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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 immediately’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 optimistic affect on the world. Then she shares some sizzling takes on the state of each ESG and lively administration. As we wind down, Liz talks in regards to the technique of launching an ETF with our pals at Alpha Architect and shares recommendation for anybody serious about launching one themselves.
Feedback or solutions? Fascinated with 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 progress and being ‘quantamental’
10:19 – Energetic administration and index hugging
15:14 – Foremost elements that filter out sectors and corporations
21:30 – Overview of stakeholder governance
25:16 – How energy balances inform Liz’s funding philosophy
34:56 – Place sizing
38:44 – What it’s like to 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 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. Because of trade rules, he is not going to 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 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 immediately. Our visitor is Liz Simmie, co-founder of Honeytree Funding Administration, which just lately launched an actively managed ESG-focused ETF ticker BEEZ. In immediately’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising corporations which can be stakeholder-governed, purpose-driven and make a internet optimistic affect on the world. And she or he shares some sizzling takes on the state of each ESG and lively administration. As we wind down, Liz talks in regards to the technique of launching an ETF with our pals at Alpha Architect, and shares recommendation for anybody serious about launching one themselves.
Please take pleasure in this episode with Liz Simmie.
Liz, welcome to the present.
Liz:
Thanks for having me.
Meb:
The place do we discover you immediately?
Liz:
Toronto, the good white north up right here.
Meb:
I heard an A in your diction earlier. Are you initially a Canadian?
Liz:
Yep, born and raised in Toronto my complete life. I’ve by no means gone wherever else. Really I went to Montreal for varsity after which got here again and can by no means go away this nice metropolis and nation.
Meb:
Superior. I adore it up there. We’re going to speak about lots immediately. One of many matters listeners, which you in all probability actually need to stick round for is this idea of beginning ETFs. I get numerous questions. Day by day folks need to begin an ETF, they received an concept for an ETF. We’re going to speak about somebody who’s executed it very just lately, placing out their first fund in November with our loopy pal, Wes Grey and crew. So we’ll positively get into slightly little bit of that later. However I need to discuss slightly bit about you, your concepts, your course of. Give us slightly background.
Liz:
I’ve an economics diploma, economics and historical past diploma, and I needed nothing to do with this nice trade of ours as a result of I needed to make the world a greater place and do cool stuff. So I ended up in market analysis, so client insights, so testing model technique for PNG and massive financial institution, new account, all these cool analysis tasks, quantitative and qualitative.
After which my dad began an rising supervisor. So my dad’s a bootstrapped US fairness supervisor primarily based in Toronto, and so they had this third man who was American and he received divorced. So if 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, “Positive, it appears like an attention-grabbing concept,” having actually no idea of the funding trade past slightly little bit of publicity right here and there.
And I used to be fortunate. I joined a bootstrapped dividend progress fairness supervisor at about 10 million AUM and was there till about 1.5 billion AUM after which left to begin Honeytree. And to be tremendous clear, it’s ’trigger my dad was a founder. There’s an entire pile of privilege in there, but when I had gone the normal path to be a portfolio supervisor at a much bigger store or a pension or no matter, it’d be a really totally different expertise that wouldn’t essentially set you as much as going to bootstrap your personal rising supervisor.
The agency’s 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 similar time, and we thought all these of us are attempting to launch ESG methods and so they’re all lacking what we predict 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 have been registered in 2019. It takes lots longer up right here to get authorized by the regulators. We began our observe data in 2019 for our world fairness technique. We did that in order that we didn’t have to launch a car off the bat as a result of automobiles price some huge cash and so they take numerous effort to distribute. They take numerous consciousness and all these things.
In any case, we had all the time supposed to launch a retail car. We didn’t ever need a personal fund. Lengthy-only boring methods positively don’t make sense in personal funds in Canada or the US and we thought we’d have a Canadian 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’d 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 lady owned. We’re the fifth or sixth public markets asset supervisor owned by lady in Canada. That’s what number of there are up right here. So there’s no supervisor variety initiatives up right here institutionally or from advisors, whereas all people is aware of within the US, numerous states have numerous 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 centered on accountable progress.
So it’s the identical funding thesis we’ve been engaged on our total agency historical past, which is responsibly rising corporations, stakeholder-governed, purpose-driven corporations who handle their stakeholders outperform in the long term.
What’s actually attention-grabbing is we didn’t like several of the prevailing ESG frameworks. We thought, and I might speak about for 10 years in regards to the issues with current ESG and funding frameworks, however we threw out numerous the rankings 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 your complete course of.
What we’re recognized on is ESG integration. So full ESG integration, which implies we deal with ESG knowledge as elementary firm knowledge in safety choice, not right here’s our monetary mannequin over right here on one aspect and right here’s our ESG mannequin and evaluations over right here on different aspect. We deal with the ESG knowledge that we use as elementary firm knowledge when selecting these corporations for the portfolio.
Meb:
So let’s dig in on the method as a result of various the phrases you used might imply numerous various things. ESG means numerous various things to numerous totally different folks. So let’s hear slightly bit about y’all’s course of. You have got a pleasant deck. If we will 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 progress? What does that imply? And once we hit a few of these phrases, let’s attempt to give y’all’s interpretation of what you assume it means to you as properly.
Liz:
So quantum psychological means we’re not purely elementary and we’re not purely quant. We use each processes. And for folk on the market who usually are not deeply steeped in fairness, elementary fairness land, elementary is taken into account deep dive qualitative analysis and quantitative analysis into an organization versus quant processes are typically extra quantitative, much less deep dive into an organization kind measures. And there’s many alternative managers who do each. We do each.
And what that appears like in our course of is we begin with the entire index, no matter index that may be. On this case for the ETF, it’s the US. And we run 25 qualification standards. And most of these are quantitative knowledge factors. We don’t do a fancy-schmancy predictive complicated quant like a few of other people would possibly assume quants are. However we’ve 25 qualification standards that’s attempting to get us right down to a consideration set about 50 corporations.
And what that qualification standards appears to be like like is there’s some useful stuff. Can we purchase it in custody in North America 5 billion minimal market cap? Some monetary. If we’ve a dividend, it needs to be rising funding above funding grade credit standing. Then there’s numerous conventional ESG exclusions. So conventional ESG exclusions are form like the unique non secular investor exclusion as a result of ESG has its roots in non secular investing. So no weapons, no weapons, no playing. We don’t exclude pot, however no pot corporations make our display screen. We exclude fossil gas manufacturing.
Meb:
That’s sacrilege up there in Toronto. Man, no marvel you’re launching this within the US. There’s all of the traditional Canadians, man, the mining and vitality, they’re in all probability similar to, “Liz, what are you speaking about?”
Liz:
Nicely, it makes it very attention-grabbing up right here as a result of we’ve all the foremost pensions are deeply dedicated to ESG and deeply dedicated to vitality funding. And I wish to level out to people who the vitality corporations are actually good at DEI and reporting far more so than tech corporations and asset managers, however that’s a unique story. However we exclude fossil gas.
There’s a few causes we exclude fossil gas. We by no means held an vitality firm at Bristol Gate as a result of vitality corporations are slightly too cyclical to have excessive constant dividend progress. So from becoming in into qualifying and moving into the portfolio, they’re more likely to fail anyway. So it’s form of only a bit simpler to display screen them out ’trigger you understand they’re not going to make it. We additionally don’t have any renewable vitality corporations in our portfolio.
Meb:
Nicely additionally, I imply if you transfer from a universe of hundreds right down to 50, you’re invariably going to kick out all types of issues and areas and sectors and industries, whether or not it’s from the broad standards, whether or not it’s from the secondary type of standards as properly. In order that’s the entire level of lively administration. You need a concentrated portfolio as a result of in case 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 of us don’t need it to look bizarre and totally different. It’s one in all my huge points with lively administration index hugging.
Meb:
It’s quite simple. They need it to look bizarre and totally different when it’s going up. They need it to look bizarre and totally different if it’s happening and also you’re not happening. However primarily it creates a bizarre precept agent drawback as a result of numerous the massive asset managers, as soon as they get to scale, upon getting 10, 50, 100 billion, 500 billion, you don’t need to look that totally different as a result of there’s solely draw back danger. The cash is already captive. And we all know that cash as soon as it’s sitting someplace, doesn’t wish to go wherever until it will get abused or does very poorly. Should you have a look at numerous the old fashioned hedge funds too, their early years the place they did 150% or these huge returns and now all of them do 7% with 10% volatility.
Liz:
And so they’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 way in which. I imply, I’m a giant believer that numerous 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 world, we exclude dictatorships in our world fairness technique. So we’re okay not having exposures to a bunch of issues, whether or not they be sectors or international locations or kind of corporations.
In our non-traditional ESG qualification standards, we have a look at board variety past gender. So we embody racial variety of board members, 33% or extra. So we gained’t have a look at an organization who has not found out put a pair token variety hires on their board but, largely as a result of in case you haven’t found out how to do this from a governance perspective, you’re not very competent.
Meb:
I imply, does that display screen alone kick out half of the universe it appears like?
Liz:
No, individuals are a lot … Within the US, particularly the US boards are fairly numerous. Canada’s fairly unhealthy, however clearly we’ve received none of these within the ETF. However even once we began, if we had a 40% bar, it might kick out numerous 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 things for some time. So it doesn’t kick any of these out.
Funding grade credit standing would possibly kick out extra corporations. Should you have a look at the final cohort of our qualification course of, there’s in all probability 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 ultimately it’ll be 35 and we’ve to cope with the universe as it’s. ‘Trigger our aim is to get from the universe right down to a manageable consideration set that we will cowl from a elementary deep dive perspective in essentially the most environment friendly means attainable.
And we run that consideration set as soon as yearly. So we’ve executed 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. We have now some monetary stuff. We usually don’t have actual property, and we’re okay with that.
And one factor you’ll discover, in case you have a look at our portfolio, there’s numerous manufacturing concerned corporations. And that’s the place the semis form of pop in. It’s ’trigger these corporations who’ve needed to handle labor, handle manufacturing services, handle worker security, you’ll be able to think about there could also be slightly few steps forward of a West Coast tech firm by way of serious 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 in all probability 90% male. I imply, I keep in mind giving a speech in New York to Quantopian crew and so they did a stay 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 slightly off-topic.
All proper, so we’re beginning with various these elements. You bought numerous them. What do you assume are the principle drivers of those that type of filter out essentially the most issues? Are there any of the 25 or so which can be significantly extra distinguished?
Liz:
Checked out it year-over-year and so they are typically, I imply clearly participation exclusions. You already know what I’d say? There’s an entire bunch and so they’re all fairly equal. And that want for dividend progress, the funding grade credit standing, the variety, the trade participation, the standard ESG exclusions, even glass door ranking, it’s form of simply an equal. You’ll assume it was greater in a few of the areas. Aside from shedding complete industries, it’s a really attention-grabbing form of balanced course of.
After we did it at Bristol Gate, it was the S&P 500, removed all of the non-dividend payers, removed all people under 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 unique course of ’trigger keep in mind, what we’re reducing out just isn’t, we will’t simply have the very best dividend growers as a result of if we simply seemed on the highest dividend growers to get the ESG growers too, or the accountable growers too, we’d must form of go slightly bit additional than the highest 50 excessive dividend growers.
And that’s why we altered or optimized this course of that my dad constructed as a result of we needed the identical issue publicity. So these excessive constant dividend growers who’re well-managed and well-governed and centered on the long-term, we needed them, however with barely increased stage of ESG. And to be tremendous clear, in case you have a look at the Bristol Gate ETF, it has a better ESG ranking than most ESG managers and techniques on the market as a result of boring, excessive, constant sustainable dividend growers usually have excessive ESG rankings ’trigger they often don’t do an entire bunch of silly stuff that will get you pushed down within the rating with controversies or behind on the instances by way of board variety, all these items that make up ESG rankings.
And also you’ll discover I didn’t point out we use ESG rankings as a result of we don’t use ESG rankings at any half in our course of. And ESG rankings, simply ’trigger I do know folks hate ESG and rankings, ESG rankings are the identical as purchase/promote rankings, proper? So it’s simply exterior sourced analysis {that a} portfolio supervisor should purchase or not.
And so we run that qualification as soon as yearly. That will get us to about 50-ish 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 progress, dividend progress, aggressive market share, and we usher in ESG knowledge and put it equally beside that monetary elementary knowledge. And we purposely manage it beneath pillars in order that they’re equally weighted. So it’s not like, “Hey, the monetary half will get 66% weighting and the ESG half will get … ” We don’t divide it like that and nor can we simply to be tremendous complicated, can we consider measures as E, S and G. Each ESG enter that we use, we take into account elementary to the corporate. And I’ll offer you some examples.
So turnover. Turnover prices you cash. It’s an ESG measure, however the increased turnover you’ve gotten, the extra it prices to rent new folks. Water use, if it can save you the associated fee that you simply spend on water, it’s a monetary factor. It’s positively an ESG factor, but it surely’s tied to the operations and the prices of an organization. It’s not a separate consideration. Waste is a superb instance. It prices numerous cash to get rid of waste.
And then you definately get into the stuff that’s slightly 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. Nicely, corporations that we’re on the lookout for and that we personal perceive that the extra ladies you’ve gotten in management roles, the larger your pool of candidates you need to recruit from. So it truly will increase the various 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 have a look at science-based targets, that are net-zero associated. We have a look at parental go away. We have a look at what knowledge we will discover that’s comparatively systematizable throughout the consideration set of corporations.
So if you consider it, we’re in all probability, of the 50 corporations we’re doing this deep dive on, we’re a few of the high 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’ll be able to’t get it for the entire S&P 500 for instance as a result of an entire bunch of these corporations aren’t reporting that stage of knowledge but. However as a result of we’re this type of extra superior ESG-esque pool of corporations, we’re getting all these knowledge factors that we’d not be capable of purchase from an index supplier who’s promoting ESG knowledge throughout their index.
In the end, we’re constructing a excessive lively 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 prospects, the local 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 prospects 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 opinions are. Nicely-managed, long-term centered 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 in all probability outline a few of these phrases.
Meb:
Positive, let’s hear it.
Liz:
So stakeholder governance. So anyone steeped in investing has been usually educated 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 staff and prospects and an entire bunch of different elements affect an organization’s capability to earn a living.
So stakeholder governance, which isn’t one thing I invented, I’d argue unique governance was stakeholder governance, however that’s a extra complicated subject. Stakeholder governance is only a firm that claims, “You already know what? Our staff and our prospects and all these items should 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 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 imagine 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 may be, that they’re contemplating their stakeholders. ‘Trigger you’ll be able to’t simply say you or your stakeholders are ruled and also you care about all these things similar to you’ll be able to’t say you care about variety. Saying you care about variety or the atmosphere is nice, however what you truly do in your corporation and the adjustments 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 trade I feel numerous our conventional finance idea assumes that stakeholders don’t matter. And so what you see in ESG is you see conventional monetary fashions over right here and also you see folks attempting to suit all this local weather and variety into these fashions and so they don’t match as a result of the normal fashions assume shareholder primacy and shareholder governance. The one means 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 usually are not doing ESG stuff to really feel good or to look good. They’re doing it as a result of it’s a part of their function and their core, and it’s how they have been all the time based and the way they’ve all the time operated. And purpose-driven is absolutely 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 tough to speak persistently to folks.
And so these corporations that we’re on the lookout for know that it’s actually onerous and know that sharing, having a shared function, getting an entire hundreds of staff to work collectively in the direction of the identical aim persistently and speaking that aim is a tough exercise that they as a board and a administration staff have to work on. And that shared function just isn’t solely having a transparent function for the group, however serving to all of your staff, your whole stakeholders, your whole prospects 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 gotten disparate targets 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 imagined to be doing.
That is all management and governance science that’s simply within the early levels of academia by way of quantifying and analyzing all these things. However I feel all people can agree that if all people’s operating round with their head reduce off and no person is aware of what they’re doing at an organization, it’s reducing productiveness. And the extra all people will be on the identical web page by way of long-term targets, the extra effectivity which you could obtain.
Meb:
As you consider governance, there’s areas that you could be or might not be concerned, however you’ll be able to communicate to it. I’m pondering of issues like within the US, significantly with a few of the tech corporations this previous cycle who’ve been very type of me-focused, that means like stock-based compensation that’s simply outrageous, a ton of dilution to shareholders, 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 consider 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 matters 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 an entire 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 lady on Google’s board stated, “In all probability we should always inform folks and hearth them, in all probability we should always do 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 an entire 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 ultimately they gave the blokes 50 million every and paid them off and induced a giant controversy with all their staff, all stuff that they may have been averted. It’s not their fault they received a bunch of sexually harassing dudes. The board’s job is to rent and hearth the CEO. And when the CEO’s not hiring and firing the dude sexually harassing of us, that’s a governance problem.
The primary time we constructed the portfolio, our world fairness technique, two of the boards had just lately fired their CEOs for sleeping with their secretaries and varied different issues. And that exhibits useful governance.
The reply to your query is what’s useful governance? Is it an entire bunch of impartial board members? Nicely, that’s what the ESG rankings would let you know is sweet governance. The issue is 10 impartial extremely certified of us don’t create good governance. Good governance is created by a governance tradition, by a shared function, by folks truly working collectively on governance points.
So you’ll be able to have good governance with bizarre compensation and all this type of stuff on the similar time, completely. However I’d argue numerous that huge tech is poorly ruled. We don’t have any financial institution shares in our portfolio for a cause. And it’s not ’trigger they get excluded for producing fossil gas. However there’s a robust perception that non-independent administrators usually are not ESG. We don’t essentially share that perception. Whereas we’d desire … Clearly we search for audit committee independence for instance. That’s one in all our necessities. We gained’t spend money on an organization. However that ship’s sailed. All people is aware of make their audit committee impartial at this level and there’s no magic bullet on compensation.
And simply going again to CEO compensation, folks hear lots about CEO compensation, and there definitely are numerous 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 usually utilizing proper now’s common employee pay to CEO pay. So it actually is dependent upon what trade and which set of knowledge 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 case you’ve received a person and a lady in senior management roles and the girl simply because she’s had decrease incomes all through her profession is getting paid much less, and that is stuff that 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 numerous cash. So it’s a extremely attention-grabbing, messy subject, however the way forward for ESG is us with the ability to get this knowledge on the proper granularity.
We have already got exec comp. So exec comp clearly was already all the time there. It’s just a bit extra standardized in ESG reporting now. What we’re quickly going to have is management comp divided by group, proper? So we’re going to have lady in management’s comp, males in management’s comp even damaged down by racial variety as a result of the way forward for ESG reporting is the Division of Labor variety knowledge being put in monetary statements as required disclosure, and that features gender and race by stage, and that’s going to finish up together with turnover. It’s going to finish up together with pay and pay fairness, together with bonuses. It’s very attention-grabbing as a result of wage versus bonuses will get very messy by way of pay fairness. It’s going to be a shock to all people and all people’s going to hate it apart 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 folks have been like, “These are the most effective factor ever.” And now they’re like, “Oh my god, these are accountable for lots of misuse and issues like …” I imply we wrote an investing paper some time again on the investing pyramid, however the instance we gave was the meals pyramid from my youth, which is such as you actually ought to simply be consuming pasta and frosted flakes and muffins. Your base of meals ought to be carbs and the very last thing you need is fat or protein, no matter it was, and immediately it’s inverted.
In order 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 type of replace these standards and concepts as they turn out to be extra accepted? How do you consider a few of these matters?
Liz:
I wish to level out virtually the whole lot we do kills folks and people within the ESG aspect of the stuff give particular sectors a cross, like prescription drugs for instance. We have now no pharma corporations in our portfolio. We have now numerous well being tech although, like medical tools and issues like that. One of many causes we’ve no pharma corporations is ’trigger all of them have worth fixing scandals. And so no matter their capability 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 could possibly be an entire different podcast, the value fixing, which is they only, I don’t know, all of them simply determined to do that previously 5 years, all of the executives simply operating for costs or no matter after which the large congress factor.
However right here’s what occurs in ESG and affect, and I say ESG and affect as a result of affect rankings occur in public markets too. Generally folks once they speak about affect investing, it’s simply personal markets, however for essentially the most half we’ve affect rankings on these corporations. The issue with affect rankings is they often are primarily based on the SDGs, so the sustainable growth targets that are developed for international locations by the UN.
So an organization to be impactful in line with this framework, and I’ve received an entire bunch of air quotes right here for people who find themselves not watching my try and framing the sarcasm, to be impactful an organization wants to handle an SDG. And so what occurs is all of the pharmaceutical corporations get 100% affect ranking as a result of they make a drug that’s serving to folks. They don’t get any detrimental ranking for worth 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 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 an entire bunch of analysis that company pursuits … That is one in all my passionate areas. Tariq Fancy was the previous CIO of BlackRock, ESG at BlackRock, and he stop and he went on a giant, huge talking tour of the world to say, “Corporations don’t make an affect. Solely governments and nonprofits could make an affect.”
However the Sackler household in an organization by way of an entire bunch of selling selections and a necessity to earn more money began and created a large detrimental affect far past their product, proper? With all of the lies and the paying off medical doctors and continued points, they created a detrimental affect that no authorities or nonprofit might cease.
And so the reply is corporations make large, large impacts, optimistic and detrimental. What we’re attempting to intention for on this portfolio is corporations making a internet optimistic affect. So corporations who’re lowering their detrimental externalities as a result of they price cash, they damage folks, they give the impression of being unhealthy from a PR perspective, an entire bunch of explanation why you would cut back your detrimental affect on the world whereas growing your optimistic affect. So whether or not that’s higher respectable pay, safer work situations, higher high quality merchandise, extra modern that clear up issues, discount in packaging so it prices much less, all these detrimental and optimistic impacts.
Meb:
So so far as portfolio building, you get down to those small group of names, 25 whatnot. Do you’ve gotten some type of sector composition display screen so it’s not all 25 in MedTech for instance, or how do you guys do any type of place sizing on this closing portfolio?
Liz:
Yeah, so they’re equal weighted, so we take away the place measurement decision-making. My dad all the time stated it was so that you didn’t have a bunch of PMs preventing over place measurement. We run a correlation evaluation, 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 if you have a look at the geographic income of them, they have been utterly reverse. And similar factor, there’s numerous corporations that look very related and appear very related on this massive cap house that aren’t essentially.
So if you have a look at our portfolio, we received an entire bunch of comparable stuff in there. And that’s the character of 1, we’re being actually selective. Two, we’re kicking out an entire bunch of stuff, however we positively don’t care about what the weights of the index are at any level in our choice making.
And we all know we’re going to be obese tech and industrials and normally supplies and each client issues relying on. However we’re agnostic to that. And these are equal weight bets, so we’re placing the identical weight on a mega cap as we’d be on a small cap within the portfolio.
After which that’s a part of the lively share. We’re okay not holding the highest 30 one thing % of the index. We have now not one of the faux shares. You’ll be able to’t have excessive lively share in case you’re holding a bunch of these corporations. And all people else, I imply all people’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. It turns into our bench too. So the following set of ranked corporations in there are who will use when we have to hearth an organization, whether or not it’s for quarterly earnings or doing one thing silly on the ESG aspect or the non-ESG aspect.
However once more, numerous our stuff is annual knowledge. Whereas annual reporting and reviews come out midyear and issues like that, numerous our board variety adjustments once they change any person on a board, and we’ve fired an organization for going under our threshold, however you’ll be able to think about the businesses that we’re holding are very cognizant of not, in case you’ve received 76% board variety, after all you’ll be able to put an entire bunch of white dudes in your board, however in case you received 31 and each investor that exhibits 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 accountable BlackRock and the funding trade on ESG. They’re the laggards on this. The pensions for essentially the most half do numerous the engagement round and many managers to be tremendous clear, ESG managers do numerous pushing on variety and environmental stuff and governance and all these sorts of issues, but it surely’s the businesses themselves who notice that it’s a advertising and marketing profit, it’s a recruiting profit. It’s their huge 4 accountants saying that they’ll audit this knowledge and serving to them manage it. It’s the companies driving ESG. It’s not BlackRock driving ESG. It’s not … positively not Vanguard driving ESG stuff. Actually Vanguard is simply being known as into congress for pushing local weather change narrative, which is the funniest factor in 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 lowering their emissions. Why? As a result of they’ve an entire bunch of traders who care and so they could possibly 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 have a look at what it’s like to begin an ETF. We get this query lots. Lots of people see the pot of gold on the finish of the rainbow. There’s clearly numerous work that goes into it and also you guys are comparatively new launch, so congratulations. However inform us slightly bit in regards to the expertise, the way it’s been, have you ever made it right down to Puerto Rico but? What’s the general agony and ecstasy of being not solely a founder however a cash supervisor and now a ETF issuer as properly?
Liz:
And a wholesaler and a marketer and all that form of stuff. I feel it’s fascinating that folks assume ETFs are like concepts. I feel there’s a lot room for innovation on this trade. 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 assume 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 an entire attention-grabbing aspect of the enterprise, you need to know who’s going to purchase it irrespective of how cool the concept is, and you need to know the way it’s going to get distributed.
The great factor with an ETF car is folks should purchase it, common folks should purchase it, and advisors should purchase it in a bunch of locations, however there’s an entire bunch of restrictions and issues. They make issues extra sophisticated than simply launching an ETF. Just like the crypto ones, for instance, you in all probability are pals 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. Nicely, a lot of the warehouse cabinets are locked within the US.
Curiously up in Canada, not one of the warehouses locked their cabinets to Canadian or US listed ETFs. So any advisor in Canada should purchase any ETFs besides the crypto ones. The massive banks up right here has put a particular ruling on crypto ETFs, and so they mainly stated to advisors, you can not purchase them. You’ll be able to solely purchase them in case your shopper indicators a giant waiver and it will get a excessive danger ranking of their portfolio.
So although these are probably the best, most talked about ETFs in your complete, total world, an entire bunch of Merrill Lynch and UBS and Citi of us usually are not going to have the ability to purchase them of their accounts anytime quickly as a result of they’re going to must get authorized, they’ll in all probability create inner ones in order that they’ll, ’trigger there’s a pay to play facet there too, that folk 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 money and a bunch of random stuff.
So this crypto one’s actually attention-grabbing ’trigger these ought to be, there’s going to be like, I don’t know, what number of are there? 18 now, all the large asset managers, and so they’re going to observe and a few of them are going to get on some platforms, however an entire bunch of them are going to get locked off a bunch of platforms. So although it looks as if an ETF is a magic bullet by way of wrapper for these merchandise, there’s an entire bunch of different concerns.
In order that’s simply my rant to inform all people that your product concept is nice. Who’s going to purchase your product and the way they entry it’s in all probability greater than 50% of the consideration that you must make earlier than spending an entire bunch of cash to launch an ETF.
For retail platforms, after I say retail platforms, I imply advisors utilizing platforms to handle their fashions, an ETF is turning into an more and more higher choice than a mutual fund as a result of one, you’re normally going to cost it decrease. Two, they’re altering all of the charges and value constructions of how ETFs and funds and commerce prices and issues like that. And so that you see a giant transfer in the direction of arguably 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 positively weren’t going to do a mutual fund, and he has an awesome white label ETF platform and has demonstrated. I imply, I met Perth first and that’s how we met Wes. Perth is my hero.
Meb:
I do know. Nicely, I seen your dictator’s remark earlier, and so I stated that appears like any person we all know.
Liz:
And I simply assume it’s so fascinating. Perth’s in all probability one in all my favourite examples clearly, of constructing a profitable product. She knew there was an absence of rising market systematic merchandise that she knew there was none that excluded dictatorships and that there can be an entire host of advisors throughout the US who can be completely effective 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? A number 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 choice, even when we’re the most effective on this planet. You’ll be able to’t change the patron habits.
So Perth actually constructed a product to resolve the top consumer’s wants. And I imply, she received a tremendous timing with the Russian invasion, however she was already doing the work of discovering the market match and getting groups to construct her into the mannequin lengthy earlier than that occurred. And so all people ought to simply go be taught 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 make your nice concept. And possibly you have been an advisor, possibly you labored as a wholesaler, possibly you labored someplace within the distribution of the trade, however particularly in case you’re a pure portfolio supervisor otherwise you’re outdoors of the trade, do some work on who and why and who’s shopping for this product and the place are they going to place it, since you want a few of these fundamental solutions earlier than you make a bunch of selections which can be going to price you cash that you simply’re going to want to go change.
The best way to launch an ETF is to have an entire bunch of cash and be prepared to spend it, I feel is one of the simplest ways. 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, we spend the entire time worrying about who’s going to be the primary 20 million in.” So you bought to go discover form of the place that first 20 million is, after which it’s by no means going to return as quick as you need it to return, and that’s why it’s essential have cash. However it actually is, you have a look at the record of … any record of ETFs and also you go to the underside ones. And it’s not similar to 30 little startup corporations you’ve by no means heard of. It’s actually 90% large asset managers who’ve received automobiles from 2 to $10 million.
I really like telling of us, Cathie Wooden launched an ESG ETF in, I don’t know, 2000 after which closed it 18 months later ’trigger she couldn’t elevate cash in ESG ETFs. So actually you can 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 form of stuff.
Meb:
In terms of, you’ve received numerous totally different takes on this house, however one of many questions we’ve been asking a lot of the company is, in case you sit right down to espresso or lunch with a bunch of advisors which can be type of in your world, what’s a perception you maintain that say in case you sat on the desk, 75% of the attendees would shake their head and say, “Liz, I disagree with you,” on funding associated, portfolio associated, ESG, DEI associated, something come to thoughts?
Liz:
Yeah, lots. I might go two instructions right here, so …
Meb:
Title them each. Do each of them. We received time.
Liz:
So I don’t imagine you’ll be able to predict the market. As any person 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, each day and guessing the place macro goes to go and all these items. I don’t assume it’s 75% of oldsters don’t imagine in market. And to be tremendous good it’s predicting the timing of the market too.
I feel there’s danger in timing. I feel all of the research recommend that the timing danger of lively safety choice is likely one of the largest 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 trade. In order that’s my normal take.
My ESG take, and I hear this lots, is ESG knowledge just isn’t standardized and might’t be standardized. And if you have a look at the businesses that we maintain within the portfolio, greater than half the portfolio has externally assured environmental knowledge. And so not solely is it standardized, not solely are they reporting by way of the identical framework. They’re getting exterior auditors to evaluate their emissions knowledge and a bunch of their environmental knowledge. And the Division of Labor is reviewing their variety knowledge.
Whereas 5 years in the past for positive, it positively seemed like stuff was not standardized by way of ESG knowledge, all the businesses we’re have moved in the direction of this. It’s known as the GRI template. There’s like a billion totally different frameworks in ESG, however in case you go into any massive cap sustainability report, apart from a Tesla or all the parents who refuse to report fundamental ESG stuff, which is a really small group now, the overwhelming majority, in all probability 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 in a position 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, unhealthy, in between?
Liz:
In all probability beginning the agency, however I’m going to say this ETF largely as a result of it’s public. I imply, if you’re working in separate accounts, we might share stuff with what we’re doing, however now it’s like, hey, we’re on the market. Efficiency has been fairly good since we began, which is a coin toss to be tremendous clear. We similar to the product. We just like the branding. We like Wes. We just like the US market. It’s nice. There’s so many alternatives. I imply, Canada’s nice too, to be tremendous clear, however we love what number of of you there are, 10 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 received to say, our ETF BEEZ is my favourite funding. We don’t love our corporations one after the other. We consider them as a staff. We’re fielding a staff of gamers. I imply, we don’t play favorites. We simply need to choose a superb staff. So it’s, I’ll by no means reply a single safety as being a superb funding or my favourite ’trigger once more, that’s simply not how we method portfolio building.
Meb:
Proper on. The place do folks discover out extra data? The place do they go? Observe you, observe the agency, the fund, all that.
Liz:
So we’ve an ETF web site, which is honeytreeinvestetfs, which is all that formal one. After which we’ve honeytreeinvest.com, which is our common one which has tons of blogs. Should you simply google Honeytree Funding or Honeytree ETF, you’ll see numerous 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 numerous nice of us there, and it’s how we met Wes and all these items. So Liz Simmie on Twitter, in order for you obnoxious, occasional ESG takes. I largely simply rant about how BlackRock just isn’t woke and folks shouldn’t be satisfied that any asset supervisor is woke. That’s us in a nutshell.
And naturally you’ll be able to go by B-E-E-Z on choose custody platforms within the US. Should you’re a retail investor, it’s in all probability even simpler to entry than an advisor, however after all, we’re primarily centered on advisors on this. So in case you’re an advisor occupied with ESG and is aware of nothing about it otherwise you’re a deep ESG practitioner, please be at liberty to achieve out to us on our web site ’trigger that’s who we’re seeking to join with.
Meb:
Liz, thanks a lot for becoming a member of us immediately.
Liz:
Thanks for having me.
Meb:
Podcast listeners we’ll publish present notes to immediately’s dialog at mebfaber.com/podcast. Should you love the present, in case you hate it, shoot us suggestions at [email protected]. We like to learn the evaluations. Please evaluate us on iTunes and subscribe the present wherever good podcasts are discovered. Thanks for listening, pals, and good investing.
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