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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 immediately’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising firms which can be stakeholder ruled, goal pushed, and make a web optimistic influence on the world. Then she shares some sizzling takes on the state of each ESG and lively administration. As we wind down, Liz talks in regards to the strategy of launching an ETF with our buddies at Alpha Architect and shares recommendation for anybody occupied with launching one themselves.
Feedback or solutions? Focused on 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 progress and being ‘quantamental’
10:19 – Energetic administration and index hugging
15:14 – Fundamental 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
Be taught extra about Liz: Honey Tree Make investments; X
Transcript:
Welcome Message:
Welcome to The Meb Faber Present, the place the main target 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 can assist 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 mirror the opinion of Cambria Funding Administration or its associates. For extra info, go to cambriainvestments.com.
Meb:
Hey, hey all people. A enjoyable present once more immediately. Our visitor is Liz Simmie, co-founder of Honeytree Funding Administration, which not too long ago launched an actively managed ESG-focused ETF ticker BEEZ. In immediately’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising firms which can be stakeholder-governed, purpose-driven and make a web optimistic influence on the world. And he or she shares some sizzling takes on the state of each ESG and lively administration. As we wind down, Liz talks in regards to the strategy of launching an ETF with our buddies at Alpha Architect, and shares recommendation for anybody occupied 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 immediately?
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 adore it up there. We’re going to speak about quite a bit immediately. One of many subjects listeners, which you most likely actually need to stick round for is this idea of beginning ETFs. I get quite a lot of questions. On daily basis individuals need to begin an ETF, they received an concept for an ETF. We’re going to speak about somebody who’s achieved it very not too long ago, placing out their first fund in November with our loopy buddy, Wes Grey and crew. So we’ll positively get into somewhat little bit of that later. However I need to discuss somewhat bit about you, your concepts, your course of. Give us somewhat background.
Liz:
I’ve an economics diploma, economics and historical past diploma, and I wished nothing to do with this nice trade 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 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 received 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 return in. I begrudgingly stated, “Certain, it appears like an attention-grabbing concept,” having actually no idea of the funding trade past somewhat 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 totally 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 similar time, and we thought all these people are attempting to launch ESG methods they usually’re all lacking what we predict 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 yr we launched the ETFs up right here. 2018, we got down to discovered Honeytree. We had been registered in 2019. It takes quite a bit longer up right here to get authorized by the regulators. We began our monitor data in 2019 for our international fairness technique. We did that in order that we didn’t must launch a automobile off the bat as a result of autos price some huge cash they usually take quite a lot of effort to distribute. They take quite a lot of consciousness and all these items.
In any case, we had all the time supposed to launch a retail automobile. We didn’t ever desire a personal fund. Lengthy-only boring methods positively don’t make sense in personal 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 nearly as good, however we thought we might 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 person 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 all people is aware of within the US, a number of states have numerous 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 giant cap and it’s targeted on accountable progress.
So it’s the identical funding thesis we’ve been engaged on our complete agency historical past, which is responsibly rising firms, stakeholder-governed, purpose-driven firms who handle their stakeholders outperform in the long term.
What’s actually attention-grabbing is we didn’t like all of the present ESG frameworks. We thought, and I may discuss for 10 years in regards to the issues with present ESG and funding frameworks, however we threw out quite a lot of the rankings 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 the complete 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 facet and right here’s our ESG mannequin and critiques over right here on different facet. We deal with the ESG information that we use as elementary firm information when choosing these firms for the portfolio.
Meb:
So let’s dig in on the method as a result of quite a few the phrases you used may imply quite a lot of various things. ESG means quite a lot of various things to quite a lot of totally different individuals. So let’s hear somewhat bit about y’all’s course of. You’ve gotten a pleasant deck. If we are able to embody it within the present notes, listeners, we actually will on the method, which I believe may be very useful. However why don’t you stroll us via 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 properly.
Liz:
So quantum psychological means we aren’t purely elementary and we aren’t purely quant. We use each processes. And for folk on the market who aren’t 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 usually 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 is likely to 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 other people may assume quants are. However we’ve 25 qualification standards that’s attempting to get us right down to a consideration set about 50 firms.
And what that qualification standards appears to be like 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 a dividend, it needs to be rising funding above funding grade credit standing. Then there’s quite a lot of conventional ESG exclusions. So conventional ESG exclusions are sort 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 firms make our display screen. We exclude fossil gasoline manufacturing.
Meb:
That’s sacrilege up there in Toronto. Man, no surprise you’re launching this within the US. There’s all of the basic Canadians, man, the mining and power, they’re most likely similar to, “Liz, what are you speaking about?”
Liz:
Nicely, it makes it very attention-grabbing up right here as a result of we’ve all the main pensions are deeply dedicated to ESG and deeply dedicated to power funding. And I wish to level out to those that the power firms are actually good at DEI and reporting rather more so than tech firms and asset managers, however that’s a distinct 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 firms are somewhat too cyclical to have excessive constant dividend progress. So from becoming in into qualifying and stepping into the portfolio, they’re prone to fail anyway. So it’s form 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 firms 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 kinds 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 type of standards as properly. In order that’s the entire level of lively administration. You desire a concentrated portfolio as a result of should you’re charging greater than zero, you need it to take a look at bizarre and totally different.
Liz:
Yeah. And it’s humorous ’trigger I’ve by no means understood why people don’t need it to look bizarre and totally different. It’s certainly one of my huge points with lively administration index hugging.
Meb:
It’s quite simple. They need it to look bizarre and totally different when it’s going up. They need it to look bizarre and totally 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 quite a lot of the massive asset managers, as soon as they get to scale, upon getting 10, 50, 100 billion, 500 billion, you don’t need to look that totally 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 wish to go anyplace except it will get abused or does very poorly. Should you take a look at quite a lot 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 select on ESG for index hugging. Energetic is index hugging all the way in which. I imply, I’m an enormous believer that quite a lot of lively underperformance comes from not taking dangers and never having excessive lively 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. After we run our international, we exclude dictatorships in our international 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 firms.
In our non-traditional ESG qualification standards, we take a look at board variety past gender. So we embody racial variety of board members, 33% or extra. So we gained’t take a look at an organization who has not found out how you can put a pair token variety hires on their board but, principally as a result of should you haven’t found out 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, persons are a lot … Within the US, particularly the US boards are fairly numerous. Canada’s fairly unhealthy, however clearly we’ve received none of these within the ETF. However even once we began, if we had a 40% bar, it could kick out a number 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 items for some time. So it doesn’t kick any of these out.
Funding grade credit standing may kick out extra firms. Should you take a look at the final cohort of our qualification course of, there’s most likely extra boards that fail or extra firms that fail on funding grade credit standing or fraud points and issues like that, lawsuits, than on the board variety. Why? ‘Trigger all people’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 to take care of the universe as it’s. ‘Trigger our aim is to get from the universe right down to a manageable consideration set that we are able to cowl from a elementary deep dive perspective in probably the most environment friendly manner doable.
And we run that consideration set as soon as yearly. So we’ve achieved it 5 occasions 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’ve some monetary stuff. We typically don’t have actual property, and we’re okay with that.
And one factor you’ll discover, should you take a look at our portfolio, there’s quite a lot of manufacturing concerned firms. And that’s the place the semis form of pop in. It’s ’trigger these firms who’ve needed to handle labor, handle manufacturing amenities, handle worker security, you possibly can think about there could also be somewhat few steps forward of a West Coast tech firm by way of occupied 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, probably 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 somewhat off-topic.
All proper, so we’re beginning with quite a few these components. You bought quite a lot of them. What do you assume are the principle drivers of those that type of filter out probably 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 usually, I imply clearly participation exclusions. You recognize 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 trade participation, the standard ESG exclusions, even glass door score, it’s form of simply an equal. You’d assume it was larger in a few of the areas. Apart from shedding complete industries, it’s a really attention-grabbing form of balanced course of.
After we did it at Bristol Gate, it was the S&P 500, removed all of the non-dividend payers, removed all people beneath funding grade credit standing, and based mostly on subsequent yr’s predicted dividend, we selected the highest 50 and did the basic deep dive on these. And what we’re getting with the identical however a distinct course of ’trigger bear in mind, what we’re slicing out shouldn’t be, we are able to’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 need to form of go somewhat 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 take 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 rankings ’trigger they typically 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 these items that make up ESG rankings.
And also you’ll discover I didn’t point out we use ESG rankings as a result of we don’t use ESG rankings at any half in our course of. And ESG rankings, simply ’trigger I do know individuals hate ESG and rankings, ESG rankings are the identical as purchase/promote rankings, proper? So it’s simply exterior sourced analysis {that a} portfolio supervisor should purchase or not.
And so we run that qualification as soon as yearly. That will get us to about 50-ish firms. 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 progress, dividend progress, 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 think about 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 individuals. Water use, if it can save you the fee that you just spend on water, it’s a monetary factor. It’s positively 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 a number of cash to eliminate waste.
And you then get into the stuff that’s somewhat 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, firms that we’re in search of 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 numerous optimistic advantages to the corporate of doing this primary stuff that some would say is silly DEI stuff. However the firms 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 take a look at science-based targets, that are net-zero associated. We take a look at parental go away. We take a look at what information we are able to discover that’s comparatively systematizable throughout the consideration set of firms.
So if you consider it, we’re most likely, of the 50 firms we’re doing this deep dive on, we’re a few of the prime ESG reporters and scoring issues. So we really can run comparatively customized information units throughout this 50-ish group of firms 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 firms aren’t reporting that stage of knowledge but. However as a result of we’re this type of extra superior ESG-esque pool of firms, we’re getting all these information factors that we might not be capable of purchase from an index supplier who’s promoting ESG information throughout their index.
Finally, we’re constructing a excessive lively share, 25 positions, tremendous concentrated ETF of probably the most boring, sustainably rising, responsibly rising firms. And in a nutshell, these firms 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 goal.
And these firms are based on that and it doesn’t matter what their political opinions are. Nicely-managed, long-term targeted firms 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:
Certain, 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 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 an entire bunch of different components affect an organization’s capacity to generate profits.
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 recognize what? Our workers and our clients and all these items have to be thought of in our governance and our administration processes. Why? As a result of they influence 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 firms 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 in search of these firms the place there’s proof of their metrics, no matter these metrics is likely to 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 items similar to you possibly can’t say you care about variety. Saying you care about variety or the atmosphere is nice, however what you really do in your enterprise and the modifications that you just make and the outputs that you would be able to 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 firms do extra naturally. I believe it’s within the funding trade I believe quite a lot of our conventional finance concept 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 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 manner ESG works in an organization is when its core to their operations and core to their goal, not as a separate exercise on the facet.
Our firms aren’t 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 had been all the time based and the way they’ve all the time operated. And purpose-driven is basically complicated as a result of it’s one thing I discovered quite a bit about in governance coaching and in advertising, which is it’s actually tough to speak constantly to individuals.
And so these firms that we’re in search of 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 aim constantly and speaking that aim is a tough exercise that they as a board and a administration group must work on. And that shared goal shouldn’t be solely having a transparent goal for the group, however serving to all of your workers, your entire stakeholders, your entire 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 people get confused and don’t perceive as clearly what they’re speculated 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 all people can agree that if all people’s working round with their head minimize off and no person is aware of what they’re doing at an organization, it’s lowering productiveness. And the extra all people may be on the identical web page by way of long-term objectives, the extra effectivity that you would be able to obtain.
Meb:
As you consider governance, there’s areas that you could be or might not be concerned, however you possibly can communicate to it. I’m pondering of issues like within the US, significantly with a few of the tech firms this previous cycle who’ve been very type of me-focused, which 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 varied screens and the way do you consider this push-pull story as outdated as time with the stability 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 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 stated, “In all probability we must always inform individuals 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 firms on this planet sat there and twiddled their thumbs. After which ultimately they gave the blokes 50 million every and paid them off and precipitated an enormous controversy with all their workers, all stuff that they may have been prevented. It’s not their fault they received 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 people, that’s a governance situation.
The primary time we constructed the portfolio, our international fairness technique, two of the boards had not too long ago fired their CEOs for sleeping with their secretaries and varied 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? Nicely, that’s what the ESG rankings would inform you is sweet governance. The issue is 10 unbiased extremely certified people don’t create good governance. Good governance is created by a governance tradition, by a shared goal, by individuals really working collectively on governance points.
So you possibly can have good governance with bizarre compensation and all this type of stuff on the similar time, completely. However I might argue quite a lot of that huge tech is poorly ruled. We don’t have any financial institution shares in our portfolio for a motive. And it’s not ’trigger they get excluded for producing fossil gasoline. However there’s a sturdy perception that non-independent administrators aren’t ESG. We don’t essentially share that perception. Whereas we’d favor … Clearly we search for audit committee independence for instance. That’s certainly one of our necessities. We gained’t put money into an organization. However that ship’s sailed. All people is aware of how you can make their audit committee unbiased at this level and there’s no magic bullet on compensation.
And simply going again to CEO compensation, individuals hear quite a bit about CEO compensation, and there actually are quite a lot 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 could be common employee pay to CEO pay. So it actually is dependent upon what trade and which set of knowledge that you just’re utilizing. And what issues extra is, to me, who cares in regards to the CEO pay. What issues extra is the baseline worker pay. What issues extra is pay fairness. So should you’ve received 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 firms 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 number of cash. So it’s a extremely attention-grabbing, messy subject, however the way forward for ESG is us having the ability to get this information 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 information 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 all people and all people’s going to hate it apart from the businesses which were 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 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 immediately it’s inverted.
In order data change and shifts, how do you guys take care of that? I do know you stated it’s an annual course of, however do you type of replace these standards and concepts as they develop into extra accepted? How do you consider a few of these subjects?
Liz:
I wish to level out virtually every part we do kills individuals and people within the ESG facet of the stuff give particular sectors a cross, like prescribed drugs for instance. We’ve no pharma firms in our portfolio. We’ve quite a lot of well being tech although, like medical gear and issues like that. One of many causes we’ve no pharma firms is ’trigger all of them have worth fixing scandals. And so no matter their capacity 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 could possibly be an entire different podcast, the value 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 influence, and I say ESG and influence as a result of influence rankings occur in public markets too. Generally individuals once they discuss influence investing, it’s simply personal markets, however for probably the most half we’ve influence rankings on these firms. The issue with influence rankings is they typically 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 response to this framework, and I’ve received an entire 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 firms get 100% influence score as a result of they make a drug that’s serving to individuals. They don’t get any damaging score for worth fixing.
And so we might not be solely involved in regards to 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 complete historical past of the advertising behind that, ’trigger once more, the meals pyramid that you just talked about, have you learnt who paid for that? It was not the FDA. It was the cereal firms simply to be tremendous clear. There’s an entire bunch of analysis that company pursuits … That is certainly one of my passionate areas. Tariq Fancy was the previous CIO of BlackRock, ESG at BlackRock, and he give up and he went on an enormous, huge talking tour of the world to say, “Corporations don’t make an influence. Solely governments and nonprofits could make an influence.”
However the Sackler household in an organization via an entire bunch of selling choices and a necessity to make more cash began and created an enormous damaging influence far past their product, proper? With all of the lies and the paying off docs and continued points, they created a damaging influence that no authorities or nonprofit may cease.
And so the reply is firms make big, big impacts, optimistic and damaging. What we’re attempting to purpose for on this portfolio is firms making a web optimistic influence. So firms who’re lowering their damaging externalities as a result of they price cash, they harm individuals, they appear unhealthy from a PR perspective, an entire bunch of the explanation why you would cut back your damaging influence on the world whereas rising your optimistic influence. So whether or not that’s higher respectable pay, safer work circumstances, higher high quality merchandise, extra modern that resolve issues, discount in packaging so it prices much less, all these damaging 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 type of sector composition display screen so it’s not all 25 in MedTech for instance, or how do you guys do any type 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 stated it was so that you didn’t have a bunch of PMs preventing 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 other people would say, “Aren’t they the identical firm?” And while you take a look at the geographic income of them, they had been utterly reverse. And similar factor, there’s a number of firms that look very comparable and appear very comparable on this giant cap area that aren’t essentially.
So while you take a look at our portfolio, we received 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 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 might be on a small cap within the portfolio.
After which that’s a part of the lively share. We’re okay not holding the highest 30 one thing p.c of the index. We’ve not one of the faux shares. You possibly can’t have excessive lively share should you’re holding a bunch of these firms. And all people else, I imply all people’s going to have these of their portfolio anyhow. However it’s actually, we’re in search of the 25 most responsibly rising firms out of that 50-ish set of firms that we’ve. It turns into our bench too. So the following set of ranked firms 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 facet or the non-ESG facet.
However once more, quite a lot of our stuff is annual information. Whereas annual reporting and experiences come out midyear and issues like that, quite a lot of our board variety modifications once they change anyone on a board, and we’ve 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 received 76% board variety, after all you possibly can put an entire bunch of white dudes in your board, however should you received 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 trade on ESG. They’re the laggards on this. The pensions for probably the most half do quite a lot of the engagement round and plenty of managers to be tremendous clear, ESG managers do quite a lot of pushing on variety and environmental stuff and governance and all these sorts of issues, however it’s the businesses themselves who notice that it’s a advertising profit, it’s a recruiting profit. It’s their huge 4 accountants saying that they will audit this information and serving to them manage it. It’s the companies driving ESG. It’s not BlackRock driving ESG. It’s not … positively 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 the complete world for a passive store.
The oil sands firms 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 buyers who care they usually could possibly 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 take a look at what it’s like to start out an ETF. We get this query quite a bit. Lots of people see the pot of gold on the finish of the rainbow. There’s clearly quite a lot of work that goes into it and also you guys are comparatively new launch, so congratulations. However inform us somewhat bit in regards to 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 form of stuff. I believe it’s fascinating that folks assume ETFs are like concepts. I believe there’s a lot room for innovation on this trade. I believe it’s going to look completely-ish totally different in 20 years, however I believe there’s some stuff that isn’t going to vary.
I believe there’s all the time going to be public markets buyers and personal markets buyers and people 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 actually a spot for thematics. While you launch a product, it doesn’t matter what it’s, this SMA mannequin, ETF fund index ’trigger that’s an entire attention-grabbing facet of the enterprise, it’s important to know who’s going to purchase it regardless 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 individuals should purchase it, common individuals should purchase it, and advisors should purchase it in a bunch of locations, however there’s an entire bunch of restrictions and issues. They make issues extra difficult than simply launching an ETF. Just like the crypto ones, for instance, you most likely are buddies 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.
Apparently up in Canada, not one of the warehouses locked their cabinets to Canadian or US listed ETFs. So any advisor in Canada should purchase any ETFs besides the crypto ones. The massive banks up right here has put a particular ruling on crypto ETFs, they usually mainly stated to advisors, you can’t purchase them. You possibly can solely purchase them in case your consumer indicators an enormous waiver and it will get a excessive danger score of their portfolio.
So regardless that these are probably the best, most talked about ETFs in the complete, complete world, an entire bunch of Merrill Lynch and UBS and Citi people aren’t going to have the ability to purchase them of their accounts anytime quickly as a result of they’re going to need to get authorized, they’ll most likely create inside ones in order that they will, ’trigger there’s a pay to play facet there too, that people 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 money 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 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 as if an ETF is a magic bullet by way of wrapper for these merchandise, there’s an entire bunch of different concerns.
In order that’s simply my rant to inform all people that your product concept 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 you need to make earlier than spending an entire 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 changing into an more and more higher choice 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 the direction of arguably easier ETF fashions, and that’s why we didn’t go together 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 important 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 stated that appears like anyone we all know.
Liz:
And I simply assume it’s so fascinating. Perth’s most likely certainly one of my favourite examples clearly, of constructing a profitable product. She knew there was an absence 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 fantastic with their rising market slice of the pie to not embody Chinese language holdings or Russian holdings or Qatari holdings or no matter as a result of there’s sufficient rising markets firms on the market to get the publicity. And yeah, you’re not going to appear to be the index. However who cares? A number of people are in search of systematic or lively 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 choice, even when we’re the perfect on this planet. You possibly can’t change the buyer conduct.
So Perth actually constructed a product to unravel the top consumer’s wants. And I imply, she received 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 all people ought to simply go be taught every part 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 superb. She’s simply the proper instance of it is advisable discover who’s going to purchase your nice concept earlier than going and determining how you can make your nice concept. And possibly you had been an advisor, possibly you labored as a wholesaler, possibly you labored someplace within the distribution of the trade, however particularly should you’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 primary solutions earlier than you make a bunch of selections which can be going to price you cash that you just’re going to want to go change.
The best way to launch an ETF is to have an entire bunch of cash and be prepared to spend it, I believe is one of the best ways. Launching a automobile, 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 fairly large asset supervisor, and he was like, “Yeah, any new fund we’ve, we spend the entire time worrying about who’s going to be the primary 20 million in.” So you bought to go discover form of the place that first 20 million is, after which it’s by no means going to return as quick as you need it to return, and that’s why it is advisable have cash. Nevertheless it actually is, you take a look at the listing of … any listing of ETFs and also you go to the underside ones. And it’s not similar to 30 little startup firms you’ve by no means heard of. It’s actually 90% big asset managers who’ve received autos 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 probably 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 it is advisable not screw up the efficiency and all that form of stuff.
Meb:
Relating to, you’ve received quite a lot of totally different takes on this area, however one of many questions we’ve been asking many of the company is, should you sit right down to espresso or lunch with a bunch of advisors which can be type 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, quite a bit. I may go two instructions right here, so …
Meb:
Title them each. Do each of them. We received time.
Liz:
So I don’t consider you possibly can predict the market. As anyone 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, daily and guessing the place macro goes to go and all these items. 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 believe there’s danger in timing. I believe all of the research counsel that the timing danger of lively safety choice is likely one of the largest issues. That’s why we’re macro agnostic. We’re every part 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 normal take.
My ESG take, and I hear this quite a bit, is ESG information shouldn’t be standardized and might’t be standardized. And while you take 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 via 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 positive, it positively regarded like stuff was not standardized by way of ESG information, all the businesses we’re have moved in the direction of this. It’s referred to as the GRI template. There’s like a billion totally different frameworks in ESG, however should you go into any giant cap sustainability report, apart from a Tesla or all the parents who refuse to report primary ESG stuff, which is a really small group now, the overwhelming majority, most likely like 400 of the S&P 500 firms 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 in a position to take a look at three yr information for many of those metrics for many of our firms.
Meb:
As you look again in your profession, what’s been probably the most memorable funding? Good, unhealthy, in between?
Liz:
In all probability beginning the agency, however I’m going to say this ETF principally as a result of it’s public. I imply, while you’re working in separate accounts, we may 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 midst of states that no person’s ever heard of, which might be the twelfth largest RIA or asset wealth store in Canada.
And so I received to say, our ETF BEEZ is my favourite funding. We don’t love our firms 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 need to decide a great group. 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 info? The place do they go? Observe you, comply with the agency, the fund, all that.
Liz:
So we’ve an ETF web site, which is honeytreeinvestetfs, which is all that formal one. After which we’ve honeytreeinvest.com, which is our common one which has tons of blogs. Should you simply google Honeytree Funding or Honeytree ETF, you’ll see a number 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 a wide range of totally different causes. ‘Trigger I like the neighborhood and there’s a number of nice people there, and it’s how we met Wes and all these items. So Liz Simmie on Twitter, in order for you obnoxious, occasional ESG takes. I principally simply rant about how BlackRock shouldn’t be woke and folks 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 most likely even simpler to entry than an advisor, however after all, we’re primarily targeted on advisors on this. So should you’re an advisor fascinated with ESG and is aware of nothing about it otherwise you’re a deep ESG practitioner, please be at liberty 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 immediately.
Liz:
Thanks for having me.
Meb:
Podcast listeners we’ll publish present notes to immediately’s dialog at mebfaber.com/podcast. Should you love the present, should you hate it, shoot us suggestions at suggestions@themebfabershow.com. We like to learn the critiques. Please overview us on iTunes and subscribe the present anyplace good podcasts are discovered. Thanks for listening, buddies, and good investing.
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