Visitor: Liz Simmie is the co-founder of Honeytree Funding Administration, an asset administration agency primarily based in Toronto, Canada.
Recorded: 12/13/2023 | Run-Time: 52:11 
Abstract: In as we speak’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising corporations which can be stakeholder ruled, goal pushed, and make a web constructive 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 strategy of launching an ETF with our associates at Alpha Architect and shares recommendation for anybody fascinated with launching one themselves.
Feedback or strategies? Curious about sponsoring an episode? Electronic mail us Suggestions@TheMebFaberShow.com
Hyperlinks from the Episode:
- 1:15 – Welcome Liz to the present
- 1:46 – Launching BEEZ
- 7:11 – Discovering accountable progress and being ‘quantamental’
- 10:19 – Energetic administration and index hugging
- 15:14 – Foremost elements 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. Resulting from business rules, he is not going to 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 info, go to cambriainvestments.com.
Meb:
Hey, hey everyone. A enjoyable present once more as we speak. Our visitor is Liz Simmie, co-founder of Honeytree Funding Administration, which lately launched an actively managed ESG-focused ETF ticker BEEZ. In as we speak’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 constructive affect on the world. And he or she shares some scorching takes on the state of each ESG and energetic administration. As we wind down, Liz talks concerning the strategy of launching an ETF with our associates at Alpha Architect, and shares recommendation for anybody fascinated with 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 as we speak?
Liz:
Toronto, the good 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 complete life. I’ve by no means gone anyplace else. Truly I went to Montreal for college after which got here again and can by no means go away this nice metropolis and nation.
Meb:
Superior. I like it up there. We’re going to speak about so much as we speak. One of many matters listeners, which you most likely actually wish to stick round for is this idea of beginning ETFs. I get lots of questions. Every single day folks wish to begin an ETF, they obtained an thought for an ETF. We’re going to speak about somebody who’s performed it very lately, placing out their first fund in November with our loopy good friend, Wes Grey and crew. So we’ll positively get into slightly little bit of that later. However I wish to speak slightly bit about you, your concepts, your course of. Give us slightly background.
Liz:
I’ve an economics diploma, economics and historical past diploma, and I wished nothing to do with this nice business of ours as a result of I wished to make the world a greater place and do cool stuff. So I ended up in market analysis, so shopper insights, so testing model technique for PNG and large financial institution, new account, all these cool analysis tasks, quantitative and qualitative.
After which my dad began an rising supervisor. So my dad’s a bootstrapped US fairness supervisor primarily based in Toronto, they usually had this third man who was American and he obtained divorced. So once 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 seems like an attention-grabbing thought,” having actually no idea of the funding business past slightly little bit of publicity right here and there.
And I used to be fortunate. I joined a bootstrapped dividend progress 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 an entire 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 individual rising supervisor.
The agency’s known as Bristol Gate for folk who wish to google issues. We launched ETFs in 2018, and I had met my co-founder on the similar time, and we thought all these of us are attempting to launch ESG methods they usually’re all lacking what we expect the top consumer 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 identical 12 months we launched the ETFs up right here. 2018, we got down to discovered Honeytree. We have been registered in 2019. It takes so much longer up right here to get accepted by the regulators. We began our monitor data in 2019 for our world fairness technique. We did that in order that we didn’t have to launch a automobile off the bat as a result of automobiles price some huge cash they usually take lots of effort to distribute. They take lots of consciousness and all these items.
Anyhow, we had all the time supposed to launch a retail automobile. We didn’t ever need a non-public fund. Lengthy-only boring methods positively don’t make sense in non-public funds in Canada or the US and we thought we’d have a Canadian automobile 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 automobile 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 larger, 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, a lot of states have various supervisor initiatives at their pensions and issues like that.
So we thought, if we’re going to do that automobile, 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 massive cap and it’s targeted on accountable progress.
So it’s the identical funding thesis we’ve been engaged on our total agency historical past, which is responsibly rising corporations, stakeholder-governed, purpose-driven corporations who maintain their stakeholders outperform in the long term.
What’s actually attention-grabbing is we didn’t like several of the prevailing ESG frameworks. We thought, and I might discuss for 10 years concerning the issues with current ESG and funding frameworks, however we threw out lots of the scores and current fashions and current assumptions about ESG. And we took what my dad had constructed, a quantum psychological mannequin for Bristol Gate and we introduced in ESG knowledge on equal footing with the monetary knowledge all through the whole course of.
What we’re recognized on is ESG integration. So full ESG integration, which suggests we deal with ESG knowledge as elementary firm knowledge in safety choice, not right here’s our monetary mannequin over right here on one aspect and right here’s our ESG mannequin and opinions over right here on different aspect. We deal with the ESG knowledge that we use as elementary firm knowledge when selecting these corporations for the portfolio.
Meb:
So let’s dig in on the method as a result of a lot of the phrases you used might imply lots of various things. ESG means lots of various things to lots of completely different folks. So let’s hear slightly bit about y’all’s course of. You could have a pleasant deck. If we will embrace it within the present notes, listeners, we definitely will on the method, which I believe could be very useful. However why don’t you stroll us by it. How do you guys discover accountable progress? What does that imply? And once 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 nicely.
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 usually are not 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 kind 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 is perhaps. On this case for the ETF, it’s the US. And we run 25 qualification standards. And most of these are quantitative knowledge factors. We don’t do a fancy-schmancy predictive advanced quant like a few of people may assume quants are. However we’ve got 25 qualification standards that’s attempting to get us all the way down to a consideration set about 50 corporations.
And what that qualification standards seems to be 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 lots of conventional ESG exclusions. So conventional ESG exclusions are sort like the unique non secular investor exclusion as a result of ESG has its roots in non secular investing. So no weapons, no weapons, no playing. We don’t exclude pot, however no pot corporations make our display screen. We exclude fossil gas 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 vitality, they’re most likely similar to, “Liz, what are you speaking about?”
Liz:
Effectively, it makes it very attention-grabbing up right here as a result of we’ve got all the main pensions are deeply dedicated to ESG and deeply dedicated to vitality funding. And I prefer to level out to people who the vitality corporations are actually good at DEI and reporting rather more so than tech corporations and asset managers, however that’s a special story. However we exclude fossil gas.
There’s a few causes we exclude fossil gas. We by no means held an vitality firm at Bristol Gate as a result of vitality corporations are slightly too cyclical to have excessive constant dividend progress. So from becoming in into qualifying and entering into the portfolio, they’re more likely to fail anyway. So it’s sort of only a bit simpler to display screen them out ’trigger you recognize they’re not going to make it. We additionally don’t have any renewable vitality corporations in our portfolio.
Meb:
Effectively additionally, I imply once you transfer from a universe of 1000’s all the way 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 nicely. In order that’s the entire level of energetic administration. You need a concentrated portfolio as a result of should you’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 of us don’t need it to look bizarre and completely different. It’s considered one of 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 taking place and also you’re not taking place. However primarily it creates a bizarre precept agent drawback as a result of lots of the big asset managers, as soon as they get to scale, after you have 10, 50, 100 billion, 500 billion, you don’t wish to look that completely different as a result of there’s solely draw back threat. The cash is already captive. And we all know that cash as soon as it’s sitting someplace, doesn’t prefer to go anyplace until it will get abused or does very poorly. In the event you have a look at lots of the old-fashioned hedge funds too, their early years the place they did 150% or these huge 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, folks like to choose on ESG for index hugging. Energetic is index hugging all the best way. I imply, I’m a giant believer that lots 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 complete 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 international locations or kind 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 methods to put a pair token variety hires on their board but, largely as a result of should you haven’t discovered how to do 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 seems like?
Liz:
No, persons are a lot … Within the US, particularly the US boards are fairly various. Canada’s fairly dangerous, however clearly we’ve obtained none of these within the ETF. However even once we began, if we had a 40% bar, it will kick out a lot of of us. It’s humorous ’trigger actually it finally ends up kicking out cool tech renewable vitality boards that you simply … 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 items for some time. So it doesn’t kick any of these out.
Funding grade credit standing may kick out extra corporations. In the event you have a look at the final cohort of our qualification course of, there’s most likely 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 take care of the universe as it’s. ‘Trigger our purpose is to get from the universe all the way down to a manageable consideration set that we will cowl from a elementary deep dive perspective in essentially the most environment friendly means attainable.
And we run that consideration set as soon as yearly. So we’ve performed it 5 occasions now. So did 2018 until now and it evolves, but it surely 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, should you have a look at our portfolio, there’s lots 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 services, handle worker security, you possibly can think about there could also be slightly few steps forward of a West Coast tech firm by way of fascinated with 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 most likely 90% male. I imply, I bear in mind giving a speech in New York to Quantopian crew they usually did a stay viewers and it was like 95% male. However the enterprise capital has to me, essentially the most outsized. I imply, I believe ladies 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 slightly off-topic.
All proper, so we’re beginning with a lot of these elements. You bought lots of them. What do you assume are the principle 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 distinguished?
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 an entire bunch they usually’re all fairly equal. And that want for dividend progress, the funding grade credit standing, the variety, the business participation, the standard ESG exclusions, even glass door score, it’s sort of simply an equal. You’d assume it was larger in a number of the areas. Aside from shedding complete 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 beneath funding grade credit standing, and primarily based 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 slicing out shouldn’t be, 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 slightly 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 wished the identical issue publicity. So these excessive constant dividend growers who’re well-managed and well-governed and targeted on the long-term, we wished them, however with barely greater stage of ESG. And to be tremendous clear, should you have a look at the Bristol Gate ETF, it has a better ESG score 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 an entire bunch of silly stuff that will get you pushed down within the rating with controversies or behind on the occasions by way of 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 folks 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 can purchase 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 taking a look at debt capability, how conservatively they’re managing their debt, earnings progress, dividend progress, aggressive market share, and we herald ESG knowledge and put it equally beside that monetary elementary knowledge. And we purposely set up 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 take into account elementary to the corporate. And I’ll provide you with some examples.
So turnover. Turnover prices you cash. It’s an ESG measure, however the greater turnover you have got, the extra it prices to rent new folks. Water use, if it can save you the price that you simply spend on water, it’s a monetary factor. It’s positively an ESG factor, but it surely’s tied to the operations and the prices of an organization. It’s not a separate consideration. Waste is a good instance. It prices a lot of cash to eliminate waste.
And you then get into the stuff that’s slightly 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. Effectively, corporations that we’re on the lookout for and that we personal perceive that the extra ladies you have got in management roles, the larger your pool of candidates it’s important to recruit from. So it really will increase the various constructive 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 go away. We have a look at what knowledge we will discover that’s comparatively systematizable throughout the consideration set of corporations.
So if you concentrate on it, we’re taking a look at most likely, of the 50 corporations we’re doing this deep dive on, we’re taking a look at a number of the high ESG reporters and scoring issues. So we really can run comparatively customized knowledge 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 an entire bunch of these corporations aren’t reporting that stage of knowledge but. However as a result of we’re taking a look at this sort of extra superior ESG-esque pool of corporations, we’re getting all these knowledge factors that we’d not have the ability to purchase from an index supplier who’s promoting ESG knowledge throughout their index.
Finally, 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 constructive impacts that they make on all of their stakeholders, so their workers, their clients, the area people, their shareholders, they perceive that the constructive 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 goal.
And these corporations are based on that and it doesn’t matter what their political views are. Effectively-managed, long-term targeted 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 most likely 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 function of a company. So a company’s job is to control on behalf of their shareholders and make their shareholders cash. The issue with that’s workers and clients and an entire bunch of different elements affect an organization’s capacity to generate income.
So stakeholder governance, which isn’t one thing I invented, I might argue unique governance was stakeholder governance, however that’s a extra advanced subject. Stakeholder governance is only a firm that claims, “You already know what? Our workers and our clients and all this stuff must 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 participating all of our stakeholders and serving to and supporting and never screwing over basically all of our stakeholders.”
So there’s tons of corporations on the market that imagine in a stakeholder governance framework. So as a substitute of being our solely purpose is to return returns to shareholders. That turns into simply one of many roles of the board. And so we’re on the lookout for these corporations the place there’s proof of their metrics, no matter these metrics is perhaps, 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 items similar to you possibly can’t say you care about variety. Saying you care about variety or the surroundings is nice, however what you really do in what you are promoting and the modifications that you simply make and the outputs you could see within the enterprise inform you whether or not one thing’s caring about any of these items.
So stakeholder governance is, I believe it’s one thing companies do extra naturally. I believe it’s within the funding business I believe lots 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 folks attempting 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 means ESG works in a company is when its core to their operations and core to their goal, not as a separate exercise on the aspect.
Our corporations usually are not 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 goal and their core, and it’s how they have been all the time based and the way they’ve all the time operated. And purpose-driven is basically advanced as a result of it’s one thing I realized so much about in governance coaching and in advertising, which is it’s actually troublesome to speak constantly to folks.
And so these corporations that we’re on the lookout for know that it’s actually onerous and know that sharing, having a shared goal, getting an entire 1000’s of workers to work collectively in the direction of the identical purpose constantly and speaking that purpose is a troublesome exercise that they as a board and a administration group have to work on. And that shared goal shouldn’t be solely having a transparent goal 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 wish to say. When you have got disparate objectives and disparate concepts in a company 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 phases of academia by way of quantifying and analyzing all these items. However I believe 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 reducing productiveness. And the extra everyone may be on the identical web page by way of long-term objectives, the extra effectivity you could obtain.
Meb:
As you concentrate on governance, there’s areas that you could be or is probably not concerned, however you possibly can communicate to it. I’m considering of issues like within the US, significantly with a number of 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, possibly twin shared courses, all these type voting issues which have gone on.
Do these play any function in any respect in your numerous screens and the way do you concentrate on 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 matters there they usually’re all tremendous fascinating. I’m going to start out with a narrative. So Google again, should’ve been 2018, 2019 once we began, had two senior dudes sexually harassing an entire 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 must always inform folks and hearth them, most likely we must 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 an entire bunch of boards they usually’re professionals at this, but one of many largest corporations on this planet sat there and twiddled their thumbs. After which ultimately they gave the fellows 50 million every and paid them off and precipitated a giant controversy with all their workers, all stuff that they might have been averted. It’s not their fault they obtained a bunch of sexually harassing dudes. The board’s job is to rent and hearth the CEO. And when the CEO’s not hiring and firing the dude sexually harassing of us, that’s a governance subject.
The primary time we constructed the portfolio, our world fairness technique, two of the boards had lately fired their CEOs for sleeping with their secretaries and numerous different issues. And that reveals practical governance.
The reply to your query is what’s practical governance? Is it an entire bunch of unbiased board members? Effectively, that’s what the ESG scores would inform you is sweet governance. The issue is 10 unbiased extremely certified of us don’t create good governance. Good governance is created by a governance tradition, by a shared goal, by folks really working collectively on governance points.
So you possibly can have good governance with bizarre compensation and all this sort of stuff on the similar time, completely. However I might argue lots of that large tech is poorly ruled. We don’t have any financial institution shares in our portfolio for a purpose. And it’s not ’trigger they get excluded for producing fossil gas. However there’s a sturdy perception that non-independent administrators usually are not ESG. We don’t essentially share that perception. Whereas we’d choose … Clearly we search for audit committee independence for instance. That’s considered one of our necessities. We received’t put money into an organization. However that ship’s sailed. Everyone is aware of methods to make their audit committee unbiased at this level and there’s no magic bullet on compensation.
And simply going again to CEO compensation, folks hear so much about CEO compensation, and there definitely are lots 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 relies on what business and which set of knowledge that you simply’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 should you’ve obtained a person and a lady in senior management roles and the girl 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 price a lot of cash. So it’s a extremely attention-grabbing, messy subject, however the way forward for ESG is us with the ability to get this knowledge on the proper granularity.
We have already got exec comp. So exec comp clearly was already all the time 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 knowledge being put in monetary statements as required disclosure, and that features gender and race by stage, 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 by way of 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 take care of shifting sands over time? Not on issues which can be as apparent possibly 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 folks have been like, “These are the very best 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 must be carbs and the very last thing you need is fat or protein, no matter it was, and as we speak it’s inverted.
In order information change and shifts, how do you guys take care of that? I do know you mentioned it’s an annual course of, however do you form of replace these standards and concepts as they turn into extra accepted? How do you concentrate on a few of these matters?
Liz:
I prefer to level out nearly every little thing we do kills folks and folk within the ESG aspect of the stuff give particular sectors a cross, like prescribed drugs for instance. We now have no pharma corporations in our portfolio. We now have lots of well being tech although, like medical tools 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 capacity to kill of us 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 an entire 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 massive 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 folks 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 primarily based on the SDGs, so the sustainable improvement objectives that are developed for international locations by the UN.
So an organization to be impactful in line with this framework, and I’ve obtained an entire bunch of air quotes right here for people who find themselves not watching my try and framing the sarcasm, to be impactful an organization wants to handle an SDG. And so what occurs is all of the pharmaceutical corporations get 100% affect score as a result of they make a drug that’s serving to folks. They don’t get any damaging score 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 believe it’s the Atlantic piece on the whole historical past of the advertising behind that, ’trigger once more, the meals pyramid that you simply 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 an entire bunch of analysis that company pursuits … That is considered one of my passionate areas. Tariq Fancy was the previous CIO of BlackRock, ESG at BlackRock, and he stop and he went on a giant, 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 a company by an entire bunch of selling choices and a necessity to earn more money began and created a large damaging affect far past their product, proper? With all of the lies and the paying off docs and continued points, they created a damaging affect that no authorities or nonprofit might cease.
And so the reply is corporations make large, large impacts, constructive and damaging. What we’re attempting to intention for on this portfolio is corporations making a web constructive affect. So corporations who’re lowering their damaging externalities as a result of they price cash, they harm folks, they give the impression of being dangerous from a PR perspective, an entire bunch of the reason why you would cut back your damaging affect on the world whereas growing your constructive affect. So whether or not that’s higher respectable pay, safer work circumstances, higher high quality merchandise, extra progressive that remedy issues, discount in packaging so it prices much less, all these damaging and constructive 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 last portfolio?
Liz:
Yeah, so they’re equal weighted, so we take away the place measurement decision-making. My dad all the time mentioned it was so that you didn’t have a bunch of PMs combating over place measurement. We run a correlation evaluation, but it surely’s sector agnostic. We used to personal McDonald’s and KFC in my dad’s technique. And other people would say, “Aren’t they the identical firm?” And once you have a look at the geographic income of them, they have been utterly reverse. And similar factor, there’s a lot of corporations that look very comparable and appear very comparable on this massive cap area that aren’t essentially.
So once you have a look at our portfolio, we obtained an entire bunch of comparable stuff in there. And that’s the character of 1, we’re being actually selective. Two, we’re kicking out an entire bunch of stuff, however we positively don’t care about what the weights of the index are at any level in our choice making.
And we all know we’re going to be obese tech and industrials and normally supplies and each shopper 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 may’t have excessive energetic share should you’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 on the lookout 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 hearth 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, lots of our stuff is annual knowledge. Whereas annual reporting and studies come out midyear and issues like that, lots of our board variety modifications after they change any individual on a board, and we’ve got fired an organization for going beneath our threshold, however you possibly can think about the businesses that we’re holding are very cognizant of not, should you’ve obtained 76% board variety, in fact you possibly can put an entire bunch of white dudes in your board, however should you obtained 31 and each investor that reveals up is participating 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 in charge BlackRock and the funding business on ESG. They’re the laggards on this. The pensions for essentially the most half do lots of the engagement round and many managers to be tremendous clear, ESG managers do lots of pushing on variety and environmental stuff and governance and all these sorts of issues, but it surely’s the businesses themselves who notice that it’s a advertising profit, it’s a recruiting profit. It’s their large 4 accountants saying that they will audit this knowledge and serving to them set up it. It’s the firms driving ESG. It’s not BlackRock driving ESG. It’s not … positively not Vanguard driving ESG stuff. Actually Vanguard is simply being known as into congress for pushing local weather change narrative, which is the funniest factor in the whole 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 an entire bunch of traders who care they usually may very well be foundations, pensions, people who care about progress on these items and workers who care about progress on these items.
Meb:
Give us a behind-the-scenes have a look at what it’s like to start out an ETF. We get this query so much. Lots of people see the pot of gold on the finish of the rainbow. There’s clearly lots of work that goes into it and also you guys are comparatively new launch, so congratulations. However inform us slightly bit concerning the expertise, the way it’s been, have you ever made it all the way 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 nicely?
Liz:
And a wholesaler and a marketer and all that sort of stuff. I believe it’s fascinating that individuals assume ETFs are like concepts. I believe there’s a lot room for innovation on this business. I believe it’s going to look completely-ish completely different in 20 years, however I believe there’s some stuff that isn’t going to alter.
I believe there’s all the time going to be public markets traders and personal markets traders and folk who do each. I believe persons are all the time going to assume geographically by way of allocation in sure issues. I believe there’s definitely a spot for thematics. Once you launch a product, it doesn’t matter what it’s, this SMA mannequin, ETF fund index ’trigger that’s an entire attention-grabbing aspect of the enterprise, it’s important to know who’s going to purchase it irrespective of how cool the thought is, and it’s important to know the way it’s going to get distributed.
The nice factor with an ETF automobile is folks can purchase it, common folks can purchase it, and advisors can purchase it in a bunch of locations, however there’s an entire bunch of restrictions and issues. They make issues extra sophisticated than simply launching an ETF. Just like the crypto ones, for instance, you most likely are associates with all Eric Balchunas and all of the crypto-obsessed ETF of us, they usually’re going to regardless of the spot Bitcoin ETF goes to launch. Effectively, a lot 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 can purchase any ETFs besides the crypto ones. The large banks up right here has put a particular ruling on crypto ETFs, they usually principally mentioned to advisors, you can not purchase them. You may solely purchase them in case your consumer indicators a giant waiver and it will get a excessive threat score of their portfolio.
So regardless that these are probably the best, most talked about ETFs in the whole, total world, an entire bunch of Merrill Lynch and UBS and Citi of us usually are not 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 most likely create inner ones in order that they will, ’trigger there’s a pay to play side there too, that folk want to grasp. You will 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 must be, there’s going to be like, I don’t know, what number of are there? 18 now, all the massive asset managers, they usually’re going to look at and a few of them are going to get on some platforms, however an entire bunch of them are going to get locked off a bunch of platforms. So regardless that it looks like an ETF is a magic bullet by way of wrapper for these merchandise, there’s an entire bunch of different issues.
In order that’s simply my rant to inform everyone that your product thought is nice. Who’s going to purchase your product and the way they entry it’s most likely greater than 50% of the consideration that it’s best to make earlier than spending an entire bunch of cash to launch an ETF.
For retail platforms, after I say retail platforms, I imply advisors utilizing platforms to handle their fashions, an ETF is turning into an more and more higher choice than a mutual fund as a result of one, you’re normally going to cost it decrease. Two, they’re altering all of the charges and price constructions of how ETFs and funds and commerce prices and issues like that. And so that you see a giant transfer in the direction of arguably easier 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 positively weren’t going to do a mutual fund, and he has an incredible 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. Effectively, I observed your dictator’s remark earlier, and so I mentioned that seems like any individual we all know.
Liz:
And I simply assume it’s so fascinating. Perth’s most likely considered one of 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 an entire host of advisors throughout the US who can be completely effective 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? Numerous of us are on the lookout for systematic or energetic choices, not the entire index. We’re by no means going to persuade a bunch of passive of us to make use of this as a core choice, even when we’re the very best on this planet. You may’t change the patron conduct.
So Perth actually constructed a product to unravel the top person’s wants. And I imply, she obtained 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 every little thing 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 belongings. So go Perth. That’s rad.
Liz:
Perth is wonderful. She’s simply the right instance of you should discover who’s going to purchase your nice thought earlier than going and determining methods to make your nice thought. And possibly you have been an advisor, possibly you labored as a wholesaler, possibly you labored someplace within the distribution of the business, however particularly should you’re a pure portfolio supervisor otherwise you’re exterior of the business, 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 price you cash that you simply’re going to want to go change.
The way in which to launch an ETF is to have an entire bunch of cash and be keen to spend it, I believe is one of the simplest ways. Launching a automobile, whether or not you’re 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 record of … any record of ETFs and also you go to the underside ones. And it’s not similar to 30 little startup corporations you’ve by no means heard of. It’s actually 90% large asset managers who’ve obtained automobiles from 2 to $10 million.
I really like telling of us, Cathie Wooden launched an ESG ETF in, I don’t know, 2000 after which closed it 18 months later ’trigger she couldn’t elevate cash in ESG ETFs. So actually you might be essentially the most well-known human being on earth. You continue to want to search out the distribution connection between the product that you simply’re wrapping and the necessity, after which you should not screw up the efficiency and all that sort of stuff.
Meb:
Relating to, you’ve obtained lots of completely different takes on this area, however one of many questions we’ve been asking a lot of the company is, should you sit all the way 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 should you 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, so much. I might go two instructions right here, so …
Meb:
Title them each. Do each of them. We obtained time.
Liz:
So I don’t imagine you possibly can predict the market. As any individual 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 complete ecosystem of oldsters yelling about shares all day, day-after-day and guessing the place macro goes to go and all this stuff. I don’t assume it’s 75% of oldsters don’t imagine in market. And to be tremendous good it’s predicting the timing of the market too.
I believe there’s threat in timing. I believe all of the research counsel that the timing threat of energetic safety choice is likely one of the largest issues. That’s why we’re macro agnostic. We’re every little thing aside from responsibly rising agnostics regardless of the fixed barrage on Twitter or CNBC or wherever. This concept that individuals simply sit on TV yelling about future numbers and what they’re going to foretell pushes cool, certified math expertise folks away from the business. In order that’s my common take.
My ESG take, and I hear this so much, is ESG knowledge shouldn’t be standardized and might’t be standardized. And once you have a look at the businesses that we maintain within the portfolio, greater than half the portfolio has externally assured environmental knowledge. And so not solely is it standardized, not solely are they reporting by the identical framework. They’re getting exterior auditors to overview their emissions knowledge and a bunch of their environmental knowledge. And the Division of Labor is reviewing their variety knowledge.
Whereas 5 years in the past for certain, it positively regarded like stuff was not standardized by way of ESG knowledge, all the businesses we’re taking a look at have moved in the direction of this. It’s known as the GRI template. There’s like a billion completely different frameworks in ESG, however should you go into any massive cap sustainability report, apart from a Tesla or all the parents who refuse to report fundamental ESG stuff, which is a really small group now, the overwhelming majority, most likely like 400 of the S&P 500 corporations are reporting this framework. Are they reporting year-over-year? No. You may 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 knowledge 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, once 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 similar 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 occasions 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 obtained to say, our ETF BEEZ is my favourite funding. We don’t love our corporations one after the other. We consider them as a group. We’re fielding a group of gamers. I imply, we don’t play favorites. We simply wish to choose group. So it’s, I’ll by no means reply a single safety as being funding or my favourite ’trigger once more, that’s simply not how we strategy portfolio building.
Meb:
Proper on. The place do folks discover out extra info? The place do they go? Observe you, observe 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. In the event you simply google Honeytree Funding or Honeytree ETF, you’ll see a lot of articles and podcasts and issues like that.
I, regardless of Twitter or no matter of us wish to name it present shit present, I’m nonetheless on there. I’ll be on there till it goes down for a wide range of completely different causes. ‘Trigger I really like the neighborhood and there’s a lot of nice of us there, and it’s how we met Wes and all this stuff. So Liz Simmie on Twitter, if you would like obnoxious, occasional ESG takes. I largely simply rant about how BlackRock shouldn’t be 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. In the event you’re a retail investor, it’s most likely even simpler to entry than an advisor, however in fact, we’re primarily targeted on advisors on this. So should you’re an advisor concerned with ESG and is aware of nothing about it otherwise you’re a deep ESG practitioner, please be happy to achieve out to us on our web site ’trigger that’s who we’re seeking to join with.
Meb:
Liz, thanks a lot for becoming a member of us as we speak.
Liz:
Thanks for having me.
Meb:
Podcast listeners we’ll publish present notes to as we speak’s dialog at mebfaber.com/podcast. In the event you love the present, should you hate it, shoot us suggestions at suggestions@themebfabershow.com. We like to learn the opinions. Please overview us on iTunes and subscribe the present anyplace good podcasts are discovered. Thanks for listening, associates, and good investing.
