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 right this moment’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising firms which can be stakeholder ruled, objective pushed, and make a internet optimistic influence on the world. Then she shares some sizzling takes on the state of each ESG and energetic administration. As we wind down, Liz talks in regards to the strategy of launching an ETF with our mates at Alpha Architect and shares recommendation for anybody fascinated by launching one themselves.
Feedback or solutions? Keen on 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 – Lively administration and index hugging
15:14 – Important components that filter out sectors and corporations
21:30 – Overview of stakeholder governance
25:16 – How energy balances inform Liz’s funding philosophy
34:56 – Place sizing
38:44 – What it’s like to start out an ETF
44:24 – Episode #318: Perth Tolle, Life + Liberty Indexes
46:23 – Beliefs Liz holds her that her friends would disagree with
49:11 – Liz’s most memorable funding
Study extra about Liz: Honey Tree Make investments; X
Transcript:
Welcome Message:
Welcome to The Meb Faber Present, the place the main focus is on serving to you develop and protect your wealth. Be 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. On account of business rules, he is not going to focus on any of Cambria’s funds on this podcast. All opinions expressed by podcast contributors 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 everyone. A enjoyable present once more right this moment. Our visitor is Liz Simmie, co-founder of Honeytree Funding Administration, which lately launched an actively managed ESG-focused ETF ticker BEEZ. In right this moment’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising firms which can be stakeholder-governed, purpose-driven and make a internet optimistic influence on the world. And he or she shares some sizzling takes on the state of each ESG and energetic administration. As we wind down, Liz talks in regards to the strategy of launching an ETF with our mates at Alpha Architect, and shares recommendation for anybody fascinated 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 right this moment?
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 entire life. I’ve by no means gone wherever else. Truly 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 right this moment. One of many subjects listeners, which you most likely actually wish to stick round for is this idea of beginning ETFs. I get lots of questions. On daily basis folks wish to begin an ETF, they obtained an concept for an ETF. We’re going to speak about somebody who’s completed it very lately, placing out their first fund in November with our loopy pal, Wes Grey and crew. So we’ll undoubtedly get into a little bit little bit of that later. However I wish to speak a little bit bit about you, your concepts, your course of. Give us a little bit background.
Liz:
I’ve an economics diploma, economics and historical past diploma, and I wished nothing to do with this nice business of ours as a result of I wished to make the world a greater place and do cool stuff. So I ended up in market analysis, so client insights, so testing model technique for PNG and 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 obtained divorced. So once 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, “Certain, it seems like an fascinating concept,” having actually no idea of the funding business past a little bit little bit of publicity right here and there.
And I used to be fortunate. I joined a bootstrapped dividend progress fairness supervisor at about 10 million AUM and was there till about 1.5 billion AUM after which left to 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 a much bigger store or a pension or no matter, it’d be a really completely different expertise that wouldn’t essentially set you as much as going to bootstrap your personal rising supervisor.
The agency’s known as Bristol Gate for folk who wish to google issues. We launched ETFs in 2018, and I had met my co-founder on the similar time, and we thought all these people try to launch ESG methods and so they’re all lacking what we predict the top consumer for these ESG merchandise need. And this, to be tremendous clear, is lengthy solely fairness universe, not alter hedge funds or something like that.
And so in 2018, we set out, which is similar 12 months 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 observe data in 2019 for our world fairness technique. We did that in order that we didn’t must launch a car off the bat as a result of autos price some huge cash and so they take lots of effort to distribute. They take lots of consciousness and all these items.
Anyhow, we had all the time meant 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’d launch a subadvised Canadian car up right here.
After which we met Wes. And Wes determined that we wanted to get ourselves right into a US ETF. After which we realized, wait a second, US, the US market’s greater, there’s simply as a lot if no more demand for ESG merchandise. One main distribution distinction between Canada and the US is in Canada, no one cares that we’re girl owned. We’re the fifth or sixth public markets asset supervisor owned by girl in Canada. That’s what number of there are up right here. So there’s no supervisor variety initiatives up right here institutionally or from advisors, whereas everyone is aware of within the US, plenty of 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 growth, November seventh, we launched our first ETF and the ticker is BEEZ, B-E-E-Z, ’trigger branding issues and it’s a US massive cap and it’s 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 firms, stakeholder-governed, purpose-driven firms who care for their stakeholders outperform in the long term.
What’s actually fascinating is we didn’t like every of the prevailing ESG frameworks. We thought, and I may speak about for 10 years in regards to the issues with current ESG and funding frameworks, however we threw out lots of 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 information on equal footing with the monetary information all through your entire course of.
What we’re identified on is ESG integration. So full ESG integration, which implies we deal with ESG information as elementary firm information in safety choice, not right here’s our monetary mannequin over right here on one facet and right here’s our ESG mannequin and opinions over right here on different facet. We deal with the ESG information that we use as elementary firm information when choosing these firms for the portfolio.
Meb:
So let’s dig in on the method as a result of plenty of the phrases you used may imply lots of various things. ESG means lots of various things to lots of completely different folks. So let’s hear a little bit bit about y’all’s course of. You’ve a pleasant deck. If we will embody it within the present notes, listeners, we definitely will on the method, which I feel may be very useful. However why don’t you stroll us via it. How do you guys discover accountable progress? What does that imply? And after we hit a few of these phrases, let’s attempt to give y’all’s interpretation of what you suppose it means to you as effectively.
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 are usually 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 usually extra quantitative, much less deep dive into an organization sort measures. And there’s many various managers who do each. We do each.
And what that appears like in our course of is we begin with the entire index, no matter index that is likely to be. On this case for the ETF, it’s the US. And we run 25 qualification standards. And most of these are quantitative information factors. We don’t do a fancy-schmancy predictive advanced quant like a few of other people would possibly suppose quants are. However now we have 25 qualification standards that’s making an attempt to get us right down to a consideration set about 50 firms.
And what that qualification standards seems to be like is there’s some useful stuff. Can we purchase it in custody in North America 5 billion minimal market cap? Some monetary. If now we have a dividend, it must be rising funding above funding grade credit standing. Then there’s lots of conventional ESG exclusions. So conventional ESG exclusions are sort like the unique spiritual investor exclusion as a result of ESG has its roots in spiritual investing. So no weapons, no weapons, no playing. We don’t exclude pot, however no pot firms make our display. 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 power, they’re most likely identical to, “Liz, what are you speaking about?”
Liz:
Nicely, it makes it very fascinating up right here as a result of now we have all the main pensions are deeply dedicated to ESG and deeply dedicated to power funding. And I prefer to level out to those who the power firms are actually good at DEI and reporting rather more so than tech firms and asset managers, however that’s a distinct story. However we exclude fossil gas.
There’s a few causes we exclude fossil gas. We by no means held an power firm at Bristol Gate as a result of power firms are a little bit too cyclical to have excessive constant dividend progress. So from becoming in into qualifying and stepping into the portfolio, they’re more likely to fail anyway. So it’s type of only a bit simpler to display them out ’trigger you recognize they’re not going to make it. We additionally don’t have any renewable power firms in our portfolio.
Meb:
Nicely additionally, I imply once you transfer from a universe of 1000’s right down to 50, you’re invariably going to kick out all kinds of issues and areas and sectors and industries, whether or not it’s from the broad standards, whether or not it’s from the secondary form of standards as effectively. In order that’s the entire level of energetic administration. You need a concentrated portfolio as a result of in the event you’re charging greater than zero, you need it to take a look at bizarre and completely different.
Liz:
Yeah. And it’s humorous ’trigger I’ve by no means understood why people don’t need it to look bizarre and completely different. It’s certainly one of my large points with energetic administration index hugging.
Meb:
It’s quite simple. They need it to look bizarre and completely different when it’s going up. They need it to look bizarre and completely different if it’s taking place and also you’re not taking place. However primarily it creates a bizarre precept agent drawback as a result of lots of the big asset managers, as soon as they get to scale, after getting 10, 50, 100 billion, 500 billion, you don’t wish to look that completely different as a result of there’s solely draw back danger. The cash is already captive. And we all know that cash as soon as it’s sitting someplace, doesn’t prefer to go wherever until it will get abused or does very poorly. For those who take a look at lots of the old-fashioned hedge funds too, their early years the place they did 150% or these large returns and now all of them do 7% with 10% volatility.
Liz:
They usually’re all chasing FANG shares and it’s like, what are you doing? However the index hugging factor, folks like to choose on ESG for index hugging. Lively is index hugging all the best way. I imply, I’m an enormous believer that lots of energetic underperformance comes from not taking dangers and never having excessive energetic share and index hugging and making a bunch of silly selections as a part of that.
However you’re proper, our qualification course of kicks out entire sectors. Once 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 sort of firms.
In our non-traditional ESG qualification standards, we take a look at board variety past gender. So we embody racial variety of board members, 33% or extra. So we gained’t take a look at an organization who has not found out easy methods to put a pair token variety hires on their board but, principally as a result of in the event you haven’t found out 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 seems like?
Liz:
No, persons are a lot … Within the US, particularly the US boards are fairly numerous. Canada’s fairly unhealthy, however clearly we’ve obtained none of these within the ETF. However even after we began, if we had a 40% bar, it might kick out plenty of people. It’s humorous ’trigger actually it finally ends up kicking out cool tech renewable power boards that you just … not typical stuff that we maintain in our portfolio like boring industrials and boring retailers and semiconductors as a result of they’ve all been engaged on these items for some time. So it doesn’t kick any of these out.
Funding grade credit standing would possibly kick out extra firms. For those who take a look at the final cohort of our qualification course of, there’s most likely extra boards that fail or extra firms that fail on funding grade credit standing or fraud points and issues like that, lawsuits, than on the board variety. Why? ‘Trigger everyone’s slowly figuring it out. And to be tremendous clear, we’ve elevated that 33% from 30, so ultimately it’ll be 35 and now we have to cope with the universe as it’s. ‘Trigger our purpose 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 approach attainable.
And we run that consideration set as soon as yearly. So we’ve completed it 5 occasions now. So did 2018 until now and it evolves, however it doesn’t change that a lot. It completely spits out obese IT, obese industrials supplies. We by no means have any banks. We’ve some monetary stuff. We usually don’t have actual property, and we’re okay with that.
And one factor you’ll discover, in the event you take a look at our portfolio, there’s lots of manufacturing concerned firms. And that’s the place the semis type of pop in. It’s ’trigger these firms who’ve needed to handle labor, handle manufacturing services, handle worker security, you possibly can think about there could also be a little bit few steps forward of a West Coast tech firm by way of fascinated by their staff and reporting ESG stuff and employee security and issues. So it’s fascinating the way it nets out.
Meb:
Yeah, I’m saying this from a podcast whose listeners are most likely 90% male. I imply, I keep in mind giving a speech in New York to Quantopian crew and so they did a stay viewers and it was like 95% male. However the enterprise capital has to me, essentially 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 plenty of these components. You bought lots of them. What do you suppose are the principle drivers of those that form of filter out essentially the most issues? Are there any of the 25 or so which can be notably extra outstanding?
Liz:
Checked out it year-over-year and so they are usually, I imply clearly participation exclusions. You realize what I’d say? There’s a complete bunch and so they’re all fairly equal. And that want for dividend progress, the funding grade credit standing, the variety, the business participation, the standard ESG exclusions, even glass door ranking, it’s type of simply an equal. You’d suppose it was greater in a few of the areas. Aside from shedding entire industries, it’s a really fascinating type of balanced course of.
Once we did it at Bristol Gate, it was the S&P 500, removed all of the non-dividend payers, removed everyone under funding grade credit standing, and primarily based on subsequent 12 months’s predicted dividend, we selected the highest 50 and did the basic deep dive on these. And what we’re getting with the identical however a distinct course of ’trigger keep in mind, what we’re slicing 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 need to type of go a little bit bit additional than the highest 50 excessive dividend growers.
And that’s why we altered or optimized this course of that my dad constructed as a result of we wished the identical issue publicity. So these excessive constant dividend growers who’re well-managed and well-governed and centered on the long-term, we wished them, however with barely greater stage of ESG. And to be tremendous clear, in the event you take 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 a complete bunch of silly stuff that will get you pushed down within the rating with controversies or behind on the occasions by way of board variety, all 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 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 buy or not.
And so we run that qualification as soon as yearly. That will get us to about 50-ish firms. After which we do our elementary deep dive. And what we do is we take all of the financials we did at Bristol Gate, which skews taking a look at debt capability, how conservatively they’re managing their debt, earnings progress, dividend progress, aggressive market share, and we usher in ESG information and put it equally beside that monetary elementary information. And we purposely manage it beneath pillars in order that they’re equally weighted. So it’s not like, “Hey, the monetary half will get 66% weighting and the ESG half will get … ” We don’t divide it like that and nor will we simply to be tremendous complicated, will 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 greater turnover you could have, the extra it prices to rent new folks. Water use, if it can save you the associated fee that you just spend on water, it’s a monetary factor. It’s undoubtedly an ESG factor, however it’s tied to the operations and the prices of an organization. It’s not a separate consideration. Waste is a good instance. It prices plenty of cash to get rid of 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. Nicely, firms that we’re in search of and that we personal perceive that the extra girls you could have in management roles, the larger your pool of candidates it’s important to recruit from. So it really will increase the numerous optimistic advantages to the corporate of doing this fundamental stuff that some would say is silly DEI stuff. However the firms that we’re holding are doing it for operational and enterprise causes, not as a result of it makes them look good on a questionnaire.
We take a look at science-based targets, that are net-zero associated. We take a look at parental go away. We take a look at what information we will discover that’s comparatively systematizable throughout the consideration set of firms.
So if you concentrate on it, we’re taking a look at most likely, of the 50 firms we’re doing this deep dive on, we’re taking a look at a few of the high ESG reporters and scoring issues. So we really can run comparatively customized information units throughout this 50-ish group of firms like racial variety and management year-over-year, three-year change in that, three-year change in water depth, three-year change in water use. As a result of you possibly can’t get it for the entire S&P 500 for instance as a result of a complete bunch of these firms aren’t reporting that stage of information but. However as a result of we’re taking a look at this sort of extra superior ESG-esque pool of firms, we’re getting all these information factors that we’d not be capable to purchase from an index supplier who’s promoting ESG information throughout their index.
In the end, we’re constructing a excessive energetic share, 25 positions, tremendous concentrated ETF of essentially the most boring, sustainably rising, responsibly rising firms. And in a nutshell, these firms that we’re holding perceive that the optimistic impacts that they make on all of their stakeholders, so their staff, their clients, 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 clients is core to their mission and core to their objective.
And these firms are based on that and it doesn’t matter what their political views are. Nicely-managed, long-term centered firms which can be stakeholder-governed and purpose-driven will outperform in the long term. And that’s our funding thesis and I ought to most likely outline a few of these phrases.
Meb:
Certain, let’s hear it.
Liz:
So stakeholder governance. So anyone steeped in investing has been usually educated that shareholder primacy and shareholder governance is the position of a company. So a company’s job is to manipulate on behalf of their shareholders and make their shareholders cash. The issue with that’s staff and clients and a complete bunch of different components affect an organization’s capacity to make cash.
So stakeholder governance, which isn’t one thing I invented, I’d argue unique governance was stakeholder governance, however that’s a extra advanced matter. Stakeholder governance is only a firm that claims, “You realize what? Our staff and our clients and all this stuff should be thought-about 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 partaking all of our stakeholders and serving to and supporting and never screwing over primarily all of our stakeholders.”
So there’s tons of firms on the market that consider in a stakeholder governance framework. So as an alternative of being our solely purpose is to return returns to shareholders. That turns into simply one of many roles of the board. And so we’re in search of these firms the place there’s proof of their metrics, no matter these metrics is likely to be, that they’re contemplating their stakeholders. ‘Trigger you possibly can’t simply say you or your stakeholders are ruled and also you care about all these items identical to you possibly can’t say you care about variety. Saying you care about variety or the setting is nice, however what you really do in what you are promoting and the adjustments that you just make and the outputs that you may see within the enterprise let you know whether or not one thing’s caring about any of these items.
So stakeholder governance is, I feel it’s one thing companies do extra naturally. I feel it’s within the funding business I feel lots of our conventional finance concept assumes that stakeholders don’t matter. And so what you see in ESG is you see conventional monetary fashions over right here and also you see folks making an attempt to suit all this local weather and variety into these fashions and so they don’t match as a result of the normal fashions assume shareholder primacy and shareholder governance. The one approach ESG works in a company is when its core to their operations and core to their objective, not as a separate exercise on the facet.
Our firms are usually not doing ESG stuff to really feel good or to look good. They’re doing it as a result of it’s a part of their objective and their core, and it’s how they had been all the time based and the way they’ve all the time operated. And purpose-driven is actually advanced as a result of it’s one thing I realized lots about in governance coaching and in advertising and marketing, which is it’s actually tough to speak persistently to folks.
And so these firms that we’re in search of know that it’s actually exhausting and know that sharing, having a shared objective, getting a complete 1000’s of staff to work collectively in the direction of the identical purpose persistently and speaking that purpose is a tough exercise that they as a board and a administration workforce must work on. And that shared objective just isn’t solely having a transparent objective for the group, however serving to all of your staff, your entire stakeholders, your entire clients perceive why you’re there and what you’re doing makes for a extra environment friendly ship if one would possibly wish to say. When you could have 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 alleged to be doing.
That is all management and governance science that’s simply within the early phases of academia by way of quantifying and analyzing all these items. However I feel everyone can agree that if everyone’s working round with their head minimize off and no one is aware of what they’re doing at an organization, it’s lowering productiveness. And the extra everyone may be on the identical web page by way of long-term targets, the extra effectivity that you may obtain.
Meb:
As you concentrate on governance, there’s areas that you could be or is probably not concerned, however you possibly can converse to it. I’m pondering of issues like within the US, notably with a few of the tech firms this previous cycle who’ve been very form of me-focused, that means like stock-based compensation that’s simply outrageous, a ton of dilution to shareholders, perhaps twin shared lessons, all these type voting issues which have gone on.
Do these play any position in any respect in your varied screens and the way do you 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 staff and the board discovered this out. After which the board spent 12 or 14 months debating what they need to do with them. And the one girl on Google’s board mentioned, “Most likely we should always inform folks and fireplace them, most likely we should always try this.” They usually all simply sat there and twiddled their thumbs.
And that is all extremely certified group of people who find themselves CEOs and on a complete bunch of boards and so they’re professionals at this, but one of many largest firms on the planet sat there and twiddled their thumbs. After which ultimately they gave the blokes 50 million every and paid them off and precipitated an enormous controversy with all their staff, all stuff that they may have been prevented. It’s not their fault they obtained a bunch of sexually harassing dudes. The board’s job is to rent and fireplace the CEO. And when the CEO’s not hiring and firing the dude sexually harassing people, that’s a governance problem.
The primary time we constructed the portfolio, our world fairness technique, two of the boards had lately fired their CEOs for sleeping with their secretaries and varied different issues. And that reveals useful governance.
The reply to your query is what’s useful governance? Is it a complete 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 people don’t create good governance. Good governance is created by a governance tradition, by a shared objective, by folks really working collectively on governance points.
So you possibly can have good governance with bizarre compensation and all this sort of stuff on the similar time, completely. However I’d argue lots of that large tech is poorly ruled. We don’t have any financial institution shares in our portfolio for a motive. And it’s not ’trigger they get excluded for producing fossil gas. However there’s a robust perception that non-independent administrators are usually not ESG. We don’t essentially share that perception. Whereas we’d want … Clearly we search for audit committee independence for instance. That’s certainly one of our necessities. We gained’t put money into an organization. However that ship’s sailed. Everyone is aware of easy methods to 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 lots of extremely paid CEOs. The issue is we don’t have any good measures proper now to actually assess CEO pay. And what I imply is what we’re usually utilizing proper now’s common employee pay to CEO pay. So it actually depends upon what business and which set of information that you just’re utilizing. And what issues extra is, to me, who cares in regards to the CEO pay. What issues extra is the baseline worker pay. What issues extra is pay fairness. So in the event you’ve obtained a person and a lady in senior management roles and the lady simply because she’s had decrease incomes all through her profession is getting paid much less, and that is stuff that firms can repair.
What issues is Walmart’s base pay versus one other retailers base pay, not essentially the ratio of what their executives make versus what that pay is. As a result of an organization paying a low quantity to executives doesn’t naturally imply it’s doing higher for the world. And executives price plenty of cash. So it’s a very fascinating, messy matter, however the way forward for ESG is us having the ability to get this information on the proper granularity.
We have already got exec comp. So exec comp clearly was already all the time there. It’s just a bit extra standardized in ESG reporting now. What we’re quickly going to have is management comp divided by group, proper? So we’re going to have 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 fascinating as a result of wage versus bonuses will get very messy by way of pay fairness. It’s going to be a shock to everyone and everyone’s going to hate it 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 perhaps as variety on boards, however issues like, hey, we’re going to exclude, you talked about hashish, alcohol, like opioids. I don’t know, a decade in the past folks had been like, “These are 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 needs to be carbs and the very last thing you need is fat or protein, no matter it was, and right this moment 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 virtually every little thing we do kills folks and people within the ESG facet of the stuff give particular sectors a go, like prescription drugs for instance. We’ve no pharma firms in our portfolio. We’ve lots of well being tech although, like medical tools and issues like that. One of many causes now we have no pharma firms is ’trigger all of them have value fixing scandals. And so no matter their capacity to kill people with their product or no matter, which is clearly don’t even get me began on the opioids and the Sacklers as a result of that might be a complete different podcast, the value fixing, which is they simply, I don’t know, all of them simply determined to do that previously 5 years, all of the executives simply working for costs or no matter after which the massive congress factor.
However right here’s what occurs in ESG and influence, and I say ESG and influence as a result of influence rankings occur in public markets too. Generally folks after they speak about influence investing, it’s simply personal markets, however for essentially the most half now we have influence rankings on these firms. The issue with influence rankings is they often are primarily based on the SDGs, so the sustainable improvement targets that are developed for international locations by the UN.
So an organization to be impactful in response to this framework, and I’ve obtained a complete bunch of air quotes right here for people who find themselves not watching my try and framing the sarcasm, to be impactful an organization wants to deal with an SDG. And so what occurs is all of the pharmaceutical firms get 100% influence ranking as a result of they make a drug that’s serving to folks. They don’t get any damaging ranking for value fixing.
And so we’d not be solely involved in regards to the opioid disaster. We’d be involved with the entire Sackler governance shit present catastrophe that was them creating the opioid disaster. For anyone who has not learn the lengthy, I feel it’s the Atlantic piece on your entire historical past of the advertising and marketing behind that, ’trigger once more, the meals pyramid that you just talked about, have you learnt who paid for that? It was not the FDA. It was the cereal firms simply to be tremendous clear. There’s a complete bunch of analysis that company pursuits … That is certainly one of my passionate areas. Tariq Fancy was the previous CIO of BlackRock, ESG at BlackRock, and he give up and he went on 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 a company via a complete bunch of promoting selections and a necessity to make more cash began and created a large 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 may cease.
And so the reply is firms make big, big impacts, optimistic and damaging. What we’re making an attempt to intention for on this portfolio is firms making a internet optimistic influence. So firms who’re decreasing their damaging externalities as a result of they price cash, they damage folks, they give the impression of being unhealthy from a PR perspective, a complete bunch of the reason why you would scale back your damaging influence on the world whereas rising your optimistic influence. So whether or not that’s higher first rate pay, safer work circumstances, higher high quality merchandise, extra modern that remedy issues, discount in packaging so it prices much less, all these damaging and optimistic impacts.
Meb:
So so far as portfolio development, you get down to those small group of names, 25 whatnot. Do you could have 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 last portfolio?
Liz:
Yeah, so they’re equal weighted, so we take away the place dimension decision-making. My dad all the time mentioned it was so that you didn’t have a bunch of PMs combating over place dimension. We run a correlation evaluation, however it’s sector agnostic. We used to personal McDonald’s and KFC in my dad’s technique. And folks would say, “Aren’t they the identical firm?” And once you take a look at the geographic income of them, they had been utterly reverse. And similar factor, there’s plenty of firms that look very comparable and appear very comparable on this massive cap area that aren’t essentially.
So once you take a look at our portfolio, we obtained 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 choice making.
And we all know we’re going to be obese tech and industrials and often supplies and each client issues relying on. However we’re agnostic to that. And these are equal weight bets, so we’re placing the identical weight on a mega cap as we’d be on a small cap within the portfolio.
After which that’s a part of the energetic share. We’re okay not holding the highest 30 one thing p.c of the index. We’ve not one of the faux shares. You may’t have excessive energetic share in the event you’re holding a bunch of these firms. And everyone else, I imply everyone’s going to have these of their portfolio anyhow. However it’s actually, we’re in search of the 25 most responsibly rising firms out of that 50-ish set of firms that now we have. It turns into our bench too. So the subsequent set of ranked firms in there are who will use when we have to fireplace an organization, whether or not it’s for quarterly earnings or doing one thing silly on the ESG facet or the non-ESG facet.
However once more, lots of our stuff is annual information. Whereas annual reporting and stories come out midyear and issues like that, lots of our board variety adjustments after they change any individual on a board, and now we have fired an organization for going under our threshold, however you possibly can think about the businesses that we’re holding are very cognizant of not, in the event you’ve obtained 76% board variety, in fact you possibly can put a complete bunch of white dudes in your board, however in the event you obtained 31 and each investor that reveals up is partaking with you in your board variety or one thing, you’re going to be cognizant of it.
And that’s what’s so humorous about ESG. The entire world tries in charge BlackRock and the funding business on ESG. They’re the laggards on this. The pensions for essentially the most half do lots of the engagement round and many managers to be tremendous clear, ESG managers do lots of pushing on variety and environmental stuff and governance and all these sorts of issues, however it’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 will audit this information and serving to them manage it. It’s the firms driving ESG. It’s not BlackRock driving ESG. It’s not … undoubtedly not Vanguard driving ESG stuff. Actually Vanguard is simply being known as into congress for pushing local weather change narrative, which is the funniest factor in your entire world for a passive store.
The oil sands firms up right here in Canada are working, doing much more work than most asset managers on variety and decreasing their emissions. Why? As a result of they’ve a complete bunch of buyers who care and so they might be foundations, pensions, people who care about progress on these items and staff 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 lots of work that goes into it and also you guys are comparatively new launch, so congratulations. However inform us a little bit 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 effectively?
Liz:
And a wholesaler and a marketer and all that type of stuff. I feel it’s fascinating that folks suppose ETFs are like concepts. I feel there’s a lot room for innovation on this business. I feel it’s going to look completely-ish completely different in 20 years, however I feel there’s some stuff that isn’t going to vary.
I feel there’s all the time going to be public markets buyers and personal markets buyers and people who do each. I feel persons are all the time going to suppose geographically by way of 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 fascinating facet of the enterprise, it’s important to know who’s going to purchase it regardless of how cool the concept is, and it’s important to know the way it’s going to get distributed.
The nice factor with an ETF car is folks should buy it, common folks should buy it, and advisors should buy it in a bunch of locations, however there’s a complete bunch of restrictions and issues. They make issues extra difficult than simply launching an ETF. Just like the crypto ones, for instance, you most likely are mates with all Eric Balchunas and all of the crypto-obsessed ETF people, and so they’re going to regardless of the spot Bitcoin ETF goes to launch. Nicely, many of the warehouse cabinets are locked within the US.
Apparently up in Canada, not one of the warehouses locked their cabinets to Canadian or US listed ETFs. So any advisor in Canada should 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 may solely purchase them in case your consumer indicators an enormous waiver and it will get a excessive danger ranking of their portfolio.
So although these are presumably the best, most talked about ETFs in your entire, total world, a complete bunch of Merrill Lynch and UBS and Citi people are usually not going to have the ability to purchase them of their accounts anytime quickly as a result of they’re going to need to get authorized, they’ll most likely create inner ones in order that they will, ’trigger there’s a pay to play facet there too, that folk want to grasp. You may get your ETF on Schwab or no matter for free-ish. Getting your ETF on US platforms requires time and cash and a bunch of random stuff.
So this crypto one’s actually fascinating ’trigger these needs to be, there’s going to be like, I don’t know, what number of are there? 18 now, all the massive asset managers, and so they’re going to observe and a few of them are going to get on some platforms, however a complete bunch of them are going to get locked off a bunch of platforms. So although it looks as if an ETF is a magic bullet by way of wrapper for these merchandise, there’s a complete bunch of different issues.
In order that’s simply my rant to inform everyone that your product concept is nice. Who’s going to purchase your product and the way they entry it’s most likely greater than 50% of the consideration that you need to 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 turning into an more and more higher choice than a mutual fund as a result of one, you’re often going to cost it decrease. Two, they’re altering all of the charges and value constructions of how ETFs and funds and commerce prices and issues like that. And so that you see an enormous transfer in the direction of arguably less complicated 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 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 observed your dictator’s remark earlier, and so I mentioned that seems like any individual we all know.
Liz:
And I simply suppose it’s so fascinating. Perth’s most likely certainly one of my favourite examples clearly, of constructing a profitable product. She knew there was an absence of rising market systematic merchandise that she knew there was none that excluded dictatorships and that there could be a complete host of advisors throughout the US who could be completely 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 firms on the market to get the publicity. And yeah, you’re not going to seem like the index. However who cares? Numerous people are in search of systematic or energetic choices, not the entire index. We’re by no means going to persuade a bunch of passive people to make use of this as a core choice, even when we’re the very best on the planet. You may’t change the buyer habits.
So Perth actually constructed a product to unravel the top consumer’s wants. And I imply, she obtained a tremendous timing with the Russian invasion, however she was already doing the work of discovering the market match and getting groups to construct her into the mannequin lengthy earlier than that occurred. And so everyone ought to simply go study every little 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 belongings. So go Perth. That’s rad.
Liz:
Perth is superb. She’s simply the proper instance of it’s essential to discover who’s going to purchase your nice concept earlier than going and determining easy methods to make your nice concept. And perhaps you had been an advisor, perhaps you labored as a wholesaler, perhaps you labored someplace within the distribution of the business, however particularly in the event you’re a pure portfolio supervisor otherwise you’re 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 price you cash that you just’re going to wish to go change.
The way in which to launch an ETF is to have a complete bunch of cash and be prepared to spend it, I feel is the easiest way. Launching a car, whether or not you might be BlackRock or a startup, is a little bit of a coin toss.
I used to be speaking to my buddy who works at a fairly large asset supervisor, and he was like, “Yeah, any new fund now we have, we spend the entire time worrying about who’s going to be the primary 20 million in.” So you bought to go discover type of the place that first 20 million is, after which it’s by no means going to return as quick as you need it to return, and that’s why it’s essential to have cash. But it surely 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 firms you’ve by no means heard of. It’s actually 90% big asset managers who’ve obtained autos from 2 to $10 million.
I like telling people, Cathie Wooden launched an ESG ETF in, I don’t know, 2000 after which closed it 18 months later ’trigger she couldn’t increase cash in ESG ETFs. So actually you could possibly 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 just’re wrapping and the necessity, after which it’s essential to not screw up the efficiency and all that type of stuff.
Meb:
In the case of, you’ve obtained lots of completely different takes on this area, however one of many questions we’ve been asking many of the friends is, in the event you sit right 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 in the event you sat on the desk, 75% of the attendees would shake their head and say, “Liz, I disagree with you,” on funding associated, portfolio associated, ESG, DEI associated, something come to thoughts?
Liz:
Yeah, lots. I may go two instructions right here, so …
Meb:
Title them each. Do each of them. We obtained time.
Liz:
So I don’t consider you possibly can 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 entire ecosystem of parents yelling about shares all day, day-after-day and guessing the place macro goes to go and all this stuff. I don’t suppose it’s 75% of parents 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 recommend that the timing danger of energetic safety choice is among the largest issues. That’s why we’re macro agnostic. We’re every little 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 folks away from the business. In order that’s my normal take.
My ESG take, and I hear this lots, is ESG information just isn’t standardized and might’t be standardized. And once you take a look at the businesses that we maintain within the portfolio, greater than half the portfolio has externally assured environmental information. And so not solely is it standardized, not solely are they reporting via the identical framework. They’re getting exterior auditors to evaluation 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 certain, it undoubtedly seemed like stuff was not standardized by way of ESG information, all the businesses we’re taking a look at have moved in the direction of this. It’s known as the GRI template. There’s like a billion completely different frameworks in ESG, however in the event 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, most likely like 400 of the S&P 500 firms are reporting this framework. Are they reporting year-over-year? No. You may return to their earlier report and a few are laggards and a few are forward, however we’re ready to take a look at three 12 months information for many of those metrics for many of our firms.
Meb:
As you look again in your profession, what’s been essentially the most memorable funding? Good, unhealthy, in between?
Liz:
Most likely beginning the agency, however I’m going to say this ETF principally as a result of it’s public. I imply, once you’re working in separate accounts, we may share stuff with what we’re doing, however now it’s like, hey, we’re on the market. Efficiency has been fairly good since we began, which is a coin toss to be tremendous clear. We 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 occasions as many people. There’s random 4 billion RIAs in the midst of states that no one’s ever heard of, which might be the twelfth largest RIA or asset wealth store in Canada.
And so I obtained to say, our ETF BEEZ is my favourite funding. We don’t love our firms one after the other. We consider them as a workforce. We’re fielding a workforce of gamers. I imply, we don’t play favorites. We simply wish to decide a superb workforce. 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 strategy portfolio development.
Meb:
Proper on. The place do folks discover out extra data? The place do they go? Observe you, comply with the agency, the fund, all that.
Liz:
So now we have an ETF web site, which is honeytreeinvestetfs, which is all that formal one. After which now we have honeytreeinvest.com, which is our common one which has tons of blogs. For those who simply google Honeytree Funding or Honeytree ETF, you’ll see plenty of articles and podcasts and issues like that.
I, regardless of Twitter or no matter people wish to name it present shit present, I’m nonetheless on there. I’ll be on there till it goes down for quite a lot of completely different causes. ‘Trigger I like the neighborhood and there’s plenty of nice people there, and it’s how we met Wes and all this stuff. So Liz Simmie on Twitter, in order for you obnoxious, occasional ESG takes. I principally simply rant about how BlackRock just isn’t woke and folks shouldn’t be satisfied that any asset supervisor is woke. That’s us in a nutshell.
And naturally you possibly can go by B-E-E-Z on choose custody platforms within the US. For those who’re a retail investor, it’s most likely even simpler to entry than an advisor, however in fact, we’re primarily centered on advisors on this. So in the event you’re an advisor interested by ESG and is aware of nothing about it otherwise you’re a deep ESG practitioner, please be at liberty to succeed in out to us on our web site ’trigger that’s who we’re seeking to join with.
Meb:
Liz, thanks a lot for becoming a member of us right this moment.
Liz:
Thanks for having me.
Meb:
Podcast listeners we’ll publish present notes to right this moment’s dialog at mebfaber.com/podcast. For those who love the present, in the event you hate it, shoot us suggestions at [email protected]. We like to learn the opinions. Please evaluation us on iTunes and subscribe the present wherever good podcasts are discovered. Thanks for listening, mates, and good investing.