Visitor: Liz Simmie is the co-founder of Honeytree Funding Administration, an asset administration agency based mostly in Toronto, Canada.
Recorded: 12/13/2023 | Run-Time: 52:11 
Abstract: In right this moment’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising firms which might be stakeholder ruled, goal pushed, and make a internet optimistic affect on the world. Then she shares some sizzling takes on the state of each ESG and energetic administration. As we wind down, Liz talks in regards to the technique of launching an ETF with our mates at Alpha Architect and shares recommendation for anybody occupied with launching one themselves.
Feedback or ideas? Fascinated by sponsoring an episode? E-mail us Suggestions@TheMebFaberShow.com
Hyperlinks from the Episode:
- 1:15 – Welcome Liz to the present
- 1:46 – Launching BEEZ
- 7:11 – Discovering accountable progress and being ‘quantamental’
- 10:19 – Energetic administration and index hugging
- 15:14 – Primary elements that filter out sectors and corporations
- 21:30 – Overview of stakeholder governance
- 25:16 – How energy balances inform Liz’s funding philosophy
- 34:56 – Place sizing
- 38:44 – What it’s like to begin an ETF
- 44:24 – Episode #318: Perth Tolle, Life + Liberty Indexes
- 46:23 – Beliefs Liz holds her that her friends would disagree with
- 49:11 – Liz’s most memorable funding
- Be taught extra about Liz: Honey Tree Make investments; X
Transcript:
Welcome Message:
Welcome to The Meb Faber Present, the place the main 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. Attributable to business 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 right this moment. Our visitor is Liz Simmie, co-founder of Honeytree Funding Administration, which not too long ago launched an actively managed ESG-focused ETF ticker BEEZ. In right this moment’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising firms which might 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 energetic administration. As we wind down, Liz talks in regards to the technique of launching an ETF with our mates at Alpha Architect, and shares recommendation for anybody occupied with launching one themselves.
Please take pleasure in this episode with Liz Simmie.
Liz, welcome to the present.
Liz:
Thanks for having me.
Meb:
The place do we discover you right 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 anyplace else. Truly I went to Montreal for college after which got here again and can by no means go away this nice metropolis and nation.
Meb:
Superior. I adore it up there. We’re going to speak about so much right this moment. One of many subjects listeners, which you most likely actually need to stick round for is this idea of beginning ETFs. I get a whole lot of questions. Each day folks need to begin an ETF, they acquired an thought for an ETF. We’re going to speak about somebody who’s accomplished it very not too long ago, placing out their first fund in November with our loopy pal, Wes Grey and crew. So we’ll positively get into a bit little bit of that later. However I need to speak a bit bit about you, your concepts, your course of. Give us a 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 tasks, quantitative and qualitative.
After which my dad began an rising supervisor. So my dad’s a bootstrapped US fairness supervisor based mostly in Toronto, they usually had this third man who was American and he acquired 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 come back in. I begrudgingly stated, “Positive, it seems like an attention-grabbing thought,” having actually no idea of the funding business past a bit little bit of publicity right here and there.
And I used to be fortunate. I joined a bootstrapped dividend progress fairness supervisor at about 10 million AUM and was there till about 1.5 billion AUM after which left to begin Honeytree. And to be tremendous clear, it’s ’trigger my dad was a founder. There’s an entire pile of privilege in there, but when I had gone the normal path to be a portfolio supervisor at an even bigger store or a pension or no matter, it’d be a really completely different expertise that wouldn’t essentially set you as much as going to bootstrap your individual rising supervisor.
The agency’s known as Bristol Gate for people who need to google issues. We launched ETFs in 2018, and I had met my co-founder on the identical time, and we thought all these of us try to launch ESG methods they usually’re all lacking what we expect the tip shopper for these ESG merchandise need. And this, to be tremendous clear, is lengthy solely fairness universe, not alter hedge funds or something like that.
And so in 2018, we set out, which is identical yr we launched the ETFs up right here. 2018, we got down to discovered Honeytree. We had been registered in 2019. It takes so much longer up right here to get authorised by the regulators. We began our observe information 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 automobiles value some huge cash they usually take a whole lot of effort to distribute. They take a whole lot of consciousness and all these items.
In any case, we had all the time meant 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 girl owned. We’re the fifth or sixth public markets asset supervisor owned by girl in Canada. That’s what number of there are up right here. So there’s no supervisor variety initiatives up right here institutionally or from advisors, whereas all people is aware of within the US, 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 increase, November seventh, we launched our first ETF and the ticker is BEEZ, B-E-E-Z, ’trigger branding issues and it’s a US giant cap and it’s targeted on accountable progress.
So it’s the identical funding thesis we’ve been engaged on our complete agency historical past, which is responsibly rising firms, stakeholder-governed, purpose-driven firms who maintain their stakeholders outperform in the long term.
What’s actually attention-grabbing is we didn’t like every of the present 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 a whole lot 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 knowledge on equal footing with the monetary knowledge all through the whole course of.
What we’re recognized on is ESG integration. So full ESG integration, which implies we deal with ESG knowledge as basic firm knowledge in safety choice, not right here’s our monetary mannequin over right here on one aspect and right here’s our ESG mannequin and critiques over right here on different aspect. We deal with the ESG knowledge that we use as basic firm knowledge when choosing these firms for the portfolio.
Meb:
So let’s dig in on the method as a result of quite a lot of the phrases you used might imply a whole lot of various things. ESG means a whole lot of various things to a whole lot of completely different folks. So let’s hear a bit bit about y’all’s course of. You have got a pleasant deck. If we will embrace it within the present notes, listeners, we definitely will on the method, which I feel may be very useful. However why don’t you stroll us by it. How do you guys discover accountable progress? What does that imply? And after we hit a few of these phrases, let’s attempt to give y’all’s interpretation of what you assume it means to you as properly.
Liz:
So quantum psychological means we aren’t purely basic and we aren’t purely quant. We use each processes. And for people on the market who will not be deeply steeped in fairness, basic fairness land, basic is taken into account deep dive qualitative analysis and quantitative analysis into an organization versus quant processes are typically extra quantitative, much less deep dive into an organization sort measures. And there’s many 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 perhaps. On this case for the ETF, it’s the US. And we run 25 qualification standards. And most of these are quantitative knowledge factors. We don’t do a fancy-schmancy predictive complicated quant like a few of other people would possibly assume quants are. However we’ve 25 qualification standards that’s attempting to get us all the way down to a consideration set about 50 firms.
And what that qualification standards appears to be like like is there’s some purposeful stuff. Can we purchase it in custody in North America 5 billion minimal market cap? Some monetary. If we’ve a dividend, it must be rising funding above funding grade credit standing. Then there’s a whole lot of 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 firms make our display. We exclude fossil gas manufacturing.
Meb:
That’s sacrilege up there in Toronto. Man, no surprise you’re launching this within the US. There’s all of the traditional Canadians, man, the mining and power, they’re most likely similar to, “Liz, what are you speaking about?”
Liz:
Properly, it makes it very attention-grabbing up right here as a result of we’ve all the most important pensions are deeply dedicated to ESG and deeply dedicated to power funding. And I wish to level out to those who the power firms are actually good at DEI and reporting far more so than tech firms and asset managers, however that’s a distinct story. However we exclude fossil gas.
There’s a few causes we exclude fossil gas. We by no means held an power firm at Bristol Gate as a result of power firms are a bit too cyclical to have excessive constant dividend progress. So from becoming in into qualifying and moving into the portfolio, they’re more likely to fail anyway. So it’s sort of only a bit simpler to display them out ’trigger you already know they’re not going to make it. We additionally don’t have any renewable power firms in our portfolio.
Meb:
Properly additionally, I imply once you transfer from a universe of hundreds all the way down to 50, you’re invariably going to kick out all kinds of issues and areas and sectors and industries, whether or not it’s from the broad standards, whether or not it’s from the secondary type of standards as properly. In order that’s the entire level of energetic administration. You need a concentrated portfolio as a result of for those who’re charging greater than zero, you need it to have a look at bizarre and completely 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 completely different. It’s one among 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 happening and also you’re not happening. However primarily it creates a bizarre precept agent drawback as a result of a whole lot of the big asset managers, as soon as they get to scale, after you have 10, 50, 100 billion, 500 billion, you don’t need 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 wish to go anyplace until it will get abused or does very poorly. For those who have a look at a whole lot of 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:
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. Energetic is index hugging all the way in which. I imply, I’m a giant believer that a whole lot 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. 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 sort of firms.
In our non-traditional ESG qualification standards, we have a look at board variety past gender. So we embrace racial variety of board members, 33% or extra. So we received’t have a look at an organization who has not discovered how one can put a pair token variety hires on their board but, principally as a result of for those who haven’t discovered how to do this from a governance perspective, you’re not very competent.
Meb:
I imply, does that display alone kick out half of the universe it 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 acquired none of these within the ETF. However even after we began, if we had a 40% bar, it might kick out plenty of of us. 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 have 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 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 all the way down to a manageable consideration set that we will cowl from a basic deep dive perspective in probably the most environment friendly approach doable.
And we run that consideration set as soon as yearly. So we’ve accomplished it 5 occasions 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’ve got some monetary stuff. We usually don’t have actual property, and we’re okay with that.
And one factor you’ll discover, for those who have a look at our portfolio, there’s a whole lot of manufacturing concerned firms. And that’s the place the semis sort of pop in. It’s ’trigger these firms who’ve needed to handle labor, handle manufacturing amenities, handle worker security, you possibly can think about there could also be a bit few steps forward of a West Coast tech firm by way of occupied with their staff and reporting ESG stuff and employee security and issues. So it’s attention-grabbing the way it nets out.
Meb:
Yeah, I’m saying this from a podcast whose listeners are most likely 90% male. I imply, I bear in mind giving a speech in New York to Quantopian crew they usually did a dwell viewers and it was like 95% male. However the enterprise capital has to me, probably the most outsized. I imply, I feel girls get 2% of enterprise capital {dollars}. It’s some extremely low quantity that’s nowhere close to 50. However anyway. Okay, so we’re getting a bit off-topic.
All proper, so we’re beginning with quite a lot of these elements. You bought a whole lot of them. What do you assume are the principle drivers of those that type of filter out probably the most issues? Are there any of the 25 or so which might be notably extra outstanding?
Liz:
Checked out it year-over-year they usually are typically, I imply clearly participation exclusions. You realize what I might say? There’s an entire bunch they usually’re all fairly equal. And that want for dividend progress, the funding grade credit standing, the range, the business participation, the everyday ESG exclusions, even glass door ranking, it’s sort of simply an equal. You’ll assume it was greater in among the areas. Apart from shedding entire industries, it’s a really attention-grabbing sort of balanced course of.
After we did it at Bristol Gate, it was the S&P 500, removed all of the non-dividend payers, removed all people beneath funding grade credit standing, and based mostly on subsequent yr’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 bear in mind, what we’re slicing out will not be, we will’t simply have the best dividend growers as a result of if we simply seemed on the highest dividend growers to get the ESG growers too, or the accountable growers too, we’d must sort of go a bit bit additional than the highest 50 excessive dividend growers.
And that’s why we altered or optimized this course of that my dad constructed as a result of we wished the identical issue publicity. So these excessive constant dividend growers who’re well-managed and well-governed and targeted on the long-term, we wished them, however with barely increased stage of ESG. And to be tremendous clear, for those who 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 occasions 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 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 basic deep dive. And what we do is we take all of the financials we did at Bristol Gate, which skews debt capability, how conservatively they’re managing their debt, earnings progress, dividend progress, aggressive market share, and we usher in ESG knowledge and put it equally beside that monetary basic knowledge. And we purposely manage it below pillars in order that they’re equally weighted. So it’s not like, “Hey, the monetary half will get 66% weighting and the ESG half will get … ” We don’t divide it like that and nor can we simply to be tremendous complicated, can we consider measures as E, S and G. Each ESG enter that we use, we contemplate basic 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 have got, the extra it prices to rent new folks. Water use, if it can save you the fee that you just 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 good instance. It prices plenty of cash to get rid of waste.
And then you definitely get into the stuff that’s a bit extra complicated to know the way it’s tied to the underside line, like gender and management year-over-year, racial variety and management year-over-year. So at first look, oh, that’s only a really feel good measure. Properly, firms that we’re searching for and that we personal perceive that the extra girls you have got in management roles, the larger your pool of candidates you must 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 firms that we’re holding are doing it for operational and enterprise causes, not as a result of it makes them look good on a questionnaire.
We have a look at science-based targets, that are net-zero associated. We have a look at parental go away. We have a look at what knowledge we will discover that’s comparatively systematizable throughout the consideration set of firms.
So if you concentrate on it, we’re most likely, of the 50 firms we’re doing this deep dive on, we’re among the high ESG reporters and scoring issues. So we truly can run comparatively customized knowledge units throughout this 50-ish group of firms like racial variety and management year-over-year, three-year change in that, three-year change in water depth, three-year change in water use. As a result of you possibly can’t get it for the entire S&P 500 for instance as a result of an entire bunch of these firms aren’t reporting that stage of knowledge but. However as a result of we’re this type of extra superior ESG-esque pool of firms, we’re getting all these knowledge factors that we’d not be capable to purchase from an index supplier who’s promoting ESG knowledge throughout their index.
Finally, we’re constructing a excessive energetic share, 25 positions, tremendous concentrated ETF of probably 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 goal.
And these firms are based on that and it doesn’t matter what their political opinions are. Properly-managed, long-term targeted firms which might be stakeholder-governed and purpose-driven will outperform in the long term. And that’s our funding thesis and I ought to most likely outline a few of these phrases.
Meb:
Positive, let’s hear it.
Liz:
So stakeholder governance. So anyone steeped in investing has been usually skilled that shareholder primacy and shareholder governance is the function 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 clients and an entire bunch of different elements affect an organization’s capability to earn money.
So stakeholder governance, which isn’t one thing I invented, I might argue unique governance was stakeholder governance, however that’s a extra complicated matter. Stakeholder governance is only a firm that claims, “You realize what? Our staff and our clients and all these items must be thought-about in our governance and our administration processes. Why? As a result of they affect they usually’re impacted by our selections. And we’ll do higher if we’re participating all of our stakeholders and serving to and supporting and never screwing over primarily all of our stakeholders.”
So there’s tons of firms on the market that imagine in a stakeholder governance framework. So as an alternative of being our solely aim is to return returns to shareholders. That turns into simply one of many roles of the board. And so we’re searching for these firms the place there’s proof of their metrics, no matter these metrics is perhaps, 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 similar to you possibly can’t say you care about variety. Saying you care about variety or the surroundings is nice, however what you truly do in your small business and the adjustments that you just make and the outputs you can see within the enterprise let you know whether or not one thing’s caring about any of these things.
So stakeholder governance is, I feel it’s one thing firms do extra naturally. I feel it’s within the funding business I feel a whole lot of our conventional finance principle 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 they usually don’t match as a result of the normal fashions assume shareholder primacy and shareholder governance. The one approach ESG works in an organization is when its core to their operations and core to their goal, not as a separate exercise on the aspect.
Our firms will not be 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 goal 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 basically complicated as a result of it’s one thing I realized so much about in governance coaching and in advertising and marketing, which is it’s actually troublesome to speak persistently to folks.
And so these firms that we’re searching for know that it’s actually exhausting and know that sharing, having a shared goal, getting an entire hundreds of staff to work collectively in the direction of the identical aim persistently and speaking that aim is a troublesome exercise that they as a board and a administration staff must work on. And that shared goal will not be solely having a transparent goal 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 need to say. When you have got disparate objectives and disparate concepts in a company about the place one ought to go, it’s much less environment friendly, and folk get confused and don’t perceive as clearly what they’re speculated to be doing.
That is all management and governance science that’s simply within the early levels of academia by way of quantifying and analyzing all these items. However I feel all people can agree that if all people’s operating round with their head minimize off and no person is aware of what they’re doing at an organization, it’s reducing productiveness. And the extra all people might be on the identical web page by way of long-term objectives, the extra effectivity you can obtain.
Meb:
As you concentrate on governance, there’s areas that you could be or might not be concerned, however you possibly can converse to it. I’m pondering of issues like within the US, notably with among the tech firms this previous cycle who’ve been very type of me-focused, which means like stock-based compensation that’s simply outrageous, a ton of dilution to shareholders, perhaps twin shared courses, all these kind voting issues which have gone on.
Do these play any function in any respect in your varied screens and the way do you concentrate on this push-pull story as outdated 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 they usually’re all tremendous fascinating. I’m going to begin with a narrative. So Google again, should’ve been 2018, 2019 after we began, had two senior dudes sexually harassing an entire bunch of their staff and the board discovered this out. After which the board spent 12 or 14 months debating what they need to do with them. And the one girl on Google’s board stated, “In all probability we must always inform folks and fireplace them, most likely we must always try this.” They usually all simply sat there and twiddled their thumbs.
And that is all extremely certified group of people who find themselves CEOs and on an entire bunch of boards they usually’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 fellows 50 million every and paid them off and precipitated a giant controversy with all their staff, all stuff that they may have been prevented. It’s not their fault they acquired a bunch of sexually harassing dudes. The board’s job is to rent and fireplace the CEO. And when the CEO’s not hiring and firing the dude sexually harassing of us, that’s a governance problem.
The primary time we constructed the portfolio, our world fairness technique, two of the boards had not too long ago fired their CEOs for sleeping with their secretaries and varied different issues. And that reveals purposeful governance.
The reply to your query is what’s purposeful governance? Is it an entire bunch of impartial board members? Properly, that’s what the ESG rankings would let you know is nice 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 goal, by folks truly working collectively on governance points.
So you possibly can have good governance with bizarre compensation and all this type of stuff on the identical time, completely. However I might argue a whole lot of that large tech is poorly ruled. We don’t have any financial institution shares in our portfolio for a cause. And it’s not ’trigger they get excluded for producing fossil gas. However there’s a sturdy perception that non-independent administrators will not be ESG. We don’t essentially share that perception. Whereas we’d favor … Clearly we search for audit committee independence for instance. That’s one among our necessities. We received’t put money into an organization. However that ship’s sailed. All people is aware of how one can 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 so much about CEO compensation, and there definitely are a whole lot of extremely paid CEOs. The issue is we don’t have any good measures proper now to really assess CEO pay. And what I imply is what we’re usually utilizing proper now’s common employee pay to CEO pay. So it actually is determined by what business and which set of knowledge 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 for those who’ve acquired a person and a girl 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 firms can repair.
What issues is Walmart’s base pay versus one other retailers base pay, not essentially the ratio of what their executives make versus what that pay is. As a result of an organization paying a low quantity to executives doesn’t naturally imply it’s doing higher for the world. And executives value plenty of cash. So it’s a very attention-grabbing, messy matter, however the way forward for ESG is us having the ability to get this knowledge on the proper granularity.
We have already got exec comp. So exec comp clearly was already all the time there. It’s just a bit extra standardized in ESG reporting now. What we’re quickly going to have is management comp divided by group, proper? So we’re going to have girl in management’s comp, males in management’s comp even damaged down by racial variety as a result of the way forward for ESG reporting is the Division of Labor variety knowledge being put in monetary statements as required disclosure, and that features gender and race by stage, and that’s going to finish up together with turnover. It’s going to finish up together with pay and pay fairness, together with bonuses. It’s very attention-grabbing as a result of wage versus bonuses will get very messy by way of pay fairness. It’s going to be a shock to all people and all people’s going to hate it apart from the businesses which have been reporting this already.
Meb:
How do you guys cope with shifting sands over time? Not on issues which might 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 perfect factor ever.” And now they’re like, “Oh my god, these are accountable for lots of misuse and issues like …” I imply we wrote an investing paper some time again on the investing pyramid, however the instance we gave was the meals pyramid from my youth, which is such as you actually ought to simply be consuming pasta and frosted flakes and muffins. Your base of meals needs to be carbs and the very last thing you need is fat or protein, no matter it was, and right this moment it’s inverted.
In order data 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 concentrate on a few of these subjects?
Liz:
I wish to level out nearly every little thing we do kills folks and folk within the ESG aspect of the stuff give particular sectors a cross, like prescription drugs for instance. We’ve got no pharma firms in our portfolio. We’ve got a whole lot of well being tech although, like medical tools and issues like that. One of many causes we’ve no pharma firms 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 may very well be an entire 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 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. Typically folks after they speak about affect investing, it’s simply personal markets, however for probably the most half we’ve affect rankings on these firms. The issue with affect rankings is they often are based mostly on the SDGs, so the sustainable growth objectives that are developed for international locations by the UN.
So an organization to be impactful in response to this framework, and I’ve acquired 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 deal with an SDG. And so what occurs is all of the pharmaceutical firms get 100% affect ranking as a result of they make a drug that’s serving to folks. They don’t get any damaging 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 the whole historical past of the advertising and marketing behind that, ’trigger once more, the meals pyramid that you just talked about, are you aware who paid for that? It was not the FDA. It was the cereal firms simply to be tremendous clear. There’s an entire bunch of analysis that company pursuits … That is one among my passionate areas. Tariq Fancy was the previous CIO of BlackRock, ESG at BlackRock, and he give up and he went on a giant, large talking tour of the world to say, “Firms don’t make an affect. Solely governments and nonprofits could make an affect.”
However the Sackler household in an organization by an entire bunch of promoting selections and a necessity to earn more money began and created a large damaging affect far past their product, proper? With all of the lies and the paying off docs and continued points, they created a damaging affect that no authorities or nonprofit might cease.
And so the reply is firms make big, big impacts, optimistic and damaging. What we’re attempting to intention for on this portfolio is firms making a internet optimistic affect. So firms who’re decreasing their damaging externalities as a result of they value cash, they harm folks, they give the impression of being unhealthy from a PR perspective, an entire bunch of the explanation why you would cut back your damaging affect on the world whereas rising your optimistic affect. So whether or not that’s higher respectable pay, safer work circumstances, higher high quality merchandise, extra progressive that remedy issues, discount in packaging so it prices much less, all these damaging and optimistic impacts.
Meb:
So so far as portfolio building, you get down to those small group of names, 25 whatnot. Do you have got some type of sector composition display so it’s not all 25 in MedTech for instance, or how do you guys do any type of place sizing on this remaining portfolio?
Liz:
Yeah, so they’re equal weighted, so we take away the place dimension decision-making. My dad all the time stated it was so that you didn’t have a bunch of PMs combating over place dimension. We run a correlation evaluation, but it surely’s sector agnostic. We used to personal McDonald’s and KFC in my dad’s technique. And other people would say, “Aren’t they the identical firm?” And once you have a look at the geographic income of them, they had been fully reverse. And identical factor, there’s plenty of firms that look very comparable and appear very comparable on this giant cap area that aren’t essentially.
So once you have a look at our portfolio, we acquired 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 determination 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 got not one of the faux shares. You may’t have excessive energetic share for those who’re holding a bunch of these firms. 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 searching for the 25 most responsibly rising firms out of that 50-ish set of firms that we’ve. It turns into our bench too. So the following set of ranked firms in there are who will use when we have to fireplace an organization, whether or not it’s for quarterly earnings or doing one thing silly on the ESG aspect or the non-ESG aspect.
However once more, a whole lot of our stuff is annual knowledge. Whereas annual reporting and stories come out midyear and issues like that, a whole lot of our board variety adjustments after they change any person on a board, and we’ve fired an organization for going beneath our threshold, however you possibly can think about the businesses that we’re holding are very cognizant of not, for those who’ve acquired 76% board variety, after all you possibly can put an entire bunch of white dudes in your board, however for those who acquired 31 and each investor that reveals up is participating with you in your board variety or one thing, you’re going to be cognizant of it.
And that’s what’s so humorous about ESG. The entire world tries accountable BlackRock and the funding business on ESG. They’re the laggards on this. The pensions for probably the most half do a whole lot of the engagement round and plenty of managers to be tremendous clear, ESG managers do a whole lot of pushing on variety and environmental stuff and governance and all these sorts of issues, but it surely’s the businesses themselves who understand that it’s a advertising and marketing profit, it’s a recruiting profit. It’s their large 4 accountants saying that they will audit this knowledge and serving to them manage it. It’s the firms 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 the whole world for a passive store.
The oil sands firms up right here in Canada are working, doing much more work than most asset managers on variety and decreasing their emissions. Why? As a result of they’ve an entire bunch of traders who care they usually may very well be foundations, pensions, people who care about progress on these items and staff who care about progress on these items.
Meb:
Give us a behind-the-scenes have a look at what it’s like to begin an ETF. We get this query so much. Lots of people see the pot of gold on the finish of the rainbow. There’s clearly a whole lot of work that goes into it and also you guys are comparatively new launch, so congratulations. However inform us a bit bit in regards to the expertise, the way it’s been, have you ever made it all the way down to Puerto Rico but? What’s the general agony and ecstasy of being not solely a founder however a cash supervisor and now a ETF issuer as properly?
Liz:
And a wholesaler and a marketer and all that sort 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 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 traders and personal markets traders and folk 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. While 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 must know who’s going to purchase it irrespective of how cool the thought is, and you must 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 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 most likely are mates with all Eric Balchunas and all of the crypto-obsessed ETF of us, they usually’re going to regardless of the spot Bitcoin ETF goes to launch. Properly, a lot of the warehouse cabinets are locked within the US.
Curiously up in Canada, not one of the warehouses locked their cabinets to Canadian or US listed ETFs. So any advisor in Canada should buy any ETFs besides the crypto ones. The massive banks up right here has put a particular ruling on crypto ETFs, they usually principally stated to advisors, you can not purchase them. You may solely purchase them in case your shopper indicators a giant waiver and it will get a excessive danger ranking of their portfolio.
So despite the fact that these are presumably the best, most talked about ETFs in the whole, complete world, an entire bunch of Merrill Lynch and UBS and Citi of us will not be going to have the ability to purchase them of their accounts anytime quickly as a result of they’re going to must get authorised, they’ll most likely create inside ones in order that they will, ’trigger there’s a pay to play side there too, that people want to know. You will get your ETF on Schwab or no matter for free-ish. Getting your ETF on US platforms requires time and money and a bunch of random stuff.
So this crypto one’s actually attention-grabbing ’trigger these needs to be, there’s going to be like, I don’t know, what number of are there? 18 now, all the large asset managers, they usually’re going to observe and a few of them are going to get on some platforms, however an entire bunch of them are going to get locked off a bunch of platforms. So despite the fact that it looks as if an ETF is a magic bullet by way of wrapper for these merchandise, there’s an entire bunch of different issues.
In order that’s simply my rant to inform all people that your product thought is nice. Who’s going to purchase your product and the way they entry it’s most likely greater than 50% of the consideration that it is best to 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 changing 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 price 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 together 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 a terrific white label ETF platform and has demonstrated. I imply, I met Perth first and that’s how we met Wes. Perth is my hero.
Meb:
I do know. Properly, I seen your dictator’s remark earlier, and so I stated that seems like any person we all know.
Liz:
And I simply assume it’s so fascinating. Perth’s most likely one among my favourite examples clearly, of constructing a profitable product. She knew there was a scarcity of rising market systematic merchandise that she knew there was none that excluded dictatorships and that there can be an entire host of advisors throughout the US who can be completely wonderful with their rising market slice of the pie to not embrace Chinese language holdings or Russian holdings or Qatari holdings or no matter as a result of there’s sufficient rising markets firms on the market to get the publicity. And yeah, you’re not going to appear like the index. However who cares? Numerous of us are searching for systematic or energetic 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 perfect on the planet. You may’t change the patron conduct.
So Perth actually constructed a product to unravel the tip consumer’s wants. And I imply, she acquired 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 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 you could discover who’s going to purchase your nice thought earlier than going and determining how one can make your nice thought. 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 for those who’re a pure portfolio supervisor otherwise you’re exterior of the business, do some work on who and why and who’s shopping for this product and the place are they going to place it, since you want a few of these fundamental solutions earlier than you make a bunch of choices which might be going to value you cash that you just’re going to want to go change.
The way in which to launch an ETF is to have an entire bunch of cash and be prepared to spend it, I 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 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 sort of the place that first 20 million is, after which it’s by no means going to come back as quick as you need it to come back, and that’s why you could have cash. Nevertheless it actually is, you have a look at the listing of … any listing of ETFs and also you go to the underside ones. And it’s not similar to 30 little startup firms you’ve by no means heard of. It’s actually 90% big asset managers who’ve acquired 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 may be probably the most well-known human being on earth. You continue to want to seek out the distribution connection between the product that you just’re wrapping and the necessity, after which you could not screw up the efficiency and all that sort of stuff.
Meb:
On the subject of, you’ve acquired a whole lot of completely different takes on this area, however one of many questions we’ve been asking a lot of the company is, for those who sit all the way down to espresso or lunch with a bunch of advisors which might be type of in your world, what’s a perception you maintain that say for those who 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, so much. I might go two instructions right here, so …
Meb:
Title them each. Do each of them. We acquired time.
Liz:
So I don’t imagine you possibly can 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 entire ecosystem of parents yelling about shares all day, every single day and guessing the place macro goes to go and all these items. I don’t assume it’s 75% of parents don’t imagine in market. And to be tremendous good it’s predicting the timing of the market too.
I feel there’s danger in timing. I feel all of the research counsel that the timing danger of energetic safety choice is among the greatest issues. That’s why we’re macro agnostic. We’re every little thing aside from responsibly rising agnostics regardless of the fixed barrage on Twitter or CNBC or wherever. This concept that folks simply sit on TV yelling about future numbers and what they’re going to foretell pushes cool, certified math expertise folks away from the business. In order that’s my normal take.
My ESG take, and I hear this so much, is ESG knowledge will not be standardized and may’t be standardized. And once you have a look at the businesses that we maintain within the portfolio, greater than half the portfolio has externally assured environmental knowledge. And so not solely is it standardized, not solely are they reporting by the identical framework. They’re getting exterior auditors to assessment their emissions knowledge and a bunch of their environmental knowledge. And the Division of Labor is reviewing their variety knowledge.
Whereas 5 years in the past for certain, it 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 completely different frameworks in ESG, however for those who go into any giant cap sustainability report, apart from a Tesla or all the oldsters who refuse to report fundamental ESG stuff, which is a really small group now, the overwhelming majority, most likely like 400 of the S&P 500 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 in a position to have a look at three yr knowledge for many of those metrics for many of our firms.
Meb:
As you look again in your profession, what’s been probably the most memorable funding? Good, unhealthy, in between?
Liz:
In all probability beginning the agency, however I’m going to say this ETF principally as a result of it’s public. I imply, once 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 occasions 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 acquired to say, our ETF BEEZ is my favourite funding. We don’t love our firms 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 an excellent staff. So it’s, I’ll by no means reply a single safety as being an excellent funding or my favourite ’trigger once more, that’s simply not how we strategy portfolio building.
Meb:
Proper on. The place do folks discover out extra data? The place do they go? Observe you, comply with 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. 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 of us need 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 really like the neighborhood and there’s plenty of 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 principally simply rant about how BlackRock will not be 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 after all, we’re primarily targeted on advisors on this. So for those who’re an advisor involved in ESG and is aware of nothing about it otherwise you’re a deep ESG practitioner, please be at liberty to succeed in out to us on our web site ’trigger that’s who we’re trying 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 submit present notes to right this moment’s dialog at mebfaber.com/podcast. For those who love the present, for those who hate it, shoot us suggestions at suggestions@themebfabershow.com. We like to learn the critiques. Please assessment us on iTunes and subscribe the present anyplace good podcasts are discovered. Thanks for listening, mates, and good investing.
