Visitor: Liz Simmie is the co-founder of Honeytree Funding Administration, an asset administration agency primarily based in Toronto, Canada.
Recorded: 12/13/2023 | Run-Time: 52:11 
Abstract: In as we speak’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising corporations which can be stakeholder ruled, function pushed, and make a internet constructive influence on the world. Then she shares some sizzling takes on the state of each ESG and lively administration. As we wind down, Liz talks concerning the technique of launching an ETF with our mates at Alpha Architect and shares recommendation for anybody interested by launching one themselves.
Feedback or recommendations? Enthusiastic about sponsoring an episode? E-mail us Suggestions@TheMebFaberShow.com
Hyperlinks from the Episode:
- 1:15 – Welcome Liz to the present
- 1:46 – Launching BEEZ
- 7:11 – Discovering accountable development and being ‘quantamental’
- 10:19 – Lively administration and index hugging
- 15:14 – Fundamental elements that filter out sectors and corporations
- 21:30 – Overview of stakeholder governance
- 25:16 – How energy balances inform Liz’s funding philosophy
- 34:56 – Place sizing
- 38:44 – What it’s like to start out an ETF
- 44:24 – Episode #318: Perth Tolle, Life + Liberty Indexes
- 46:23 – Beliefs Liz holds her that her friends would disagree with
- 49:11 – Liz’s most memorable funding
- Be taught extra about Liz: Honey Tree Make investments; X
Transcript:
Welcome Message:
Welcome to The Meb Faber Present, the place the main target is on serving to you develop and protect your wealth. Be part of us as we focus on the craft of investing and uncover new and worthwhile concepts, all that will help you develop wealthier and wiser. Higher investing begins right here.
Disclaimer:
Med Faber is the co-founder and Chief Funding Officer at Cambria Funding Administration. Resulting from business laws, he is not going to focus on any of Cambria’s funds on this podcast. All opinions expressed by podcast individuals are solely their very own opinions and don’t replicate the opinion of Cambria Funding Administration or its associates. For extra data, go to cambriainvestments.com.
Meb:
Hey, hey all people. A enjoyable present once more as we speak. Our visitor is Liz Simmie, co-founder of Honeytree Funding Administration, which just lately launched an actively managed ESG-focused ETF ticker BEEZ. In as we speak’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising corporations which can be stakeholder-governed, purpose-driven and make a internet constructive influence on the world. And he or she shares some sizzling takes on the state of each ESG and lively administration. As we wind down, Liz talks concerning the technique of launching an ETF with our mates at Alpha Architect, and shares recommendation for anybody interested by 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 as we speak?
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 college after which got here again and can by no means depart this nice metropolis and nation.
Meb:
Superior. I like it up there. We’re going to speak about lots as we speak. One of many subjects listeners, which you most likely actually need to stick round for is this idea of beginning ETFs. I get a variety of questions. Every single day individuals need to begin an ETF, they bought an thought for an ETF. We’re going to speak about somebody who’s carried out it very just lately, placing out their first fund in November with our loopy good friend, Wes Grey and crew. So we’ll undoubtedly get into a little bit little bit of that later. However I need 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 shopper insights, so testing model technique for PNG and massive financial institution, new account, all these cool analysis initiatives, quantitative and qualitative.
After which my dad began an rising supervisor. So my dad’s a bootstrapped US fairness supervisor primarily based 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 particular person to return in. I begrudgingly mentioned, “Positive, it appears like an attention-grabbing thought,” 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 development fairness supervisor at about 10 million AUM and was there till about 1.5 billion AUM after which left to start out Honeytree. And to be tremendous clear, it’s ’trigger my dad was a founder. There’s a complete pile of privilege in there, but when I had gone the normal 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 individual rising supervisor.
The agency’s known as Bristol Gate for folk who need to google issues. We launched ETFs in 2018, and I had met my co-founder on the identical time, and we thought all these of us are attempting to launch ESG methods and so they’re all lacking what we expect the top shopper for these ESG merchandise need. And this, to be tremendous clear, is lengthy solely fairness universe, not alter hedge funds or something like that.
And so in 2018, we set out, which is similar yr we launched the ETFs up right here. 2018, we got down to discovered Honeytree. We had been registered in 2019. It takes lots longer up right here to get authorized by the regulators. We began our monitor data in 2019 for our international fairness technique. We did that in order that we didn’t have to launch a car off the bat as a result of autos value some huge cash and so they take a variety of effort to distribute. They take a variety of consciousness and all these items.
In any case, we had at all times supposed to launch a retail car. We didn’t ever need a personal fund. Lengthy-only boring methods undoubtedly don’t make sense in personal funds in Canada or the US and we thought we’d have a Canadian car first. So we went round. There’s not as many white label choices up right here, and those that they’ve are, we’ll name it not pretty much as good, however we thought we might launch a subadvised Canadian car up right here.
After which we met Wes. And Wes determined that we would have liked 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 person 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 all people 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 car, 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 massive cap and it’s targeted on accountable development.
So it’s the identical funding thesis we’ve been engaged on our total agency historical past, which is responsibly rising corporations, stakeholder-governed, purpose-driven corporations who deal with 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 might discuss for 10 years concerning the issues with present ESG and funding frameworks, however we threw out a variety of the rankings and present fashions and present assumptions about ESG. And we took what my dad had constructed, a quantum psychological mannequin for Bristol Gate and we introduced in ESG information on equal footing with the monetary information all through your complete course of.
What we’re identified on is ESG integration. So full ESG integration, which suggests we deal with ESG information as elementary firm information in safety choice, not right here’s our monetary mannequin over right here on one aspect and right here’s our ESG mannequin and critiques over right here on different aspect. We deal with the ESG information that we use as elementary firm information 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 might imply a variety of various things. ESG means a variety of various things to a variety of totally different individuals. So let’s hear a little bit bit about y’all’s course of. You could have a pleasant deck. If we are able to embody it within the present notes, listeners, we definitely will on the method, which I feel could be very useful. However why don’t you stroll us by way of it. How do you guys discover accountable development? What does that imply? And after we hit a few of these phrases, let’s attempt to give y’all’s interpretation of what you suppose it means to you as nicely.
Liz:
So quantum psychological means we aren’t purely elementary and we aren’t purely quant. We use each processes. And for folk on the market who aren’t deeply steeped in fairness, elementary fairness land, elementary is taken into account deep dive qualitative analysis and quantitative analysis into an organization versus quant processes are usually extra quantitative, much less deep dive into an organization sort measures. And there’s many alternative managers who do each. We do each.
And what that appears like in our course of is we begin with the entire index, no matter index that is likely to be. On this case for the ETF, it’s the US. And we run 25 qualification standards. And most of these are quantitative information factors. We don’t do a fancy-schmancy predictive complicated quant like a few of folks would possibly suppose quants are. However we’ve got 25 qualification standards that’s attempting to get us all the way down to a consideration set about 50 corporations.
And what that qualification standards 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 a variety of conventional ESG exclusions. So conventional ESG exclusions are sort like the unique spiritual investor exclusion as a result of ESG has its roots in spiritual investing. So no weapons, no weapons, no playing. We don’t exclude pot, however no pot corporations make our display. We exclude fossil gasoline manufacturing.
Meb:
That’s sacrilege up there in Toronto. Man, no marvel you’re launching this within the US. There’s all of the basic Canadians, man, the mining and vitality, they’re most likely identical to, “Liz, what are you speaking about?”
Liz:
Effectively, it makes it very attention-grabbing up right here as a result of we’ve got all the foremost pensions are deeply dedicated to ESG and deeply dedicated to vitality funding. And I prefer to level out to people who the vitality corporations are actually good at DEI and reporting rather more so than tech corporations and asset managers, however that’s a special story. However we exclude fossil gasoline.
There’s a few causes we exclude fossil gasoline. We by no means held an vitality firm at Bristol Gate as a result of vitality corporations are a little bit too cyclical to have excessive constant dividend development. So from becoming in into qualifying and entering into the portfolio, they’re prone to fail anyway. So it’s sort of only a bit simpler to display them out ’trigger you realize they’re not going to make it. We additionally don’t have any renewable vitality corporations in our portfolio.
Meb:
Effectively 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 form of standards as nicely. In order that’s the entire level of lively administration. You need a concentrated portfolio as a result of when you’re charging greater than zero, you need it to take a look at bizarre and totally different.
Liz:
Yeah. And it’s humorous ’trigger I’ve by no means understood why of us don’t need it to look bizarre and totally different. It’s considered one of my large points with lively administration index hugging.
Meb:
It’s quite simple. They need it to look bizarre and totally different when it’s going up. They need it to look bizarre and totally different if it’s taking place and also you’re not taking place. However primarily it creates a bizarre precept agent downside as a result of a variety of the big asset managers, as soon as they get to scale, upon getting 10, 50, 100 billion, 500 billion, you don’t need to look that totally different as a result of there’s solely draw back danger. The cash is already captive. And we all know that cash as soon as it’s sitting someplace, doesn’t prefer to go anyplace except it will get abused or does very poorly. In the event you take a look at a variety of the old-fashioned hedge funds too, their early years the place they did 150% or these large returns and now all of them do 7% with 10% volatility.
Liz:
And so they’re all chasing FANG shares and it’s like, what are you doing? However the index hugging factor, individuals like to select on ESG for index hugging. Lively is index hugging all the best way. I imply, I’m an enormous believer that a variety of lively underperformance comes from not taking dangers and never having excessive lively 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 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 gained’t take a look at an organization who has not discovered the way to put a pair token variety hires on their board but, principally as a result of when 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 after we began, if we had a 40% bar, it might kick out a number of of us. It’s humorous ’trigger actually it finally ends up kicking out cool tech renewable vitality boards that you simply … not typical stuff that we maintain in our portfolio like boring industrials and boring retailers and semiconductors as a result of they’ve all been engaged on these items for some time. So it doesn’t kick any of these out.
Funding grade credit standing would possibly kick out extra corporations. In the event 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 all people’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 aim is to get from the universe all the way down to a manageable consideration set that we are able to cowl from a elementary deep dive perspective in probably the most environment friendly manner doable.
And we run that consideration set as soon as yearly. So we’ve carried out it 5 instances now. So did 2018 until now and it evolves, but it surely doesn’t change that a lot. It completely spits out obese IT, obese industrials supplies. We by no means have any banks. Now we have some monetary stuff. We typically don’t have actual property, and we’re okay with that.
And one factor you’ll discover, when you take a look at our portfolio, there’s a variety of manufacturing concerned corporations. And that’s the place the semis sort of pop in. It’s ’trigger these corporations who’ve needed to handle labor, handle manufacturing amenities, handle worker security, you may think about there could also be a little bit few steps forward of a West Coast tech firm when it comes to interested by their workers and reporting ESG stuff and employee security and issues. So it’s attention-grabbing the way it nets out.
Meb:
Yeah, I’m saying this from a podcast whose listeners are most likely 90% male. I imply, I bear in mind giving a speech in New York to Quantopian crew and so they did a dwell viewers and it was like 95% male. However the enterprise capital has to me, probably the most outsized. I imply, I feel girls get 2% of enterprise capital {dollars}. It’s some extremely low quantity that’s nowhere close to 50. However anyway. Okay, so we’re getting a little bit off-topic.
All proper, so we’re beginning with a lot of these elements. You bought a variety of them. What do you suppose are the principle drivers of those that form of filter out probably the most issues? Are there any of the 25 or so which can be notably extra distinguished?
Liz:
Checked out it year-over-year and so they are usually, I imply clearly participation exclusions. You realize 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 everyday ESG exclusions, even glass door score, it’s sort of simply an equal. You’ll suppose it was greater in among the areas. Apart from dropping complete industries, it’s a really attention-grabbing sort 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 primarily based 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 special course of ’trigger bear in mind, what we’re chopping out will not be, 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 should sort 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 increased stage of ESG. And to be tremendous clear, when you take a look at the Bristol Gate ETF, it has a better ESG score than most ESG managers and methods on the market as a result of boring, excessive, constant sustainable dividend growers typically have excessive ESG rankings ’trigger they typically don’t do a complete bunch of silly stuff that will get you pushed down within the rating with controversies or behind on the instances when it comes to board variety, all this stuff that make up ESG rankings.
And also you’ll discover I didn’t point out we use ESG rankings as a result of we don’t use ESG rankings at any half in our course of. And ESG rankings, simply ’trigger I do know individuals hate ESG and rankings, ESG rankings are the identical as purchase/promote rankings, proper? So it’s simply exterior sourced analysis {that a} portfolio supervisor should buy or not.
And so we run that qualification as soon as yearly. That will get us to about 50-ish corporations. After which we do our elementary deep dive. And what we do is we take all of the financials we did at Bristol Gate, which skews debt capability, how conservatively they’re managing their debt, earnings development, dividend development, aggressive market share, and we usher in ESG information and put it equally beside that monetary elementary information. And we purposely set up it below 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 think about elementary to the corporate. And I’ll provide you with some examples.
So turnover. Turnover prices you cash. It’s an ESG measure, however the increased turnover you’ve, the extra it prices to rent new individuals. 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, but it surely’s tied to the operations and the prices of an organization. It’s not a separate consideration. Waste is a superb instance. It prices a number 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. Effectively, corporations that we’re on the lookout for and that we personal perceive that the extra girls you’ve in management roles, the larger your pool of candidates you need to recruit from. So it truly will increase the numerous constructive advantages to the corporate of doing this fundamental stuff that some would say is silly DEI stuff. However the corporations that we’re holding are doing it for operational and enterprise causes, not as a result of it makes them look good on a questionnaire.
We take a look at science-based targets, that are net-zero associated. We take a look at parental depart. We take a look at what information we are able to 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 among the prime ESG reporters and scoring issues. So we truly can run comparatively customized information units throughout this 50-ish group of corporations like racial variety and management year-over-year, three-year change in that, three-year change in water depth, three-year change in water use. As a result of you 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 sort of extra superior ESG-esque pool of corporations, we’re getting all these information factors that we might not be capable of purchase from an index supplier who’s promoting ESG information throughout their index.
In the end, we’re constructing a excessive lively share, 25 positions, tremendous concentrated ETF of probably the most boring, sustainably rising, responsibly rising corporations. And in a nutshell, these corporations that we’re holding perceive that the constructive impacts that they make on all of their stakeholders, so their workers, their clients, the area people, their shareholders, they perceive that the constructive impacts they make on these teams drives their backside line. So it’s not separate from their backside line. Doing good by their workers or their clients is core to their mission and core to their function.
And these corporations are based on that and it doesn’t matter what their political views are. Effectively-managed, long-term targeted corporations which can be stakeholder-governed and purpose-driven will outperform in the long term. And that’s our funding thesis and I ought to most likely outline a few of these phrases.
Meb:
Positive, let’s hear it.
Liz:
So stakeholder governance. So anyone steeped in investing has been typically skilled that shareholder primacy and shareholder governance is the position of an organization. So an organization’s job is to manipulate on behalf of their shareholders and make their shareholders cash. The issue with that’s workers and clients and a complete bunch of different elements affect an organization’s capacity to generate income.
So stakeholder governance, which isn’t one thing I invented, I might argue unique governance was stakeholder governance, however that’s a extra complicated matter. Stakeholder governance is only a firm that claims, “You realize what? Our workers and our clients and all this stuff must be thought of in our governance and our administration processes. Why? As a result of they influence and so they’re impacted by our selections. And we’ll do higher if we’re participating all of our stakeholders and serving to and supporting and never screwing over primarily all of our stakeholders.”
So there’s tons of corporations on the market that consider in a stakeholder governance framework. So as an alternative of being our solely aim is to return returns to shareholders. That turns into simply one of many roles of the board. And so we’re on the lookout for these corporations the place there’s proof of their metrics, no matter these metrics is likely to be, 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 items identical to you may’t say you care about variety. Saying you care about variety or the atmosphere is nice, however what you truly do in your online business and the adjustments that you simply make and the outputs that you may see within the enterprise inform you whether or not one thing’s caring about any of these things.
So stakeholder governance is, I feel it’s one thing firms do extra naturally. I feel it’s within the funding business I feel a variety of our conventional finance idea assumes that stakeholders don’t matter. And so what you see in ESG is you see conventional monetary fashions over right here and also you see individuals attempting to suit all this local weather and variety into these fashions and so they don’t match as a result of the normal fashions assume shareholder primacy and shareholder governance. The one manner ESG works in an organization is when its core to their operations and core to their function, not as a separate exercise on the aspect.
Our corporations aren’t doing ESG stuff to really feel good or to look good. They’re doing it as a result of it’s a part of their function and their core, and it’s how they had been at all times based and the way they’ve at all times operated. And purpose-driven is actually complicated as a result of it’s one thing I discovered lots about in governance coaching and in advertising and marketing, which is it’s actually troublesome to speak persistently to individuals.
And so these corporations that we’re on the lookout for know that it’s actually laborious and know that sharing, having a shared function, getting a complete 1000’s of workers to work collectively in the direction of the identical aim persistently and speaking that aim is a troublesome exercise that they as a board and a administration group have to work on. And that shared function will not be solely having a transparent function 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 need to say. When you’ve disparate targets and disparate concepts in a corporation about the place one ought to go, it’s much less environment friendly, and folk get confused and don’t perceive as clearly what they’re alleged to be doing.
That is all management and governance science that’s simply within the early phases of academia when it comes to quantifying and analyzing all these items. However I feel all people can agree that if all people’s working round with their head reduce off and no person is aware of what they’re doing at an organization, it’s lowering productiveness. And the extra all people could be on the identical web page when it comes to long-term targets, the extra effectivity that you may obtain.
Meb:
As you concentrate on governance, there’s areas that you could be or will not be concerned, however you may converse to it. I’m pondering of issues like within the US, notably with among the tech corporations this previous cycle who’ve been very form of me-focused, which means like stock-based compensation that’s simply outrageous, a ton of dilution to shareholders, possibly twin shared courses, all these type voting issues which have gone on.
Do these play any position in any respect in your varied screens and the way do you concentrate on this push-pull story as previous as time with the stability of energy between boards and C-suite and compensation? How does that play into what y’all do?
Liz:
There’s like 100 subjects there and so they’re all tremendous fascinating. I’m going to start out with a narrative. So Google again, should’ve been 2018, 2019 after we began, had two senior dudes sexually harassing a complete bunch of their workers and the board discovered this out. After which the board spent 12 or 14 months debating what they need to do with them. And the one girl on Google’s board mentioned, “In all probability we should always inform individuals and fireplace them, most likely we should always try this.” And so they 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 precipitated an enormous controversy with all their workers, 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 of us, that’s a governance difficulty.
The primary time we constructed the portfolio, our international fairness technique, two of the boards had just lately fired their CEOs for sleeping with their secretaries and varied different issues. And that reveals practical governance.
The reply to your query is what’s practical governance? Is it a complete bunch of unbiased board members? Effectively, that’s what the ESG rankings would inform you is sweet governance. The issue is 10 unbiased extremely certified of us don’t create good governance. Good governance is created by a governance tradition, by a shared function, by individuals truly working collectively on governance points.
So you may have good governance with bizarre compensation and all this sort of stuff on the identical time, completely. However I might argue a variety of that large tech is poorly ruled. We don’t have any financial institution shares in our portfolio for a cause. And it’s not ’trigger they get excluded for producing fossil gasoline. However there’s a robust perception that non-independent administrators aren’t ESG. We don’t essentially share that perception. Whereas we’d desire … Clearly we search for audit committee independence for instance. That’s considered one of our necessities. We gained’t spend money on an organization. However that ship’s sailed. All people 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, individuals hear lots about CEO compensation, and there definitely are a variety of extremely paid CEOs. The issue is we don’t have any good measures proper now to really 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 is determined by 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 when 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 value a number of cash. So it’s a extremely attention-grabbing, messy matter, however the way forward for ESG is us with the ability to get this information on the proper granularity.
We have already got exec comp. So exec comp clearly was already at all times there. It’s just a bit extra standardized in ESG reporting now. What we’re quickly going to have is management comp divided by group, proper? So we’re going to have 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 information being put in monetary statements as required disclosure, and that features gender and race by stage, and that’s going to finish up together with turnover. It’s going to finish up together with pay and pay fairness, together with bonuses. It’s very attention-grabbing as a result of wage versus bonuses will get very messy when it comes to pay fairness. It’s going to be a shock to all people and all people’s going to hate it aside from the businesses which were reporting this already.
Meb:
How do you guys cope with shifting sands over time? Not on issues which can be as apparent possibly as variety on boards, however issues like, hey, we’re going to exclude, you talked about hashish, alcohol, like opioids. I don’t know, a decade in the past individuals had been like, “These are the very best factor ever.” And now they’re like, “Oh my god, these are accountable for lots of misuse and issues like …” I imply we wrote an investing paper some time again on the investing pyramid, however the instance we gave was the meals pyramid from my youth, which is such as you actually ought to simply be consuming pasta and frosted flakes and muffins. Your base of meals must be carbs and the very last thing you need is fat or protein, no matter it was, and as we speak it’s inverted.
In order information change and shifts, how do you guys cope with that? I do know you mentioned it’s an annual course of, however do you form of replace these standards and concepts as they grow to be extra accepted? How do you concentrate on a few of these subjects?
Liz:
I prefer to level out nearly every thing we do kills individuals and folk within the ESG aspect of the stuff give particular sectors a cross, like prescribed drugs for instance. Now we have no pharma corporations in our portfolio. Now we have a variety 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 capacity to kill of us with their product or no matter, which is clearly don’t even get me began on the opioids and the Sacklers as a result of that may very well be 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 large congress factor.
However right here’s what occurs in ESG and influence, and I say ESG and influence as a result of influence rankings occur in public markets too. Generally individuals once they discuss influence investing, it’s simply personal markets, however for probably the most half we’ve got influence rankings on these corporations. The issue with influence rankings is they typically are primarily based on the SDGs, so the sustainable growth targets that are developed for nations 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 to 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% influence score as a result of they make a drug that’s serving to individuals. They don’t get any damaging score for value fixing.
And so we might not be solely involved concerning the opioid disaster. We’d be involved with the entire Sackler governance shit present catastrophe that was them creating the opioid disaster. For anyone who has not learn the lengthy, I feel it’s the Atlantic piece on your complete historical past of the advertising and marketing behind that, ’trigger once more, the meals pyramid that you simply talked about, are you aware who paid for that? It was not the FDA. It was the cereal corporations simply to be tremendous clear. There’s a complete bunch of analysis that company pursuits … That is considered one of my passionate areas. Tariq Fancy was the previous CIO of BlackRock, ESG at BlackRock, and he stop and he went on an enormous, large talking tour of the world to say, “Corporations don’t make an influence. Solely governments and nonprofits could make an influence.”
However the Sackler household in an organization by way of a complete bunch of promoting selections and a necessity to earn more money began and created an enormous damaging influence far past their product, proper? With all of the lies and the paying off medical doctors and continued points, they created a damaging influence that no authorities or nonprofit might cease.
And so the reply is corporations make large, large impacts, constructive and damaging. What we’re attempting to goal for on this portfolio is corporations making a internet constructive influence. So corporations who’re decreasing their damaging externalities as a result of they value cash, they damage individuals, they give the impression of being dangerous from a PR perspective, a complete bunch of the reason why you would cut back your damaging influence on the world whereas rising your constructive influence. So whether or not that’s higher respectable pay, safer work circumstances, higher high quality merchandise, extra progressive that resolve issues, discount in packaging so it prices much less, all these damaging and constructive impacts.
Meb:
So so far as portfolio development, you get down to those small group of names, 25 whatnot. Do you’ve some form of sector composition display so it’s not all 25 in MedTech for instance, or how do you guys do any form of place sizing on this closing portfolio?
Liz:
Yeah, so they’re equal weighted, so we take away the place dimension decision-making. My dad at all times mentioned it was so that you didn’t have a bunch of PMs preventing over place dimension. We run a correlation evaluation, but it surely’s sector agnostic. We used to personal McDonald’s and KFC in my dad’s technique. And other people would say, “Aren’t they the identical firm?” And 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 obese tech and industrials and normally supplies and each shopper issues relying on. However we’re agnostic to that. And these are equal weight bets, so we’re placing the identical weight on a mega cap as we might be on a small cap within the portfolio.
After which that’s a part of the lively share. We’re okay not holding the highest 30 one thing % of the index. Now we have not one of the pretend shares. You’ll be able to’t have excessive lively share when you’re holding a bunch of these corporations. And all people else, I imply all people’s going to have these of their portfolio anyhow. However it’s actually, we’re on the lookout for the 25 most responsibly rising corporations out of that 50-ish set of corporations that we’ve got. It turns into our bench too. So the subsequent set of ranked corporations in there are who will use when we have to fireplace an organization, whether or not it’s for quarterly earnings or doing one thing silly on the ESG aspect or the non-ESG aspect.
However once more, a variety of our stuff is annual information. Whereas annual reporting and experiences come out midyear and issues like that, a variety of our board variety adjustments 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, when you’ve bought 76% board variety, after all you may put a complete bunch of white dudes in your board, however when you bought 31 and each investor that reveals up is participating with you in your board variety or one thing, you’re going to be cognizant of it.
And that’s what’s so humorous about ESG. The entire world tries in charge BlackRock and the funding business on ESG. They’re the laggards on this. The pensions for probably the most half do a variety of the engagement round and many managers to be tremendous clear, ESG managers do a variety of pushing on variety and environmental stuff and governance and all these sorts of issues, but it surely’s the businesses themselves who understand that it’s a advertising and marketing profit, it’s a recruiting profit. It’s their large 4 accountants saying that they’ll audit this information and serving to them set up it. It’s the companies driving ESG. It’s not BlackRock driving ESG. It’s not … undoubtedly not Vanguard driving ESG stuff. Actually Vanguard is simply being known as into congress for pushing local weather change narrative, which is the funniest factor in your complete 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 buyers who care and so they may very well be foundations, pensions, people who care about progress on these items and workers who care about progress on these items.
Meb:
Give us a behind-the-scenes take a look at what it’s like to start out an ETF. We get this query lots. Lots of people see the pot of gold on the finish of the rainbow. There’s clearly a variety of work that goes into it and also you guys are comparatively new launch, so congratulations. However inform us 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 nicely?
Liz:
And a wholesaler and a marketer and all that sort 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 isn’t going to alter.
I feel there’s at all times going to be public markets buyers and personal markets buyers and folk who do each. I feel individuals are at all times going to suppose geographically when it comes to allocation in sure issues. I feel there’s definitely a spot for thematics. While you launch a product, it doesn’t matter what it’s, this SMA mannequin, ETF fund index ’trigger that’s a complete attention-grabbing aspect 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 nice factor with an ETF car is individuals should buy it, common individuals should buy it, and advisors should buy it in a bunch of locations, however there’s a complete bunch of restrictions and issues. They make issues extra sophisticated than simply launching an ETF. Just like the crypto ones, for instance, you most likely are mates with all Eric Balchunas and all of the crypto-obsessed ETF of us, and so they’re going to regardless of the spot Bitcoin ETF goes to launch. Effectively, a lot 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 large banks up right here has put a particular ruling on crypto ETFs, and so they mainly mentioned to advisors, you can’t purchase them. You’ll be able to solely purchase them in case your shopper indicators an enormous waiver and it will get a excessive danger score of their portfolio.
So despite the fact that these are presumably the good, most talked about ETFs in your complete, total world, a complete bunch of Merrill Lynch and UBS and Citi of us aren’t going to have the ability to purchase them of their accounts anytime quickly as a result of they’re going to should get authorized, they’ll most likely create inner ones in order that they’ll, ’trigger there’s a pay to play facet there too, that people want to grasp. You may get your ETF on Schwab or no matter for free-ish. Getting your ETF on US platforms requires time and cash and a bunch of random stuff.
So this crypto one’s actually attention-grabbing ’trigger these must be, there’s going to be like, I don’t know, what number of are there? 18 now, all the large asset managers, and so they’re going to look at and a few of them are going to get on some platforms, however a complete bunch of them are going to get locked off a bunch of platforms. So despite the fact that it looks like an ETF is a magic bullet when it comes to wrapper for these merchandise, there’s a complete bunch of different issues.
In order that’s simply my rant to inform all people that your product thought is nice. Who’s going to purchase your product and the way they entry it’s most likely greater than 50% of the consideration that you must make earlier than spending a complete bunch of cash to launch an ETF.
For retail platforms, once I say retail platforms, I imply advisors utilizing platforms to handle their fashions, an ETF is 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 an enormous transfer in the direction of arguably easier ETF fashions, and that’s why we didn’t go together with Wes ’trigger we love Wes. We went with Wes as a result of we undoubtedly weren’t going to do a mutual fund, and he has an important white label ETF platform and has demonstrated. I imply, I met Perth first and that’s how we met Wes. Perth is my hero.
Meb:
I do know. Effectively, I observed your dictator’s remark earlier, and so I mentioned that appears like any individual we all know.
Liz:
And I simply suppose it’s so fascinating. Perth’s most likely considered one of my favourite examples clearly, of constructing a profitable product. She knew there was an absence of rising market systematic merchandise that she knew there was none that excluded dictatorships and that there can be a complete host of advisors throughout the US who can be completely fantastic with their rising market slice of the pie to not embody Chinese language holdings or Russian holdings or Qatari holdings or no matter as a result of there’s sufficient rising markets corporations on the market to get the publicity. And yeah, you’re not going to appear to be the index. However who cares? Plenty of of us are on the lookout for systematic or lively choices, not the entire index. We’re by no means going to persuade a bunch of passive of us to make use of this as a core possibility, even when we’re the very best on this planet. You’ll be able to’t change the buyer habits.
So Perth actually constructed a product to resolve the top consumer’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 all people ought to simply go be taught every thing about Perth as a result of if you wish to launch an ETF, actually simply go watch all Perth’s movies.
Meb:
Perth has been on the present. She’s an alum. She, listeners, runs the Freedom ETF, FRDM, which is closing in on a billion {dollars} in property. So go Perth. That’s rad.
Liz:
Perth is wonderful. She’s simply the proper instance of it’s good to discover who’s going to purchase your nice thought earlier than going and determining the way to make your nice thought. And possibly you had been an advisor, possibly you labored as a wholesaler, possibly you labored someplace within the distribution of the business, however particularly when you’re a pure portfolio supervisor otherwise you’re outdoors of the business, do some work on who and why and who’s shopping for this product and the place are they going to place it, since you want a few of these fundamental solutions earlier than you make a bunch of selections which can be going to value you cash that you simply’re going to want to go change.
The way in which to launch an ETF is to have a complete bunch of cash and be keen to spend it, I feel is the easiest way. Launching a car, whether or not you’re BlackRock or a startup, is a little bit of a coin toss.
I used to be speaking to my buddy who works at a pretty big asset supervisor, and he was like, “Yeah, any new fund we’ve got, we spend the entire time worrying about who’s going to be the primary 20 million in.” So you bought to go discover sort of the place that first 20 million is, after which it’s by no means going to return as quick as you need it to return, and that’s why it’s good to have cash. However 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 identical to 30 little startup corporations you’ve by no means heard of. It’s actually 90% large asset managers who’ve bought autos from 2 to $10 million.
I really like telling of us, Cathie Wooden launched an ESG ETF in, I don’t know, 2000 after which closed it 18 months later ’trigger she couldn’t increase cash in ESG ETFs. So actually you can be probably the most well-known human being on earth. You continue to want to seek out the distribution connection between the product that you simply’re wrapping and the necessity, after which it’s good to not screw up the efficiency and all that sort of stuff.
Meb:
On the subject of, you’ve bought a variety of totally different takes on this area, however one of many questions we’ve been asking a lot of the friends is, when you sit all the way down to espresso or lunch with a bunch of advisors which can be form of in your world, what’s a perception you maintain that say when 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, lots. I might go two instructions right here, so …
Meb:
Identify them each. Do each of them. We bought time.
Liz:
So I don’t consider you 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 oldsters yelling about shares all day, every single day and guessing the place macro goes to go and all this stuff. I don’t suppose it’s 75% of oldsters don’t consider in market. And to be tremendous good it’s predicting the timing of the market too.
I feel there’s danger in timing. I feel all of the research counsel that the timing danger of lively safety choice is likely one of the greatest issues. That’s why we’re macro agnostic. We’re every thing apart from responsibly rising agnostics regardless of the fixed barrage on Twitter or CNBC or wherever. This concept that folks simply sit on TV yelling about future numbers and what they’re going to foretell pushes cool, certified math expertise individuals away from the business. In order that’s my common take.
My ESG take, and I hear this lots, is ESG information will not be standardized and might’t be standardized. And while you take a look at the businesses that we maintain within the portfolio, greater than half the portfolio has externally assured environmental information. And so not solely is it standardized, not solely are they reporting by way of the identical framework. They’re getting exterior auditors to assessment their emissions information and a bunch of their environmental information. And the Division of Labor is reviewing their variety information.
Whereas 5 years in the past for positive, it undoubtedly seemed like stuff was not standardized when it comes to ESG information, all the businesses we’re have moved in the direction of this. It’s known as the GRI template. There’s like a billion totally different frameworks in ESG, however when you go into any massive cap sustainability report, aside from a Tesla or all the parents who refuse to report fundamental ESG stuff, which is a really small group now, the overwhelming majority, most likely like 400 of the S&P 500 corporations are reporting this framework. Are they reporting year-over-year? No. You’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 yr information for many of those metrics for many of our corporations.
Meb:
As you look again in your profession, what’s been probably the most memorable funding? Good, dangerous, in between?
Liz:
In all probability beginning the agency, however I’m going to say this ETF principally as a result of it’s public. I imply, while you’re working in separate accounts, we might share stuff with what we’re doing, however now it’s like, hey, we’re on the market. Efficiency has been fairly good since we began, which is a coin toss to be tremendous clear. We identical to the product. We just like the branding. We like Wes. We just like the US market. It’s nice. There’s so many alternatives. I imply, Canada’s nice too, to be tremendous clear, however we love what number of of you there are, 10 instances as many people. There’s random 4 billion RIAs in the 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 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 need to decide a great group. So it’s, I’ll by no means reply a single safety as being a great funding or my favourite ’trigger once more, that’s simply not how we method portfolio development.
Meb:
Proper on. The place do individuals discover out extra data? The place do they go? Comply with you, comply with the agency, the fund, all that.
Liz:
So we’ve got an ETF web site, which is honeytreeinvestetfs, which is all that formal one. After which we’ve got honeytreeinvest.com, which is our common one which has tons of blogs. In the event 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 of us need to name it present shit present, I’m nonetheless on there. I’ll be on there till it goes down for a wide range of totally different causes. ‘Trigger I really like the neighborhood and there’s a number of nice of us 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 principally simply rant about how BlackRock will not 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 the event 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 when 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 as we speak.
Liz:
Thanks for having me.
Meb:
Podcast listeners we’ll publish present notes to as we speak’s dialog at mebfaber.com/podcast. In the event you love the present, when you hate it, shoot us suggestions at suggestions@themebfabershow.com. We like to learn the critiques. Please assessment us on iTunes and subscribe the present anyplace good podcasts are discovered. Thanks for listening, mates, and good investing.
