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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 right now’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising firms which can be stakeholder ruled, objective pushed, and make a internet optimistic affect on the world. Then she shares some scorching takes on the state of each ESG and energetic administration. As we wind down, Liz talks concerning the strategy of launching an ETF with our buddies at Alpha Architect and shares recommendation for anybody occupied with launching one themselves.
Feedback or recommendations? Serious about sponsoring an episode? E mail us Suggestions@TheMebFaberShow.com
Hyperlinks from the Episode:
- 1:15 – Welcome Liz to the present
- 1:46 – Launching BEEZ
- 7:11 – Discovering accountable progress and being ‘quantamental’
- 10:19 – Lively administration and index hugging
- 15:14 – Important 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 begin 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 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 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. Attributable to business rules, he won’t talk about any of Cambria’s funds on this podcast. All opinions expressed by podcast individuals 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 right now. 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 right now’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 internet optimistic 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 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 right now?
Liz:
Toronto, the nice white north up right here.
Meb:
I heard an A in your diction earlier. Are you initially a Canadian?
Liz:
Yep, born and raised in Toronto my complete life. I’ve by no means gone anyplace else. Really I went to Montreal for varsity 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 loads right now. One of many matters listeners, which you in all probability actually wish to stick round for is this idea of beginning ETFs. I get lots of questions. Day-after-day folks wish to begin an ETF, they obtained an concept for an ETF. We’re going to speak about somebody who’s finished it very not too long ago, placing out their first fund in November with our loopy buddy, Wes Grey and crew. So we’ll undoubtedly get into a little bit little bit of that later. However I wish to speak a little bit bit about you, your concepts, your course of. Give us a little bit 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 client insights, so testing model technique for PNG and large 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 obtained divorced. So whenever 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 concept,” having actually no idea of the funding business past a little bit 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 begin 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 referred to as Bristol Gate for people who wish to google issues. We launched ETFs in 2018, and I had met my co-founder on the identical time, and we thought all these people are attempting to launch ESG methods they usually’re all lacking what we predict the tip shopper for these ESG merchandise need. And this, to be tremendous clear, is lengthy solely fairness universe, not alter hedge funds or something like that.
And so in 2018, we set out, which is 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 loads longer up right here to get accepted by the regulators. We began our monitor information 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 automobiles value some huge cash they usually take lots of effort to distribute. They take lots of consciousness and all these things.
In any case, we had all the time supposed to launch a retail automobile. We didn’t ever need a non-public fund. Lengthy-only boring methods undoubtedly don’t make sense in non-public funds in Canada or the US and we thought we’d have a Canadian 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’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 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, plenty 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 increase, 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 whole 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 speak about for 10 years concerning the issues with present ESG and funding frameworks, however we threw out lots of the scores and present fashions and present assumptions about ESG. And we took what my dad had constructed, a quantum psychological mannequin for Bristol Gate and we introduced in ESG knowledge on equal footing with the monetary knowledge all through the complete course of.
What we’re recognized on is ESG integration. So full ESG integration, which suggests we deal with ESG knowledge as basic firm knowledge in safety choice, not right here’s our monetary mannequin over right here on one facet and right here’s our ESG mannequin and evaluations over right here on different facet. We deal with the ESG knowledge that we use as basic firm knowledge when selecting these firms for the portfolio.
Meb:
So let’s dig in on the method as a result of a lot of the phrases you used may imply lots of various things. ESG means lots of various things to lots of completely different folks. So let’s hear a little bit bit about y’all’s course of. You’ve a pleasant deck. If we are able to embrace 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 by it. How do you guys discover accountable progress? What does that imply? And after we hit a few of these phrases, let’s attempt to give y’all’s interpretation of what you assume it means to you as effectively.
Liz:
So quantum psychological means we’re not purely basic and we’re not purely quant. We use each processes. And for people on the market who should not deeply steeped in fairness, basic fairness land, basic 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 various 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 knowledge factors. We don’t do a fancy-schmancy predictive complicated quant like a few of other people would possibly assume quants are. However we have now 25 qualification standards that’s making an attempt to get us all the way down to a consideration set about 50 firms.
And what that qualification standards seems like is there’s some useful stuff. Can we purchase it in custody in North America 5 billion minimal market cap? Some monetary. If we have now a dividend, it needs to be rising funding above funding grade credit standing. Then there’s lots of conventional ESG exclusions. So conventional ESG exclusions are type 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 firms make our display screen. We exclude fossil gas 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 vitality, they’re in all probability similar to, “Liz, what are you speaking about?”
Liz:
Properly, it makes it very attention-grabbing up right here as a result of we have now all the main pensions are deeply dedicated to ESG and deeply dedicated to vitality funding. And I prefer to level out to folks that the vitality firms are actually good at DEI and reporting far more so than tech firms and asset managers, however that’s a distinct 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 firms are a little bit too cyclical to have excessive constant dividend progress. So from becoming in into qualifying and moving into the portfolio, they’re more likely to fail anyway. So it’s type of only a bit simpler to display screen them out ’trigger you realize they’re not going to make it. We additionally don’t have any renewable vitality firms in our portfolio.
Meb:
Properly additionally, I imply whenever you transfer from a universe of hundreds 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 type of standards as effectively. In order that’s the entire level of energetic administration. You need a concentrated portfolio as a result of in case you’re charging greater than zero, you need it to take a look at bizarre and completely different.
Liz:
Yeah. And it’s humorous ’trigger I’ve by no means understood why people don’t need it to look bizarre and completely different. It’s certainly one of my huge 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 massive asset managers, as soon as they get to scale, after getting 10, 50, 100 billion, 500 billion, you don’t wish to look that completely different as a result of there’s solely draw back danger. The cash is already captive. And we all know that cash as soon as it’s sitting someplace, doesn’t prefer to go anyplace except 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 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, folks like to choose on ESG for index hugging. Lively 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 selections 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 kind of firms.
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 gained’t have a look at an organization who has not found out the way to put a pair token variety hires on their board but, largely as a result of in case you haven’t found out 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 looks like?
Liz:
No, individuals are a lot … Within the US, particularly the US boards are fairly various. Canada’s fairly dangerous, however clearly we’ve obtained none of these within the ETF. However even after we began, if we had a 40% bar, it might kick out plenty of people. 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 things for some time. So it doesn’t kick any of these out.
Funding grade credit standing would possibly kick out extra firms. In the event you have a look at the final cohort of our qualification course of, there’s in all probability 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 have now to cope with 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 are able to cowl from a basic deep dive perspective in essentially the most environment friendly method doable.
And we run that consideration set as soon as yearly. So we’ve finished it 5 instances now. So did 2018 until now and it evolves, nevertheless it doesn’t change that a lot. It completely spits out chubby IT, chubby 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, in case you have a look at our portfolio, there’s lots of manufacturing concerned firms. And that’s the place the semis type 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 a little bit 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 in all probability 90% male. I imply, I bear in mind giving a speech in New York to Quantopian crew they usually did a dwell viewers and it was like 95% male. However the enterprise capital has to me, essentially the most outsized. I imply, I believe girls get 2% of enterprise capital {dollars}. It’s some extremely low quantity that’s nowhere close to 50. However anyway. Okay, so we’re getting a little bit 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 primary drivers of those that type 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’d say? There’s an entire bunch they usually’re all fairly equal. And that want for dividend progress, the funding grade credit standing, the range, the business participation, the standard ESG exclusions, even glass door ranking, it’s type of simply an equal. You’d assume it was larger in among the areas. Apart from shedding complete industries, it’s a really attention-grabbing type 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 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 distinct course of ’trigger bear in mind, what we’re reducing out just isn’t, we are able to’t simply have the very best dividend growers as a result of if we simply seemed on the highest dividend growers to get the ESG growers too, or the accountable growers too, we’d must type of go a little bit 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 larger degree of ESG. And to be tremendous clear, in case you have a look at the Bristol Gate ETF, it has the next ESG ranking than most ESG managers and techniques 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 instances 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 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 basic 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 herald ESG knowledge and put it equally beside that monetary basic knowledge. And we purposely manage it underneath 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 will we simply to be tremendous complicated, will we consider measures as E, S and G. Each ESG enter that we use, we contemplate basic to the corporate. And I’ll provide you with some examples.
So turnover. Turnover prices you cash. It’s an ESG measure, however the larger turnover you will have, 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 undoubtedly an ESG factor, nevertheless it’s tied to the operations and the prices of an organization. It’s not a separate consideration. Waste is a superb instance. It prices plenty of cash to eliminate waste.
And you then get into the stuff that’s a little bit 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. Properly, firms that we’re searching for and that we personal perceive that the extra girls you will have in management roles, the larger your pool of candidates you need to recruit from. So it really will increase the various 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 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 are able to discover that’s comparatively systematizable throughout the consideration set of firms.
So if you consider it, we’re in all probability, of the 50 firms we’re doing this deep dive on, we’re among the high ESG reporters and scoring issues. So we really can run comparatively customized knowledge 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 degree of information but. However as a result of we’re this sort of extra superior ESG-esque pool of firms, we’re getting all these knowledge factors that we’d not be capable to purchase from an index supplier who’s promoting ESG knowledge throughout their index.
In the end, we’re constructing a excessive energetic share, 25 positions, tremendous concentrated ETF of essentially the most boring, sustainably rising, responsibly rising 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 objective.
And these firms are based on that and it doesn’t matter what their political opinions are. Properly-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 in all probability outline a few of these phrases.
Meb:
Positive, let’s hear it.
Liz:
So stakeholder governance. So anyone steeped in investing has been typically skilled that shareholder primacy and shareholder governance is the position of an organization. So an organization’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 potential to generate profits.
So stakeholder governance, which isn’t one thing I invented, I’d argue unique governance was stakeholder governance, however that’s a extra complicated matter. Stakeholder governance is only a firm that claims, “You already know what? Our workers and our clients and all this stuff have to be thought of in our governance and our administration processes. Why? As a result of they affect they usually’re impacted by our selections. And we’ll do higher if we’re partaking all of our stakeholders and serving to and supporting and never screwing over primarily all of our stakeholders.”
So there’s tons of firms on the market that imagine in a stakeholder governance framework. So as an alternative 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 searching for 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 things 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 your enterprise and the adjustments that you simply make and the outputs you can 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 making an attempt to suit all this local weather and variety into these fashions they usually don’t match as a result of the standard fashions assume shareholder primacy and shareholder governance. The one method ESG works in an organization is when its core to their operations and core to their objective, not as a separate exercise on the facet.
Our firms should 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 objective 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 actually complicated as a result of it’s one thing I discovered loads about in governance coaching and in advertising, which is it’s actually troublesome to speak constantly to folks.
And so these firms that we’re searching for know that it’s actually arduous and know that sharing, having a shared objective, getting an entire hundreds 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 must work on. And that shared objective just isn’t solely having a transparent objective 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 would possibly wish to say. When you will have 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 speculated to be doing.
That is all management and governance science that’s simply within the early levels of academia by way of quantifying and analyzing all these things. However I believe all people can agree that if all people’s operating round with their head lower off and no person is aware of what they’re doing at an organization, it’s reducing productiveness. And the extra all people may be on the identical web page by way of long-term objectives, the extra effectivity you can obtain.
Meb:
As you consider governance, there’s areas that you could be or will not be concerned, however you possibly can communicate to it. I’m considering of issues like within the US, significantly with among the tech firms this previous cycle who’ve been very type of me-focused, that means like stock-based compensation that’s simply outrageous, a ton of dilution to shareholders, perhaps twin shared lessons, all these type voting issues which have gone on.
Do these play any position in any respect in your varied screens and the way do you consider this push-pull story as previous as time with the steadiness of energy between boards and C-suite and compensation? How does that play into what y’all do?
Liz:
There’s like 100 matters there they usually’re all tremendous fascinating. I’m going to begin with a narrative. So Google again, should’ve been 2018, 2019 after 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 fireplace them, in all probability we must always do 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 fellows 50 million every and paid them off and induced a giant controversy with all their workers, all stuff that they may have been averted. It’s not their fault they obtained a bunch of sexually harassing dudes. The board’s job is to rent and fireplace the CEO. And when the CEO’s not hiring and firing the dude sexually harassing people, that’s a governance challenge.
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 useful governance.
The reply to your query is what’s useful governance? Is it an entire bunch of unbiased board members? Properly, that’s what the ESG scores would inform you is nice 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 objective, 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 identical time, completely. However I’d argue lots of that huge tech is poorly ruled. We don’t have any financial institution shares in our portfolio for a cause. And it’s not ’trigger they get excluded for producing fossil gas. However there’s a robust perception that non-independent administrators should not ESG. We don’t essentially share that perception. Whereas we’d desire … Clearly we search for audit committee independence for instance. That’s certainly one of our necessities. We gained’t spend money on an organization. However that ship’s sailed. Everyone is aware of the way 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 loads about CEO compensation, and there actually 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 information 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 in case you’ve obtained a person and a lady in senior management roles and the lady simply because she’s had decrease incomes all through her profession is getting paid much less, and that is stuff that 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 value plenty of cash. So it’s a very attention-grabbing, messy matter, however the way forward for ESG is us having 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 degree, and that’s going to finish up together with turnover. It’s going to finish up together with pay and pay fairness, together with bonuses. It’s very attention-grabbing as a result of wage versus bonuses will get very messy 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 have been reporting this already.
Meb:
How do you guys cope with shifting sands over time? Not on issues which can be as apparent perhaps as variety on boards, however issues like, hey, we’re going to exclude, you talked about hashish, alcohol, like opioids. I don’t know, a decade in the past folks have 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 needs to be carbs and the very last thing you need is fat or protein, no matter it was, and right now it’s inverted.
In order information change and shifts, how do you guys cope with that? I do know you mentioned it’s an annual course of, however do you type of replace these standards and concepts as they grow to be extra accepted? How do you consider a few of these matters?
Liz:
I prefer to level out virtually all the things we do kills folks and folk 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 lots of well being tech although, like medical gear and issues like that. One of many causes we have now no pharma firms is ’trigger all of them have worth fixing scandals. And so no matter their potential to kill people with their product or no matter, which is clearly don’t even get me began on the opioids and the Sacklers as a result of that may very well be 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 operating for costs or no matter after which the large congress factor.
However right here’s what occurs in ESG and affect, and I say ESG and affect as a result of affect scores occur in public markets too. Typically folks after they speak about affect investing, it’s simply non-public markets, however for essentially the most half we have now affect scores on these firms. The issue with affect scores is they often are based mostly on the SDGs, so the sustainable growth objectives that are developed for nations by the UN.
So an organization to be impactful in response to this framework, and I’ve obtained 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 handle an SDG. And so what occurs is all of the pharmaceutical firms get 100% affect ranking as a result of they make a drug that’s serving to folks. They don’t get any unfavourable ranking for worth fixing.
And so we’d not be solely involved concerning the opioid disaster. We’d be involved with the entire Sackler governance shit present catastrophe that was them creating the opioid disaster. For anyone who has not learn the lengthy, I believe it’s the Atlantic piece on the complete historical past of the advertising behind that, ’trigger once more, the meals pyramid that you simply 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 stop and he went on a giant, huge talking tour of the world to say, “Corporations don’t make an affect. Solely governments and nonprofits could make an affect.”
However the Sackler household in an organization by an entire bunch of promoting selections and a necessity to make more cash began and created a large unfavourable affect far past their product, proper? With all of the lies and the paying off medical doctors and continued points, they created a unfavourable affect that no authorities or nonprofit may cease.
And so the reply is firms make big, big impacts, optimistic and unfavourable. What we’re making an attempt to purpose for on this portfolio is firms making a internet optimistic affect. So firms who’re decreasing their unfavourable externalities as a result of they value cash, they damage folks, they give the impression of being dangerous from a PR perspective, an entire bunch of the explanation why you would cut back your unfavourable affect on the world whereas rising your optimistic affect. So whether or not that’s higher first rate pay, safer work situations, higher high quality merchandise, extra modern that clear up issues, discount in packaging so it prices much less, all these unfavourable and optimistic impacts.
Meb:
So so far as portfolio development, you get down to those small group of names, 25 whatnot. Do you will have 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 mentioned it was so that you didn’t have a bunch of PMs combating over place measurement. We run a correlation evaluation, nevertheless it’s sector agnostic. We used to personal McDonald’s and KFC in my dad’s technique. And folks would say, “Aren’t they the identical firm?” And whenever you have a look at the geographic income of them, they have been utterly reverse. And identical factor, there’s plenty of firms that look very related and appear very related on this giant cap house that aren’t essentially.
So whenever 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 undoubtedly don’t care about what the weights of the index are at any level in our determination making.
And we all know we’re going to be chubby tech and industrials and often supplies and each client issues relying on. However we’re agnostic to that. And these are equal weight bets, so we’re placing the identical weight on a mega cap as we’d be on a small cap within the portfolio.
After which that’s a part of the energetic share. We’re okay not holding the highest 30 one thing % of the index. We’ve not one of the pretend shares. You’ll be able to’t have excessive energetic share in case 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 searching for the 25 most responsibly rising firms out of that 50-ish set of firms that we have now. It turns into our bench too. So the following set of ranked firms in there are who will use when we have to fireplace an organization, whether or not it’s for quarterly earnings or doing one thing silly on the ESG facet or the non-ESG facet.
However once more, lots of our stuff is annual knowledge. Whereas annual reporting and stories come out midyear and issues like that, lots of our board variety adjustments after they change someone on a board, and we have now 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, in case you’ve obtained 76% board variety, after all you possibly can put an entire bunch of white dudes in your board, however in case you obtained 31 and each investor that reveals up is partaking with you in your board variety or one thing, you’re going to be cognizant of it.
And that’s what’s so humorous about ESG. The entire world tries 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 plenty of managers to be tremendous clear, ESG managers do lots of pushing on variety and environmental stuff and governance and all these sorts of issues, nevertheless 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’ll audit this knowledge and serving to them manage it. It’s the firms driving ESG. It’s not BlackRock driving ESG. It’s not … undoubtedly not Vanguard driving ESG stuff. Actually Vanguard is simply being referred to as into congress for pushing local weather change narrative, which is the funniest factor in 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 decreasing 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 things and workers who care about progress on these things.
Meb:
Give us a behind-the-scenes have a look at what it’s like to begin an ETF. We get this query loads. 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 a little bit 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 effectively?
Liz:
And a wholesaler and a marketer and all that type 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 individuals are all the time going to assume geographically by way of allocation in sure issues. I believe there’s actually a spot for thematics. If you launch a product, it doesn’t matter what it’s, this SMA mannequin, ETF fund index ’trigger that’s an entire attention-grabbing facet of the enterprise, you need to know who’s going to purchase it regardless of how cool the concept is, and you need to know the way it’s going to get distributed.
The great factor with an ETF automobile is folks should purchase it, common folks 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 in all probability 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. Properly, 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 should 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’t purchase them. You’ll be able to solely purchase them in case your shopper indicators a giant waiver and it will get a excessive danger ranking of their portfolio.
So regardless that these are probably the best, most talked about ETFs in the complete, whole world, an entire bunch of Merrill Lynch and UBS and Citi people should not going to have the ability to purchase them of their accounts anytime quickly as a result of they’re going to must get accepted, they’ll in all probability create inside ones in order that they’ll, ’trigger there’s a pay to play side there too, that folk want to grasp. You may get your ETF on Schwab or no matter for free-ish. Getting your ETF on US platforms requires time and cash and a bunch of random stuff.
So this crypto one’s actually attention-grabbing ’trigger these needs to be, there’s going to be like, I don’t know, what number of are there? 18 now, all the large asset managers, they usually’re going to observe 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 in all probability 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 possibility than a mutual fund as a result of one, you’re often going to cost it decrease. Two, they’re altering all of the charges and price buildings 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 less complicated ETF fashions, and that’s why we didn’t go along with Wes ’trigger we love Wes. We went with Wes as a result of we undoubtedly weren’t going to do a mutual fund, and he has an ideal 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. Properly, I observed your dictator’s remark earlier, and so I mentioned that seems like someone we all know.
Liz:
And I simply assume it’s so fascinating. Perth’s in all probability 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 could be an entire host of advisors throughout the US who could be completely high-quality 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 firms on the market to get the publicity. And yeah, you’re not going to appear like the index. However who cares? Plenty of people are searching for systematic or energetic choices, not the entire index. We’re by no means going to persuade a bunch of passive people to make use of this as a core possibility, even when we’re the perfect on this planet. You’ll be able to’t change the patron conduct.
So Perth actually constructed a product to resolve the tip consumer’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 all people ought to simply go be taught all the things about Perth as a result of if you wish to launch an ETF, actually simply go watch all Perth’s movies.
Meb:
Perth has been on the present. She’s an alum. She, listeners, runs the Freedom ETF, FRDM, which is closing in on a billion {dollars} in belongings. So go Perth. That’s rad.
Liz:
Perth is superb. She’s simply the right instance of it’s essential to discover who’s going to purchase your nice concept earlier than going and determining the way to make your nice concept. And perhaps you have been an advisor, perhaps you labored as a wholesaler, perhaps you labored someplace within the distribution of the business, however particularly in case 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 primary solutions earlier than you make a bunch of selections which can be going to value 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 prepared 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 have now, we spend the entire time worrying about who’s going to be the primary 20 million in.” So you bought to go discover type 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 it’s essential to have cash. Nevertheless it 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 firms you’ve by no means heard of. It’s actually 90% big asset managers who’ve obtained automobiles from 2 to $10 million.
I like telling people, Cathie Wooden launched an ESG ETF in, I don’t know, 2000 after which closed it 18 months later ’trigger she couldn’t increase cash in ESG ETFs. So actually you may be essentially the most well-known human being on earth. You continue to want to search out the distribution connection between the product that you simply’re wrapping and the necessity, after which it’s essential to not screw up the efficiency and all that type of stuff.
Meb:
Relating to, you’ve obtained lots of completely different takes on this house, however one of many questions we’ve been asking a lot of the company is, in case you sit all the way 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 in case 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, loads. I may go two instructions right here, so …
Meb:
Identify them each. Do each of them. We obtained time.
Liz:
So I don’t imagine you possibly can predict the market. As someone 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 parents yelling about shares all day, every single day and guessing the place macro goes to go and all this stuff. I don’t assume it’s 75% of parents don’t imagine 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 energetic safety choice is among the largest issues. That’s why we’re macro agnostic. We’re all the things apart 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 normal take.
My ESG take, and I hear this loads, is ESG knowledge just isn’t standardized and may’t be standardized. And whenever 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 evaluate 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 positive, it undoubtedly seemed like stuff was not standardized by way of ESG knowledge, 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 completely different frameworks in ESG, however in case 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, in all probability like 400 of the S&P 500 firms are reporting this framework. Are they reporting year-over-year? No. You’ll be able to return to their earlier report and a few are laggards and a few are forward, however we’re ready to take a look at three 12 months knowledge for many of those metrics for many of our firms.
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, whenever 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 instances 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 obtained 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 wish to decide 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 development.
Meb:
Proper on. The place do folks discover out extra info? The place do they go? Observe you, comply with the agency, the fund, all that.
Liz:
So we have now an ETF web site, which is honeytreeinvestetfs, which is all that formal one. After which we have now 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 plenty of articles and podcasts and issues like that.
I, regardless of Twitter or no matter people wish to name it present shit present, I’m nonetheless on there. I’ll be on there till it goes down for quite a lot of completely different causes. ‘Trigger I like the neighborhood and there’s plenty of nice people there, and it’s how we met Wes and all this stuff. So Liz Simmie on Twitter, if you need obnoxious, occasional ESG takes. I largely simply rant about how BlackRock just isn’t 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. In the event you’re a retail investor, it’s in all probability even simpler to entry than an advisor, however after all, we’re primarily targeted on advisors on this. So in case you’re an advisor inquisitive about ESG and is aware of nothing about it otherwise you’re a deep ESG practitioner, please be at liberty to succeed in out to us on our web site ’trigger that’s who we’re trying to join with.
Meb:
Liz, thanks a lot for becoming a member of us right now.
Liz:
Thanks for having me.
Meb:
Podcast listeners we’ll publish present notes to right now’s dialog at mebfaber.com/podcast. In the event you love the present, in case you hate it, shoot us suggestions at suggestions@themebfabershow.com. We like to learn the evaluations. Please evaluate us on iTunes and subscribe the present anyplace good podcasts are discovered. Thanks for listening, buddies, and good investing.
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