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 at present’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising corporations which are stakeholder ruled, objective pushed, and make a web optimistic affect on the world. Then she shares some sizzling takes on the state of each ESG and energetic administration. As we wind down, Liz talks in regards to the strategy of launching an ETF with our pals at Alpha Architect and shares recommendation for anybody enthusiastic about launching one themselves.
Feedback or strategies? Concerned about sponsoring an episode? E-mail us [email protected]
Hyperlinks from the Episode:
1:15 – Welcome Liz to the present
1:46 – Launching BEEZ
7:11 – Discovering accountable development and being ‘quantamental’
10:19 – Energetic administration and index hugging
15:14 – Most important components that filter out sectors and firms
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
Study 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. Attributable to business rules, he won’t talk about any of Cambria’s funds on this podcast. All opinions expressed by podcast members 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 everyone. A enjoyable present once more at present. Our visitor is Liz Simmie, co-founder of Honeytree Funding Administration, which lately launched an actively managed ESG-focused ETF ticker BEEZ. In at present’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising corporations which are stakeholder-governed, purpose-driven and make a web optimistic affect on the world. And he or she shares some sizzling takes on the state of each ESG and energetic administration. As we wind down, Liz talks in regards to the strategy of launching an ETF with our pals at Alpha Architect, and shares recommendation for anybody enthusiastic about launching one themselves.
Please get pleasure from this episode with Liz Simmie.
Liz, welcome to the present.
Liz:
Thanks for having me.
Meb:
The place do we discover you at present?
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. Really I went to Montreal for college after which got here again and can by no means go away this nice metropolis and nation.
Meb:
Superior. I like it up there. We’re going to speak about quite a bit at present. One of many subjects listeners, which you most likely actually wish to stick round for is this idea of beginning ETFs. I get plenty of questions. Day-after-day folks wish to begin an ETF, they bought an concept for an ETF. We’re going to speak about somebody who’s executed it very lately, placing out their first fund in November with our loopy pal, Wes Grey and crew. So we’ll undoubtedly get into just a little little bit of that later. However I wish to discuss just a little bit about you, your concepts, your course of. Give us just a little background.
Liz:
I’ve an economics diploma, economics and historical past diploma, and I wished nothing to do with this nice business of ours as a result of I wished to make the world a greater place and do cool stuff. So I ended up in market analysis, so shopper insights, so testing model technique for PNG and massive financial institution, new account, all these cool analysis tasks, quantitative and qualitative.
After which my dad began an rising supervisor. So my dad’s a bootstrapped US fairness supervisor based mostly in Toronto, and so they had this third man who was American and he bought divorced. So while you get divorced and also you’re right here on a spousal visa, you get despatched again to the US, which it’s what it’s. So my dad wanted a 3rd individual to return in. I begrudgingly stated, “Certain, it appears like an attention-grabbing concept,” having actually no idea of the funding business past just a little little bit of publicity right here and there.
And I used to be fortunate. I joined a bootstrapped dividend development fairness supervisor at about 10 million AUM and was there till about 1.5 billion AUM after which left to begin Honeytree. And to be tremendous clear, it’s ’trigger my dad was a founder. There’s a complete pile of privilege in there, but when I had gone the standard path to be a portfolio supervisor at an even 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 known 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 and so they’re all lacking what we expect the tip 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 permitted 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 price some huge cash and so they take plenty of effort to distribute. They take plenty of consciousness and all these things.
In any case, we had all the time meant 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 pretty much as good, however we thought we’d launch a subadvised Canadian automobile up right here.
After which we met Wes. And Wes determined that we wanted to get ourselves right into a US ETF. After which we realized, wait a second, US, the US market’s greater, there’s simply as a lot if no more demand for ESG merchandise. One main distribution distinction between Canada and the US is in Canada, no one cares that we’re girl owned. We’re the fifth or sixth public markets asset supervisor owned by girl in Canada. That’s what number of there are up right here. So there’s no supervisor variety initiatives up right here institutionally or from advisors, whereas everyone is aware of within the US, a number of states have various supervisor initiatives at their pensions and issues like that.
So we thought, if we’re going to do that automobile, let’s do it within the US, let’s do it as an ETF and let’s do it with Wes. And growth, November seventh, we launched our first ETF and the ticker is BEEZ, B-E-E-Z, ’trigger branding issues and it’s a US massive cap and it’s targeted on accountable development.
So it’s the identical funding thesis we’ve been engaged on our complete agency historical past, which is responsibly rising corporations, stakeholder-governed, purpose-driven corporations who maintain their stakeholders outperform in the long term.
What’s actually attention-grabbing is we didn’t like several of the present ESG frameworks. We thought, and I may discuss for 10 years in regards to the issues with current ESG and funding frameworks, however we threw out plenty of the scores and current fashions and current assumptions about ESG. And we took what my dad had constructed, a quantum psychological mannequin for Bristol Gate and we introduced in ESG knowledge on equal footing with the monetary knowledge all through all the course of.
What we’re identified on is ESG integration. So full ESG integration, which implies 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 opinions over right here on different facet. We deal with the ESG knowledge that we use as basic firm knowledge when choosing these corporations for the portfolio.
Meb:
So let’s dig in on the method as a result of a lot of the phrases you used may imply plenty of various things. ESG means plenty of various things to plenty of totally different folks. So let’s hear just a little bit about y’all’s course of. You could have a pleasant deck. If we will embody it within the present notes, listeners, we definitely will on the method, which I feel may be very useful. However why don’t you stroll us by it. How do you guys discover accountable development? 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 suppose it means to you as properly.
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 are usually 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 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 perhaps. On this case for the ETF, it’s the US. And we run 25 qualification standards. And most of these are quantitative knowledge factors. We don’t do a fancy-schmancy predictive complicated quant like a few of people would possibly suppose quants are. However we’ve got 25 qualification standards that’s making an attempt to get us all the way down to a consideration set about 50 corporations.
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 got a dividend, it needs to be rising funding above funding grade credit standing. Then there’s plenty of conventional ESG exclusions. So conventional ESG exclusions are variety like the unique spiritual investor exclusion as a result of ESG has its roots in spiritual investing. So no weapons, no weapons, no playing. We don’t exclude pot, however no pot corporations make our display. 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 traditional Canadians, man, the mining and power, they’re most likely similar to, “Liz, what are you speaking about?”
Liz:
Properly, it makes it very attention-grabbing up right here as a result of we’ve got all the most important pensions are deeply dedicated to ESG and deeply dedicated to power funding. And I wish to level out to folks that the power corporations are actually good at DEI and reporting rather more so than tech corporations 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 corporations are just a little too cyclical to have excessive constant dividend development. So from becoming in into qualifying and stepping into the portfolio, they’re more likely to fail anyway. So it’s type of only a bit simpler to display them out ’trigger you understand they’re not going to make it. We additionally don’t have any renewable power corporations in our portfolio.
Meb:
Properly additionally, I imply while you transfer from a universe of 1000’s all the way 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 kind of standards as properly. In order that’s the entire level of energetic administration. You need a concentrated portfolio as a result of in the event you’re charging greater than zero, you need it to have 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 massive points with energetic 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 downside as a result of plenty of the big asset managers, as soon as they get to scale, after getting 10, 50, 100 billion, 500 billion, you don’t wish 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. In case you take a look at plenty 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 select on ESG for index hugging. Energetic is index hugging all the best way. I imply, I’m a giant believer that plenty 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. Once 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 international locations or sort of corporations.
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 received’t take a look at an organization who has not discovered the best way to put a pair token variety hires on their board but, largely as a result of in the event you haven’t discovered how to do this from a governance perspective, you’re not very competent.
Meb:
I imply, does that display alone kick out half of the universe it looks like?
Liz:
No, individuals are a lot … Within the US, particularly the US boards are fairly various. Canada’s fairly dangerous, however clearly we’ve bought none of these within the ETF. However even once we began, if we had a 40% bar, it will kick out a number of people. It’s humorous ’trigger actually it finally ends up kicking out cool tech renewable power 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 corporations. In case you take a look at the final cohort of our qualification course of, there’s most likely extra boards that fail or extra corporations that fail on funding grade credit standing or fraud points and issues like that, lawsuits, than on the board variety. Why? ‘Trigger everyone’s slowly figuring it out. And to be tremendous clear, we’ve elevated that 33% from 30, so finally it’ll be 35 and we’ve got 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 will cowl from a basic deep dive perspective in essentially the most environment friendly approach potential.
And we run that consideration set as soon as yearly. So we’ve executed 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 now have some monetary stuff. We usually don’t have actual property, and we’re okay with that.
And one factor you’ll discover, in the event you take a look at our portfolio, there’s plenty of manufacturing concerned corporations. And that’s the place the semis type of pop in. It’s ’trigger these corporations who’ve needed to handle labor, handle manufacturing amenities, handle worker security, you may think about there could also be just a little few steps forward of a West Coast tech firm by way of enthusiastic about their staff 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 keep in mind giving a speech in New York to Quantopian crew and so they did a reside viewers and it was like 95% male. However the enterprise capital has to me, essentially the most outsized. I imply, I feel 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 just a little off-topic.
All proper, so we’re beginning with a lot of these components. You bought plenty of them. What do you suppose are the primary drivers of those that kind of filter out essentially the most issues? Are there any of the 25 or so which are significantly extra outstanding?
Liz:
Checked out it year-over-year and so they are typically, I imply clearly participation exclusions. what I might say? There’s a complete bunch and so they’re all fairly equal. And that want for dividend development, the funding grade credit standing, the range, the business participation, the standard ESG exclusions, even glass door score, it’s type of simply an equal. You’ll suppose it was greater in a number of the areas. Apart from shedding complete industries, it’s a really attention-grabbing type of balanced course of.
Once we did it at Bristol Gate, it was the S&P 500, removed all of the non-dividend payers, removed everyone beneath funding grade credit standing, and based mostly on subsequent yr’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 keep in mind, what we’re reducing out shouldn’t be, we will’t simply have the 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 need to type of go just a little bit additional than the highest 50 excessive dividend growers.
And that’s why we altered or optimized this course of that my dad constructed as a result of we 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 increased stage of ESG. And to be tremendous clear, in the event you take a look at the Bristol Gate ETF, it has the next ESG score than most ESG managers and methods on the market as a result of boring, excessive, constant sustainable dividend growers usually have excessive ESG scores ’trigger they often don’t do a complete bunch of silly stuff that will get you pushed down within the rating with controversies or behind on the instances 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 buy or not.
And so we run that qualification as soon as yearly. That will get us to about 50-ish corporations. After which we do our 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 development, dividend development, aggressive market share, and we usher in ESG knowledge and put it equally beside that monetary basic knowledge. And we purposely set up it beneath pillars in order that they’re equally weighted. So it’s not like, “Hey, the monetary half will get 66% weighting and the ESG half will get … ” We don’t divide it like that and nor 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 increased turnover you’ve, the extra it prices to rent new folks. Water use, if it can save you the fee 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 good instance. It prices a number of cash to get rid of waste.
And then you definately get into the stuff that’s just a little extra complicated to know 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, corporations that we’re on the lookout for and that we personal perceive that the extra ladies you’ve in management roles, the larger your pool of candidates it’s a must to recruit from. So it truly will increase the numerous optimistic advantages to the corporate of doing this fundamental stuff that some would say is silly DEI stuff. However the corporations that we’re holding are doing it for operational and enterprise causes, not as a result of it makes them look good on a questionnaire.
We 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 knowledge we will discover that’s comparatively systematizable throughout the consideration set of corporations.
So if you concentrate on it, we’re most likely, of the 50 corporations we’re doing this deep dive on, we’re a number of the prime ESG reporters and scoring issues. So we truly can run comparatively customized knowledge units throughout this 50-ish group of corporations like racial variety and management year-over-year, three-year change in that, three-year change in water depth, three-year change in water use. As a result of you may’t get it for the entire S&P 500 for instance as a result of a complete bunch of these corporations aren’t reporting that stage of information but. However as a result of we’re this type of extra superior ESG-esque pool of corporations, we’re getting all these knowledge factors that we’d not have the ability to purchase from an index supplier who’s promoting ESG knowledge throughout their index.
Finally, we’re constructing a excessive energetic share, 25 positions, tremendous concentrated ETF of essentially the most boring, sustainably rising, responsibly rising corporations. And in a nutshell, these corporations that we’re holding perceive that the optimistic impacts that they make on all of their stakeholders, so their staff, 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 staff or their clients is core to their mission and core to their objective.
And these corporations are based on that and it doesn’t matter what their political opinions are. Properly-managed, long-term targeted corporations which are 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 usually skilled that shareholder primacy and shareholder governance is the function of a company. So a company’s job is to manipulate on behalf of their shareholders and make their shareholders cash. The issue with that’s staff and clients and a complete bunch of different components affect an organization’s skill 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 matter. Stakeholder governance is only a firm that claims, “ what? Our staff and our clients and all this stuff have to be thought-about in our governance and our administration processes. Why? As a result of they affect and so they’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 basically all of our stakeholders.”
So there’s tons of corporations 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 on the lookout for these corporations the place there’s proof of their metrics, no matter these metrics is perhaps, that they’re contemplating their stakeholders. ‘Trigger you may’t simply say you or your stakeholders are ruled and also you care about all these things similar to you may’t say you care about variety. Saying you care about variety or the surroundings is nice, however what you truly do in your online business and the modifications that you simply make and the outputs which you could see within the enterprise let you know whether or not one thing’s caring about any of these items.
So stakeholder governance is, I feel it’s one thing companies do extra naturally. I feel it’s within the funding business I feel plenty 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 and so they don’t match as a result of the standard fashions assume shareholder primacy and shareholder governance. The one approach ESG works in a company is when its core to their operations and core to their objective, not as a separate exercise on the facet.
Our corporations are usually 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 had been all the time based and the way they’ve all the time operated. And purpose-driven is absolutely complicated as a result of it’s one thing I realized quite a bit about in governance coaching and in advertising and marketing, which is it’s actually troublesome to speak persistently to folks.
And so these corporations that we’re on the lookout for know that it’s actually arduous and know that sharing, having a shared objective, getting a complete 1000’s of staff to work collectively in direction of the identical purpose persistently and speaking that purpose is a troublesome exercise that they as a board and a administration group must work on. And that shared objective shouldn’t be solely having a transparent objective for the group, however serving to all of your staff, all your stakeholders, all your clients perceive why you’re there and what you’re doing makes for a extra environment friendly ship if one would possibly wish to say. When you’ve 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 presupposed 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 things. However I feel everyone can agree that if everyone’s working round with their head lower off and no one is aware of what they’re doing at an organization, it’s reducing productiveness. And the extra everyone will be on the identical web page by way of long-term objectives, the extra effectivity which you could obtain.
Meb:
As you concentrate on governance, there’s areas that you could be or might not be concerned, however you may converse to it. I’m considering of issues like within the US, significantly with a number of the tech corporations this previous cycle who’ve been very kind of me-focused, which 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 function in any respect in your numerous screens and the way do you concentrate on this push-pull story as outdated as time with the steadiness of energy between boards and C-suite and compensation? How does that play into what y’all do?
Liz:
There’s like 100 subjects there and so they’re all tremendous fascinating. I’m going to begin with a narrative. So Google again, should’ve been 2018, 2019 once we began, had two senior dudes sexually harassing a complete bunch of their staff 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 girl on Google’s board stated, “Most likely we must always inform folks and fireplace 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 a complete bunch of boards and so they’re professionals at this, but one of many largest corporations on this planet sat there and twiddled their thumbs. After which finally they gave the fellows 50 million every and paid them off and brought about a giant controversy with all their staff, all stuff that they might have been prevented. It’s not their fault they bought a bunch of sexually harassing dudes. The board’s job is to rent and fireplace the CEO. And when the CEO’s not hiring and firing the dude sexually harassing people, that’s a governance challenge.
The primary time we constructed the portfolio, our international fairness technique, two of the boards had lately fired their CEOs for sleeping with their secretaries and numerous different issues. And that reveals practical governance.
The reply to your query is what’s practical governance? Is it a complete bunch of unbiased board members? Properly, that’s what the ESG scores would let you know 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 truly working collectively on governance points.
So you may have good governance with bizarre compensation and all this type of stuff on the identical time, completely. However I might argue plenty of that massive tech is poorly ruled. We don’t have any financial institution shares in our portfolio for a cause. And it’s not ’trigger they get excluded for producing fossil gasoline. However there’s a sturdy perception that non-independent administrators are usually not 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 received’t put money into an organization. However that ship’s sailed. Everyone is aware of the best 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 quite a bit about CEO compensation, and there definitely are plenty 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 usually utilizing proper now’s common employee pay to CEO pay. So it actually is dependent upon what business and which set of information that you simply’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 in the event you’ve bought a person and a girl in senior management roles and the lady simply because she’s had decrease incomes all through her profession is getting paid much less, and that is stuff that corporations can repair.
What issues is Walmart’s base pay versus one other retailers base pay, not essentially the ratio of what their executives make versus what that pay is. As a result of an organization paying a low quantity to executives doesn’t naturally imply it’s doing higher for the world. And executives price a number of cash. So it’s a extremely 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 girl in management’s comp, males in management’s comp even damaged down by racial variety as a result of the way forward for ESG reporting is the Division of Labor variety knowledge being put in monetary statements as required disclosure, and that features gender and race by stage, and that’s going to finish up together with turnover. It’s going to finish up together with pay and pay fairness, together with bonuses. It’s very attention-grabbing as a result of wage versus bonuses will get very messy by way of pay fairness. It’s going to be a shock to everyone and everyone’s going to hate it aside from the businesses which have been reporting this already.
Meb:
How do you guys cope with shifting sands over time? Not on issues which are 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 had been like, “These are one of the best factor ever.” And now they’re like, “Oh my god, these are accountable for lots of misuse and issues like …” I imply we wrote an investing paper some time again on the investing pyramid, however the instance we gave was the meals pyramid from my youth, which is such as you actually ought to simply be consuming pasta and frosted flakes and muffins. Your base of meals ought to be carbs and the very last thing you need is fat or protein, no matter it was, and at present it’s inverted.
In order information change and shifts, how do you guys cope with that? I do know you stated it’s an annual course of, however do you kind of replace these standards and concepts as they grow to be extra accepted? How do you concentrate on a few of these subjects?
Liz:
I wish to level out nearly the whole lot we do kills folks and people within the ESG facet of the stuff give particular sectors a cross, like prescribed drugs for instance. We now have no pharma corporations in our portfolio. We now have plenty of well being tech although, like medical tools and issues like that. One of many causes we’ve got no pharma corporations is ’trigger all of them have value fixing scandals. And so no matter their skill to kill people with their product or no matter, which is clearly don’t even get me began on the opioids and the Sacklers as a result of that may very well be a complete different podcast, the value fixing, which is they simply, I don’t know, all of them simply determined to do that previously 5 years, all of the executives simply working for costs or no matter after which the massive congress factor.
However right here’s what occurs in ESG and affect, and I say ESG and affect as a result of affect scores occur in public markets too. Generally folks once they discuss affect investing, it’s simply non-public markets, however for essentially the most half we’ve got affect scores on these corporations. The issue with affect scores is they often are based mostly on the SDGs, so the sustainable growth objectives that are developed for international locations by the UN.
So an organization to be impactful in accordance with this framework, and I’ve bought a complete bunch of air quotes right here for people who find themselves not watching my try and framing the sarcasm, to be impactful an organization wants to handle an SDG. And so what occurs is all of the pharmaceutical corporations get 100% affect score as a result of they make a drug that’s serving to folks. They don’t get any unfavourable score for value fixing.
And so we’d 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 feel it’s the Atlantic piece on all the historical past of the advertising and marketing 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 corporations simply to be tremendous clear. There’s a complete 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 a giant, massive 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 a company by a complete bunch of selling 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 corporations make large, large impacts, optimistic and unfavourable. What we’re making an attempt to purpose for on this portfolio is corporations making a web optimistic affect. So corporations who’re decreasing their unfavourable externalities as a result of they price cash, they damage folks, they give the impression of being dangerous from a PR perspective, a complete bunch of explanation why you would cut back your unfavourable affect on the world whereas rising your optimistic affect. So whether or not that’s higher respectable pay, safer work situations, higher high quality merchandise, extra progressive that clear up issues, discount in packaging so it prices much less, all these unfavourable and optimistic impacts.
Meb:
So so far as portfolio building, you get down to those small group of names, 25 whatnot. Do you’ve some kind of sector composition display so it’s not all 25 in MedTech for instance, or how do you guys do any kind of place sizing on this remaining 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 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 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 fully reverse. And identical factor, there’s a number of corporations that look very related and appear very related on this massive cap area that aren’t essentially.
So while you take a look at our portfolio, we bought a complete bunch of comparable stuff in there. And that’s the character of 1, we’re being actually selective. Two, we’re kicking out a complete bunch of stuff, however we undoubtedly don’t care about what the weights of the index are at any level in our determination making.
And we all know we’re going to be chubby tech and industrials and normally supplies and each shopper issues relying on. However we’re agnostic to that. And these are equal weight bets, so we’re placing the identical weight on a mega cap as we’d be on a small cap within the portfolio.
After which that’s a part of the energetic share. We’re okay not holding the highest 30 one thing p.c of the index. We now have not one of the pretend shares. You possibly can’t have excessive energetic share in the event you’re holding a bunch of these corporations. And everyone else, I imply everyone’s going to have these of their portfolio in any case. However it’s actually, we’re on the lookout for the 25 most responsibly rising corporations out of that 50-ish set of corporations that we’ve got. It turns into our bench too. So the following set of ranked corporations in there are who will use when we have to 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, plenty of our stuff is annual knowledge. Whereas annual reporting and reviews come out midyear and issues like that, plenty of our board variety modifications once they change any individual on a board, and we’ve got fired an organization for going beneath our threshold, however you may think about the businesses that we’re holding are very cognizant of not, in the event you’ve bought 76% board variety, after all you may put a complete bunch of white dudes in your board, however in the event you bought 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 responsible BlackRock and the funding business on ESG. They’re the laggards on this. The pensions for essentially the most half do plenty of the engagement round and many managers to be tremendous clear, ESG managers do plenty of pushing on variety and environmental stuff and governance and all these sorts of issues, nevertheless it’s the businesses themselves who understand that it’s a advertising and marketing profit, it’s a recruiting profit. It’s their massive 4 accountants saying that they will audit this knowledge and serving to them set up it. It’s the firms driving ESG. It’s not BlackRock driving ESG. It’s not … undoubtedly not Vanguard driving ESG stuff. Actually Vanguard is simply being known as into congress for pushing local weather change narrative, which is the funniest factor in all the world for a passive store.
The oil sands corporations up right here in Canada are working, doing much more work than most asset managers on variety and decreasing their emissions. Why? As a result of they’ve a complete bunch of traders who care and so they may very well be foundations, pensions, people who care about progress on these things and staff who care about progress on these things.
Meb:
Give us a behind-the-scenes take a look at what it’s like to begin 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 plenty of work that goes into it and also you guys are comparatively new launch, so congratulations. However inform us just a little bit in regards to 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 properly?
Liz:
And a wholesaler and a marketer and all that type of stuff. I feel it’s fascinating that folks suppose ETFs are like concepts. I feel there’s a lot room for innovation on this business. I feel it’s going to look completely-ish totally different in 20 years, however I feel there’s some stuff that’s not going to vary.
I feel there’s all the time going to be public markets traders and personal markets traders and people who do each. I feel individuals are all the time going to suppose geographically by way of allocation in sure issues. I feel there’s definitely a spot for thematics. Once you launch a product, it doesn’t matter what it’s, this SMA mannequin, ETF fund index ’trigger that’s a complete attention-grabbing facet of the enterprise, it’s a must to know who’s going to purchase it irrespective of how cool the thought is, and it’s a must to know the way it’s going to get distributed.
The nice factor with an ETF automobile is folks should buy it, common folks should buy it, and advisors should buy it in a bunch of locations, however there’s a complete bunch of restrictions and issues. They make issues extra difficult than simply launching an ETF. Just like the crypto ones, for instance, you most likely are pals with all Eric Balchunas and all of the crypto-obsessed ETF people, and so they’re going to regardless of the spot Bitcoin ETF goes to launch. Properly, 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 buy any ETFs besides the crypto ones. The massive banks up right here has put a particular ruling on crypto ETFs, and so they principally stated to advisors, you can’t purchase them. You possibly can solely purchase them in case your consumer indicators a giant waiver and it will get a excessive danger score of their portfolio.
So though these are presumably the best, most talked about ETFs in all the, complete world, a complete bunch of Merrill Lynch and UBS and Citi people are usually not going to have the ability to purchase them of their accounts anytime quickly as a result of they’re going to need to get permitted, they’ll most likely create inside ones in order that they will, ’trigger there’s a pay to play side there too, that people want to know. You will get your ETF on Schwab or no matter for free-ish. Getting your ETF on US platforms requires time and cash and a bunch of random stuff.
So this crypto one’s actually attention-grabbing ’trigger these 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, and so they’re going to observe and a few of them are going to get on some platforms, however a complete bunch of them are going to get locked off a bunch of platforms. So though it looks like an ETF is a magic bullet by way of wrapper for these merchandise, there’s a complete bunch of different concerns.
In order that’s simply my rant to inform everyone that your product concept is nice. Who’s going to purchase your product and the way they entry it’s most likely greater than 50% of the consideration that it is best to make earlier than spending a complete bunch of cash to launch an ETF.
For retail platforms, after I say retail platforms, I imply advisors utilizing platforms to handle their fashions, an ETF is changing into an more and more higher possibility than a mutual fund as a result of one, you’re normally going to cost it decrease. Two, they’re altering all of the charges and price constructions of how ETFs and funds and commerce prices and issues like that. And so that you see a giant transfer in 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 excellent 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 stated that appears like any individual we all know.
Liz:
And I simply suppose it’s so fascinating. Perth’s most likely certainly one of my favourite examples clearly, of constructing a profitable product. She knew there was a scarcity of rising market systematic merchandise that she knew there was none that excluded dictatorships and that there could be a complete host of advisors throughout the US who could be completely positive 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 corporations on the market to get the publicity. And yeah, you’re not going to seem like the index. However who cares? A lot of people are on the lookout for systematic or energetic choices, not the entire index. We’re by no means going to persuade a bunch of passive people to make use of this as a core possibility, even when we’re one of the best on this planet. You possibly can’t change the patron habits.
So Perth actually constructed a product to unravel the tip person’s wants. And I imply, she bought an incredible timing with the Russian invasion, however she was already doing the work of discovering the market match and getting groups to construct her into the mannequin lengthy earlier than that occurred. And so everyone ought to simply go study the whole lot about Perth as a result of if you wish to launch an ETF, actually simply go watch all Perth’s movies.
Meb:
Perth has been on the present. She’s an alum. She, listeners, runs the Freedom ETF, FRDM, which is closing in on a billion {dollars} in property. So go Perth. That’s rad.
Liz:
Perth is superb. She’s simply the right instance of it’s essential discover who’s going to purchase your nice concept earlier than going and determining the best way to make your nice concept. And perhaps you had been an advisor, perhaps you labored as a wholesaler, perhaps you labored someplace within the distribution of the business, however particularly in the event you’re a pure portfolio supervisor otherwise you’re exterior of the business, do some work on who and why and who’s shopping for this product and the place are they going to place it, since you want a few of these fundamental solutions earlier than you make a bunch of choices which are going to price you cash that you simply’re going to want to go change.
The best way to launch an ETF is to have a complete bunch of cash and be prepared to spend it, I feel 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 pretty big asset supervisor, and he was like, “Yeah, any new fund we’ve got, we spend the entire time worrying about who’s going to be the primary 20 million in.” So you bought to go discover type 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’s essential 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 corporations you’ve by no means heard of. It’s actually 90% large asset managers who’ve bought automobiles from 2 to $10 million.
I really 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 might be essentially the most well-known human being on earth. You continue to want to search out the distribution connection between the product that you simply’re wrapping and the necessity, after which it’s essential not screw up the efficiency and all that type of stuff.
Meb:
Relating to, you’ve bought plenty of totally different takes on this area, however one of many questions we’ve been asking many of the friends is, in the event you sit all the way down to espresso or lunch with a bunch of advisors which are kind of in your world, what’s a perception you maintain that say in the event 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 bought time.
Liz:
So I don’t imagine you may predict the market. As any individual who was raised in a really evidence-based quantum psychological store the place we did no predicting of the market, it’s fascinating to see this complete ecosystem of parents yelling about shares all day, day by day and guessing the place macro goes to go and all this stuff. I don’t suppose 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 feel there’s danger in timing. I feel all of the research recommend that the timing danger of energetic safety choice is likely one of the greatest issues. That’s why we’re macro agnostic. We’re the whole lot 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 folks away from the business. In order that’s my common take.
My ESG take, and I hear this quite a bit, is ESG knowledge 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 knowledge. And so not solely is it standardized, not solely are they reporting by the identical framework. They’re getting exterior auditors to assessment their emissions knowledge and a bunch of their environmental knowledge. And the Division of Labor is reviewing their variety knowledge.
Whereas 5 years in the past for certain, it undoubtedly seemed like stuff was not standardized by way of ESG knowledge, all the businesses we’re have moved in direction of this. It’s known as the GRI template. There’s like a billion totally different frameworks in ESG, however in the event you go into any massive cap sustainability report, aside from a Tesla or all the oldsters who refuse to report fundamental ESG stuff, which is a really small group now, the overwhelming majority, most likely like 400 of the S&P 500 corporations are reporting this framework. Are they reporting year-over-year? No. You possibly can return to their earlier report and a few are laggards and a few are forward, however we’re ready to have a look at three yr knowledge for many of those metrics for many of our corporations.
Meb:
As you look again in your profession, what’s been essentially the most memorable funding? Good, dangerous, in between?
Liz:
Most likely beginning the agency, however I’m going to say this ETF largely as a result of it’s public. I imply, while you’re working in separate accounts, we 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 one’s ever heard of, which might be the twelfth largest RIA or asset wealth store in Canada.
And so I bought to say, our ETF BEEZ is my favourite funding. We don’t love our corporations one after the other. We consider them as a group. We’re fielding a group of gamers. I imply, we don’t play favorites. We simply wish to choose a very good group. So it’s, I’ll by no means reply a single safety as being a very good funding or my favourite ’trigger once more, that’s simply not how we strategy portfolio building.
Meb:
Proper on. The place do folks discover out extra info? The place do they go? Observe you, comply with the agency, the fund, all that.
Liz:
So we’ve got an ETF web site, which is honeytreeinvestetfs, which is all that formal one. After which we’ve got honeytreeinvest.com, which is our common one which has tons of blogs. In case 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 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 totally different causes. ‘Trigger I really like the neighborhood and there’s a number of nice people there, and it’s how we met Wes and all this stuff. So Liz Simmie on Twitter, in order for you obnoxious, occasional ESG takes. I largely simply rant about how BlackRock shouldn’t be woke and other people shouldn’t be satisfied that any asset supervisor is woke. That’s us in a nutshell.
And naturally you may go by B-E-E-Z on choose custody platforms within the US. In case 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 in the event you’re an advisor involved in ESG and is aware of nothing about it otherwise you’re a deep ESG practitioner, please be at liberty to succeed in out to us on our web site ’trigger that’s who we’re seeking to join with.
Meb:
Liz, thanks a lot for becoming a member of us at present.
Liz:
Thanks for having me.
Meb:
Podcast listeners we’ll publish present notes to at present’s dialog at mebfaber.com/podcast. In case you love the present, in the event you hate it, shoot us suggestions at [email protected]. We like to learn the opinions. Please assessment us on iTunes and subscribe the present anyplace good podcasts are discovered. Thanks for listening, pals, and good investing.
