t be satisfied that any asset supervisor is woke. That’s us in a nutshell.
And naturally you possibly can go by B-E-E-Z on choose custody platforms within the US. Should you’re a retail investor, it’s in all probability even simpler to entry than an advisor, however in fact, we’re primarily centered on advisors on this. So for those who’re an advisor involved in ESG and is aware of nothing about it otherwise you’re a deep ESG practitioner, please be at liberty to succeed in out to us on our web site ’trigger that’s who we’re trying to join with.
Meb:
Liz, thanks a lot for becoming a member of us in the present day.
Liz:
Thanks for having me.
Meb:
Podcast listeners we’ll submit present notes to in the present day’s dialog at mebfaber.com/podcast. Should you love the present, for those who hate it, shoot us suggestions at suggestions@themebfabershow.com. We like to learn the evaluations. Please overview us on iTunes and subscribe the present wherever good podcasts are discovered. Thanks for listening, pals, and good investing.
