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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 in the present day’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising corporations which can be stakeholder ruled, goal pushed, and make a web constructive impression 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 associates at Alpha Architect and shares recommendation for anybody eager about launching one themselves.
Feedback or strategies? Desirous about sponsoring an episode? E mail us Suggestions@TheMebFaberShow.com
Hyperlinks from the Episode:
- 1:15 – Welcome Liz to the present
- 1:46 – Launching BEEZ
- 7:11 – Discovering accountable development and being ‘quantamental’
- 10:19 – Energetic administration and index hugging
- 15:14 – Fundamental elements that filter out sectors and corporations
- 21:30 – Overview of stakeholder governance
- 25:16 – How energy balances inform Liz’s funding philosophy
- 34:56 – Place sizing
- 38:44 – What it’s like to begin an ETF
- 44:24 – Episode #318: Perth Tolle, Life + Liberty Indexes
- 46:23 – Beliefs Liz holds her that her friends would disagree with
- 49:11 – Liz’s most memorable funding
- Study extra about Liz: Honey Tree Make investments; X
Transcript:
Welcome Message:
Welcome to The Meb Faber Present, the place the main target is on serving to you develop and protect your wealth. Be part of us as we talk about the craft of investing and uncover new and worthwhile concepts, all that can assist you develop wealthier and wiser. Higher investing begins right here.
Disclaimer:
Med Faber is the co-founder and Chief Funding Officer at Cambria Funding Administration. Attributable to trade laws, he won’t talk about any of Cambria’s funds on this podcast. All opinions expressed by podcast individuals are solely their very own opinions and don’t replicate the opinion of Cambria Funding Administration or its associates. For extra data, go to cambriainvestments.com.
Meb:
Hey, hey all people. A enjoyable present once more in the present day. 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 in the present day’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising corporations which can be stakeholder-governed, purpose-driven and make a web constructive impression 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 technique of launching an ETF with our associates at Alpha Architect, and shares recommendation for anybody eager about launching one themselves.
Please take pleasure in this episode with Liz Simmie.
Liz, welcome to the present.
Liz:
Thanks for having me.
Meb:
The place do we discover you in the present day?
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 varsity after which got here again and can by no means go away this nice metropolis and nation.
Meb:
Superior. I find it irresistible up there. We’re going to speak about lots in the present day. One of many matters listeners, which you in all probability actually need to stick round for is this idea of beginning ETFs. I get a number of questions. Day-after-day folks need to begin an ETF, they acquired an concept for an ETF. We’re going to speak about somebody who’s executed it very not too long ago, placing out their first fund in November with our loopy pal, Wes Grey and crew. So we’ll undoubtedly get into just a little little bit of that later. However I need to discuss just a little bit about you, your concepts, your course of. Give us just a little background.
Liz:
I’ve an economics diploma, economics and historical past diploma, and I needed nothing to do with this nice trade of ours as a result of I needed to make the world a greater place and do cool stuff. So I ended up in market analysis, so shopper insights, so testing model technique for PNG and massive financial institution, new account, all these cool analysis tasks, quantitative and qualitative.
After which my dad began an rising supervisor. So my dad’s a bootstrapped US fairness supervisor based mostly in Toronto, and so they had this third man who was American and he acquired divorced. So while you get divorced and also you’re right here on a spousal visa, you get despatched again to the US, which it’s what it’s. So my dad wanted a 3rd individual to come back in. I begrudgingly mentioned, “Certain, it seems like an fascinating concept,” having actually no idea of the funding trade past just a little little bit of publicity right here and there.
And I used to be fortunate. I joined a bootstrapped dividend development fairness supervisor at about 10 million AUM and was there till about 1.5 billion AUM after which left to begin Honeytree. And to be tremendous clear, it’s ’trigger my dad was a founder. There’s 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 totally different expertise that wouldn’t essentially set you as much as going to bootstrap your personal rising supervisor.
The agency’s referred to as Bristol Gate for folk who need to google issues. We launched ETFs in 2018, and I had met my co-founder on the similar time, and we thought all these of us are attempting to launch ESG methods and so they’re all lacking what we expect the top shopper for these ESG merchandise need. And this, to be tremendous clear, is lengthy solely fairness universe, not alter hedge funds or something like that.
And so in 2018, we set out, which is identical yr we launched the ETFs up right here. 2018, we got down to discovered Honeytree. We had been registered in 2019. It takes lots longer up right here to get authorized by the regulators. We began our observe data in 2019 for our international fairness technique. We did that in order that we didn’t must launch a car off the bat as a result of autos value some huge cash and so they take a number of effort to distribute. They take a number of consciousness and all these things.
Anyhow, we had all the time supposed to launch a retail car. We didn’t ever need a non-public fund. Lengthy-only boring methods undoubtedly don’t make sense in non-public funds in Canada or the US and we thought we’d have a Canadian 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 nearly 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 larger, 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, numerous states have various supervisor initiatives at their pensions and issues like that.
So we thought, if we’re going to do that car, let’s do it within the US, let’s do it as an ETF and let’s do it with Wes. And increase, November seventh, we launched our first ETF and the ticker is BEEZ, B-E-E-Z, ’trigger branding issues and it’s a US giant cap and it’s centered on accountable development.
So it’s the identical funding thesis we’ve been engaged on our total agency historical past, which is responsibly rising corporations, stakeholder-governed, purpose-driven corporations who care for their stakeholders outperform in the long term.
What’s actually fascinating is we didn’t like all of the present ESG frameworks. We thought, and I might discuss for 10 years in regards to the issues with current ESG and funding frameworks, however we threw out a number 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 complete course of.
What we’re recognized on is ESG integration. So full ESG integration, which suggests we deal with ESG information as elementary firm information in safety choice, not right here’s our monetary mannequin over right here on one aspect and right here’s our ESG mannequin and evaluations over right here on different aspect. We deal with the ESG information that we use as elementary firm information when choosing these corporations for the portfolio.
Meb:
So let’s dig in on the method as a result of quite a lot of the phrases you used might imply a number of various things. ESG means a number of various things to a number of totally different folks. So let’s hear just a little bit about y’all’s course of. You’ve a pleasant deck. If we will embrace it within the present notes, listeners, we actually will on the method, which I feel could be very useful. However why don’t you stroll us by means of it. How do you guys discover accountable development? What does that imply? And after we hit a few of these phrases, let’s attempt to give y’all’s interpretation of what you assume it means to you as nicely.
Liz:
So quantum psychological means we’re not purely elementary and we’re not purely quant. We use each processes. And for folk on the market who aren’t deeply steeped in fairness, elementary fairness land, elementary is taken into account deep dive qualitative analysis and quantitative analysis into an organization versus quant processes are usually extra quantitative, much less deep dive into an organization kind 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 people may assume 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 corporations.
And what that qualification standards seems like is there’s some practical 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 a number of conventional ESG exclusions. So conventional ESG exclusions are type like the unique non secular investor exclusion as a result of ESG has its roots in non secular investing. So no weapons, no weapons, no playing. We don’t exclude pot, however no pot corporations make our display screen. We exclude fossil gas manufacturing.
Meb:
That’s sacrilege up there in Toronto. Man, no marvel you’re launching this within the US. There’s all of the traditional Canadians, man, the mining and power, they’re in all probability similar to, “Liz, what are you speaking about?”
Liz:
Properly, it makes it very fascinating up right here as a result of now we have all the foremost pensions are deeply dedicated to ESG and deeply dedicated to power funding. And I wish to level out to those who the power corporations are actually good at DEI and reporting rather more so than tech corporations and asset managers, however that’s a special story. However we exclude fossil 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 corporations are just a little too cyclical to have excessive constant dividend development. So from becoming in into qualifying and entering into the portfolio, they’re prone to fail anyway. So it’s type of only a bit simpler to display screen them out ’trigger you recognize they’re not going to make it. We additionally don’t have any renewable power corporations in our portfolio.
Meb:
Properly additionally, I imply while you transfer from a universe of 1000’s right down to 50, you’re invariably going to kick out all types of issues and areas and sectors and industries, whether or not it’s from the broad standards, whether or not it’s from the secondary type of standards as nicely. In order that’s the entire level of energetic administration. You need a concentrated portfolio as a result of if you happen to’re charging greater than zero, you need it to take a look at bizarre and totally different.
Liz:
Yeah. And it’s humorous ’trigger I’ve by no means understood why of us don’t need it to look bizarre and totally different. It’s one in all my large points with energetic administration index hugging.
Meb:
It’s quite simple. They need it to look bizarre and totally different when it’s going up. They need it to look bizarre and totally different if it’s taking place and also you’re not taking place. However primarily it creates a bizarre precept agent downside as a result of a number of the massive 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 totally different as a result of there’s solely draw back danger. The cash is already captive. And we all know that cash as soon as it’s sitting someplace, doesn’t wish to go anyplace until it will get abused or does very poorly. In case you have a look at a number 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 number of energetic underperformance comes from not taking dangers and never having excessive energetic share and index hugging and making a bunch of silly choices as a part of that.
However you’re proper, our qualification course of kicks out entire sectors. Once we run our international, we exclude dictatorships in our international fairness technique. So we’re okay not having exposures to a bunch of issues, whether or not they be sectors or international locations or kind of corporations.
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 gained’t have a look at an organization who has not discovered easy methods to put a pair token variety hires on their board but, principally as a result of if you happen to haven’t discovered how to do this from a governance perspective, you’re not very competent.
Meb:
I imply, does that display screen alone kick out half of the universe it seems like?
Liz:
No, individuals are a lot … Within the US, particularly the US boards are fairly various. Canada’s fairly dangerous, however clearly we’ve acquired none of these within the ETF. However even after we began, if we had a 40% bar, it could kick out numerous of us. It’s humorous ’trigger actually it finally ends up kicking out cool tech renewable power boards that you simply … not typical stuff that we maintain in our portfolio like boring industrials and boring retailers and semiconductors as a result of they’ve all been engaged on these things for some time. So it doesn’t kick any of these out.
Funding grade credit standing may kick out extra corporations. In case you have a look at the final cohort of our qualification course of, there’s in all probability extra boards that fail or extra corporations that fail on funding grade credit standing or fraud points and issues like that, lawsuits, than on the board variety. Why? ‘Trigger all people’s slowly figuring it out. And to be tremendous clear, we’ve elevated that 33% from 30, so ultimately it’ll be 35 and now we have to cope with the universe as it’s. ‘Trigger our aim is to get from the universe right down to a manageable consideration set that we will cowl from a elementary deep dive perspective in probably the most environment friendly means potential.
And we run that consideration set as soon as yearly. So we’ve executed it 5 occasions now. So did 2018 until now and it evolves, nevertheless 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 got some monetary stuff. We typically don’t have actual property, and we’re okay with that.
And one factor you’ll discover, if you happen to have a look at our portfolio, there’s a number of manufacturing concerned corporations. And that’s the place the semis type of pop in. It’s ’trigger these corporations who’ve needed to handle labor, handle manufacturing amenities, handle worker security, you’ll be able to think about there could also be just a little few steps forward of a West Coast tech firm when it comes to eager about their workers 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 in all probability 90% male. I imply, I bear 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, 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 just a little off-topic.
All proper, so we’re beginning with quite a lot of these elements. You bought a number 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 can be significantly extra outstanding?
Liz:
Checked out it year-over-year and so they are usually, I imply clearly participation exclusions. You understand what I might say? There’s an entire bunch and so they’re all fairly equal. And that want for dividend development, the funding grade credit standing, the variety, the trade participation, the standard ESG exclusions, even glass door score, it’s type of simply an equal. You’ll assume it was larger in a number of the areas. Aside from dropping 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 all people under funding grade credit standing, and based mostly on subsequent yr’s predicted dividend, we selected the highest 50 and did the elemental deep dive on these. And what we’re getting with the identical however a special course of ’trigger bear in mind, what we’re chopping out will not be, we will’t simply have the best dividend growers as a result of if we simply regarded on the highest dividend growers to get the ESG growers too, or the accountable growers too, we’d must type of go just a little bit additional than the highest 50 excessive dividend growers.
And that’s why we altered or optimized this course of that my dad constructed as a result of we needed the identical issue publicity. So these excessive constant dividend growers who’re well-managed and well-governed and centered on the long-term, we needed them, however with barely increased stage of ESG. And to be tremendous clear, if you happen to have a look at the Bristol Gate ETF, it has the next ESG score than most ESG managers and methods on the market as a result of boring, excessive, constant sustainable dividend growers typically have excessive ESG rankings ’trigger they typically 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 when it comes to 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 can purchase or not.
And so we run that qualification as soon as yearly. That will get us to about 50-ish corporations. After which we do our elementary deep dive. And what we do is we take all of the financials we did at Bristol Gate, which skews taking a look at debt capability, how conservatively they’re managing their debt, earnings development, dividend development, aggressive market share, and we usher in ESG information and put it equally beside that monetary elementary information. And we purposely arrange 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 take into account elementary to the corporate. And I’ll offer you some examples.
So turnover. Turnover prices you cash. It’s an ESG measure, however the increased turnover you could have, the extra it prices to rent new folks. Water use, if it can save you the associated fee that you simply spend on water, it’s a monetary factor. It’s undoubtedly an ESG factor, nevertheless it’s tied to the operations and the prices of an organization. It’s not a separate consideration. Waste is a good instance. It prices numerous cash to eliminate waste.
And then you definately get into the stuff that’s just a little 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. Properly, corporations that we’re on the lookout for 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 truly will increase the various constructive advantages to the corporate of doing this fundamental stuff that some would say is silly DEI stuff. However the corporations that we’re holding are doing it for operational and enterprise causes, not as a result of it makes them look good on a questionnaire.
We 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 information we will discover that’s comparatively systematizable throughout the consideration set of corporations.
So if you consider it, we’re taking a look at in all probability, of the 50 corporations we’re doing this deep dive on, we’re taking a look at a number of the high ESG reporters and scoring issues. So we truly can run comparatively customized information units throughout this 50-ish group of corporations like racial variety and management year-over-year, three-year change in that, three-year change in water depth, three-year change in water use. As a result of you’ll be able to’t get it for the entire S&P 500 for instance as a result of an entire bunch of these corporations aren’t reporting that stage of knowledge but. However as a result of we’re taking a look at this sort of extra superior ESG-esque pool of corporations, 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.
Finally, we’re constructing a excessive energetic share, 25 positions, tremendous concentrated ETF of probably the most boring, sustainably rising, responsibly rising corporations. And in a nutshell, these corporations that we’re holding perceive that the constructive impacts that they make on all of their stakeholders, so their workers, their prospects, the area people, their shareholders, they perceive that the constructive impacts they make on these teams drives their backside line. So it’s not separate from their backside line. Doing good by their workers or their prospects is core to their mission and core to their goal.
And these corporations are based on that and it doesn’t matter what their political opinions are. Properly-managed, long-term centered corporations which can be stakeholder-governed and purpose-driven will outperform in the long term. And that’s our funding thesis and I ought to in all probability outline a few of these phrases.
Meb:
Certain, let’s hear it.
Liz:
So stakeholder governance. So anyone steeped in investing has been typically skilled that shareholder primacy and shareholder governance is the function of an organization. So an organization’s job is to control on behalf of their shareholders and make their shareholders cash. The issue with that’s workers and prospects and an entire bunch of different elements affect an organization’s potential to generate profits.
So stakeholder governance, which isn’t one thing I invented, I might argue unique governance was stakeholder governance, however that’s a extra advanced matter. Stakeholder governance is only a firm that claims, “You understand what? Our workers and our prospects and all these items should be thought of in our governance and our administration processes. Why? As a result of they impression and so they’re impacted by our choices. 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 corporations on the market that consider in a stakeholder governance framework. So as an alternative of being our solely aim is to return returns to shareholders. That turns into simply one of many roles of the board. And so we’re on the lookout for these corporations the place there’s proof of their metrics, no matter these metrics is likely to be, that they’re contemplating their stakeholders. ‘Trigger you’ll be able to’t simply say you or your stakeholders are ruled and also you care about all these things similar to you’ll be able to’t say you care about variety. Saying you care about variety or the atmosphere is nice, however what you truly do in your small business and the modifications that you simply 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 trade I feel a number 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 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 means 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 corporations aren’t doing ESG stuff to really feel good or to look good. They’re doing it as a result of it’s a part of their 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 advanced as a result of it’s one thing I discovered lots about in governance coaching and in advertising, which is it’s actually troublesome to speak constantly to folks.
And so these corporations that we’re on the lookout for know that it’s actually laborious and know that sharing, having a shared goal, getting an entire 1000’s of workers to work collectively in direction of the identical aim constantly and speaking that aim is a troublesome exercise that they as a board and a administration workforce must work on. And that shared goal will not be solely having a transparent goal for the group, however serving to all of your workers, your entire stakeholders, your entire prospects perceive why you’re there and what you’re doing makes for a extra environment friendly ship if one may need to say. When you could have disparate targets 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 imagined to be doing.
That is all management and governance science that’s simply within the early levels of academia when it comes to quantifying and analyzing all these things. However I feel all people can agree that if all people’s working 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 could be on the identical web page when it comes to long-term targets, the extra effectivity that you may obtain.
Meb:
As you consider governance, there’s areas that you could be or might not be concerned, however you’ll be able to converse to it. I’m considering of issues like within the US, significantly with a number of the tech corporations this previous cycle who’ve been very type of me-focused, that means like stock-based compensation that’s simply outrageous, a ton of dilution to shareholders, possibly twin shared lessons, all these type voting issues which have gone on.
Do these play any function in any respect in your numerous screens and the way do you consider 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 matters there and so they’re all tremendous fascinating. I’m going to begin with a narrative. So Google again, should’ve been 2018, 2019 after we began, had two senior dudes sexually harassing an entire bunch of their workers and the board discovered this out. After which the board spent 12 or 14 months debating what they need to do with them. And the one girl on Google’s board mentioned, “Most likely we must always inform folks and hearth them, in all probability 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 and so they’re professionals at this, but one of many largest corporations on this planet sat there and twiddled their thumbs. After which ultimately they gave the fellows 50 million every and paid them off and precipitated a giant controversy with all their workers, all stuff that they may have been averted. It’s not their fault they acquired a bunch of sexually harassing dudes. The board’s job is to rent and hearth the CEO. And when the CEO’s not hiring and firing the dude sexually harassing of us, that’s a governance concern.
The primary time we constructed the portfolio, our international fairness technique, two of the boards had not too long ago fired their CEOs for sleeping with their secretaries and numerous different issues. And that exhibits practical governance.
The reply to your query is what’s practical governance? Is it an entire bunch of unbiased board members? Properly, that’s what the ESG rankings would let you know is sweet governance. The issue is 10 unbiased extremely certified of us don’t create good governance. Good governance is created by a governance tradition, by a shared goal, by folks truly working collectively on governance points.
So you’ll be able to have good governance with bizarre compensation and all this sort of stuff on the similar time, completely. However I might argue a number of that large tech is poorly ruled. We don’t have any financial institution shares in our portfolio for a purpose. And it’s not ’trigger they get excluded for producing fossil gas. However there’s a robust perception that non-independent administrators aren’t ESG. We don’t essentially share that perception. Whereas we’d favor … Clearly we search for audit committee independence for instance. That’s one in all our necessities. We gained’t spend money on an organization. However that ship’s sailed. All people is aware of easy methods to make their audit committee unbiased at this level and there’s no magic bullet on compensation.
And simply going again to CEO compensation, folks hear lots about CEO compensation, and there actually are a number 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 typically utilizing proper now could be common employee pay to CEO pay. So it actually depends upon what trade and which set of knowledge that you simply’re utilizing. And what issues extra is, to me, who cares in regards to the CEO pay. What issues extra is the baseline worker pay. What issues extra is pay fairness. So if you happen to’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 corporations can repair.
What issues is Walmart’s base pay versus one other retailers base pay, not essentially the ratio of what their executives make versus what that pay is. As a result of an organization paying a low quantity to executives doesn’t naturally imply it’s doing higher for the world. And executives value numerous cash. So it’s a very fascinating, messy matter, however the way forward for ESG is us with the ability to get this information on the proper granularity.
We have already got exec comp. So exec comp clearly was already 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 when it comes to 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 can be as apparent possibly as variety on boards, however issues like, hey, we’re going to exclude, you talked about hashish, alcohol, like opioids. I don’t know, a decade in the past folks 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 in the present day 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 type of replace these standards and concepts as they turn out to be extra accepted? How do you consider a few of these matters?
Liz:
I wish to level out virtually the whole lot we do kills folks and folk within the ESG aspect of the stuff give particular sectors a go, like prescribed drugs for instance. We’ve got no pharma corporations in our portfolio. We’ve got a number of well being tech although, like medical tools and issues like that. One of many causes now we have no pharma corporations is ’trigger all of them have value fixing scandals. And so no matter their potential 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 only, 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 impression, and I say ESG and impression as a result of impression rankings occur in public markets too. Typically folks after they discuss impression investing, it’s simply non-public markets, however for probably the most half now we have impression rankings on these corporations. The issue with impression rankings is they typically are based mostly on the SDGs, so the sustainable growth targets 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 handle an SDG. And so what occurs is all of the pharmaceutical corporations get 100% impression score as a result of they make a drug that’s serving to folks. They don’t get any detrimental score for value fixing.
And so we’d not be solely involved in regards to the opioid disaster. We’d be involved with the entire Sackler governance shit present catastrophe that was them creating the opioid disaster. For anyone who has not learn the lengthy, I feel it’s the Atlantic piece on your complete historical past of the advertising behind that, ’trigger once more, the meals pyramid that you simply talked about, have you learnt who paid for that? It was not the FDA. It was the cereal corporations simply to be tremendous clear. There’s an entire bunch of analysis that company pursuits … That is one in all my passionate areas. Tariq Fancy was the previous CIO of BlackRock, ESG at BlackRock, and he stop and he went on a giant, large talking tour of the world to say, “Corporations don’t make an impression. Solely governments and nonprofits could make an impression.”
However the Sackler household in an organization by means of an entire bunch of selling choices and a necessity to make more cash began and created a large detrimental impression far past their product, proper? With all of the lies and the paying off medical doctors and continued points, they created a detrimental impression that no authorities or nonprofit might cease.
And so the reply is corporations make large, large impacts, constructive and detrimental. What we’re making an attempt to intention for on this portfolio is corporations making a web constructive impression. So corporations who’re lowering their detrimental externalities as a result of they value cash, they harm folks, they give the impression of being dangerous from a PR perspective, an entire bunch of explanation why you would scale back your detrimental impression on the world whereas rising your constructive impression. So whether or not that’s higher respectable pay, safer work circumstances, higher high quality merchandise, extra modern that resolve issues, discount in packaging so it prices much less, all these detrimental and constructive impacts.
Meb:
So so far as portfolio building, you get down to those small group of names, 25 whatnot. Do you could have some type of sector composition display screen so it’s not all 25 in MedTech for instance, or how do you guys do any type of place sizing on this closing portfolio?
Liz:
Yeah, so they’re equal weighted, so we take away the place 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, nevertheless 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 while you have a look at the geographic income of them, they had been fully reverse. And similar factor, there’s numerous corporations that look very comparable and appear very comparable on this giant cap house that aren’t essentially.
So while 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 undoubtedly don’t care about what the weights of the index are at any level in our resolution making.
And we all know we’re going to be obese tech and industrials and often supplies and each shopper issues relying on. However we’re agnostic to that. And these are equal weight bets, so we’re placing the identical weight on a mega cap as we’d be on a small cap within the portfolio.
After which that’s a part of the energetic share. We’re okay not holding the highest 30 one thing % of the index. We’ve got not one of the faux shares. You may’t have excessive energetic share if you happen to’re holding a bunch of these corporations. And all people else, I imply all people’s going to have these of their portfolio anyhow. However it’s actually, we’re on the lookout for the 25 most responsibly rising corporations out of that 50-ish set of corporations that now we have. It turns into our bench too. So the subsequent set of ranked corporations in there are who will use when we have to hearth an organization, whether or not it’s for quarterly earnings or doing one thing silly on the ESG aspect or the non-ESG aspect.
However once more, a number of our stuff is annual information. Whereas annual reporting and reviews come out midyear and issues like that, a number of our board variety modifications after they change any individual on a board, and now we have fired an organization for going under our threshold, however you’ll be able to think about the businesses that we’re holding are very cognizant of not, if you happen to’ve acquired 76% board variety, in fact you’ll be able to put an entire bunch of white dudes in your board, however if you happen to acquired 31 and each investor that exhibits 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 accountable BlackRock and the funding trade on ESG. They’re the laggards on this. The pensions for probably the most half do a number of the engagement round and plenty of managers to be tremendous clear, ESG managers do a number of pushing on variety and environmental stuff and governance and all these sorts of issues, nevertheless it’s the businesses themselves who notice that it’s a advertising profit, it’s a recruiting profit. It’s their large 4 accountants saying that they will audit this information and serving to them arrange it. It’s the companies driving ESG. It’s not BlackRock driving ESG. It’s not … undoubtedly not Vanguard driving ESG stuff. Actually Vanguard is simply being referred to as into congress for pushing local weather change narrative, which is the funniest factor in your complete world for a passive store.
The oil sands corporations up right here in Canada are working, doing much more work than most asset managers on variety and lowering their emissions. Why? As a result of they’ve an entire bunch of buyers who care and so they may very well be foundations, pensions, people who care about progress on these things and workers who care about progress on these things.
Meb:
Give us a behind-the-scenes have a look at what it’s like to begin an ETF. We get this query lots. Lots of people see the pot of gold on the finish of the rainbow. There’s clearly a number of work that goes into it and also you guys are comparatively new launch, so congratulations. However inform us just a little bit in regards to the expertise, the way it’s been, have you ever made it 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 nicely?
Liz:
And a wholesaler and a marketer and all that type of stuff. I feel it’s fascinating that folks assume ETFs are like concepts. I feel there’s a lot room for innovation on this trade. I feel it’s going to look completely-ish totally different in 20 years, however I feel there’s some stuff that’s not going to alter.
I feel there’s all the time going to be public markets buyers and personal markets buyers and folk who do each. I feel individuals are all the time going to assume geographically when it comes to allocation in sure issues. I feel there’s actually a spot for thematics. Once you launch a product, it doesn’t matter what it’s, this SMA mannequin, ETF fund index ’trigger that’s an entire fascinating aspect of the enterprise, it’s important to know who’s going to purchase it regardless of how cool the thought is, and it’s important to know the way it’s going to get distributed.
The great factor with an ETF car is folks can purchase it, common folks can purchase it, and advisors can purchase it in a bunch of locations, however there’s an entire bunch of restrictions and issues. They make issues extra difficult than simply launching an ETF. Just like the crypto ones, for instance, you in all probability are associates with all Eric Balchunas and all of the crypto-obsessed ETF of us, and so they’re going to regardless of the spot Bitcoin ETF goes to launch. 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 can purchase any ETFs besides the crypto ones. The massive banks up right here has put a particular ruling on crypto ETFs, and so they principally mentioned to advisors, you can’t purchase them. You may solely purchase them in case your shopper indicators a giant waiver and it will get a excessive danger score of their portfolio.
So despite the fact that these are presumably the good, most talked about ETFs in your complete, total world, an entire bunch of Merrill Lynch and UBS and Citi of us aren’t going to have the ability to purchase them of their accounts anytime quickly as a result of they’re going to must get authorized, they’ll in all probability create inner ones in order that they will, ’trigger there’s a pay to play side 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 look at 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 when it comes to wrapper for these merchandise, there’s an entire bunch of different concerns.
In order that’s simply my rant to inform all people that your product concept is nice. Who’s going to purchase your product and the way they entry it’s in all probability greater than 50% of the consideration that you need to make earlier than spending an entire bunch of cash to launch an ETF.
For retail platforms, once I say retail platforms, I imply advisors utilizing platforms to handle their fashions, an ETF is changing into an more and more higher possibility than a mutual fund as a result of one, you’re often going to cost it decrease. Two, they’re altering all of the charges and price buildings of how ETFs and funds and commerce prices and issues like that. And so that you see a giant transfer in direction of arguably less complicated ETF fashions, and that’s why we didn’t go along with Wes ’trigger we love Wes. We went with Wes as a result of we undoubtedly weren’t going to do a mutual fund, and he has an important white label ETF platform and has demonstrated. I imply, I met Perth first and that’s how we met Wes. Perth is my hero.
Meb:
I do know. Properly, I observed your dictator’s remark earlier, and so I mentioned that seems like any individual we all know.
Liz:
And I simply assume it’s so fascinating. Perth’s in all probability one in all my favourite examples clearly, of constructing a profitable product. She knew there was a scarcity of rising market systematic merchandise that she knew there was none that excluded dictatorships and that there could be an entire host of advisors throughout the US who could be completely superb 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 corporations on the market to get the publicity. And yeah, you’re not going to appear to be the index. However who cares? Numerous of us are on the lookout for systematic or energetic choices, not the entire index. We’re by no means going to persuade a bunch of passive of us to make use of this as a core possibility, even when we’re the very best on this planet. You may’t change the buyer habits.
So Perth actually constructed a product to unravel the top person’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 be taught the whole lot about Perth as a result of if you wish to launch an ETF, actually simply go watch all Perth’s movies.
Meb:
Perth has been on the present. She’s an alum. She, listeners, runs the Freedom ETF, FRDM, which is closing in on a billion {dollars} in property. So go Perth. That’s rad.
Liz:
Perth is wonderful. She’s simply the proper instance of you want to discover who’s going to purchase your nice concept earlier than going and determining easy methods to make your nice concept. And possibly you had been an advisor, possibly you labored as a wholesaler, possibly you labored someplace within the distribution of the trade, however particularly if you happen to’re a pure portfolio supervisor otherwise you’re exterior of the trade, do some work on who and why and who’s shopping for this product and the place are they going to place it, since you want a few of these fundamental solutions earlier than you make a bunch of selections which can be going to value you cash that you simply’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 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 come back as quick as you need it to come back, and that’s why you want to have cash. But it surely 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 corporations you’ve by no means heard of. It’s actually 90% large asset managers who’ve acquired autos from 2 to $10 million.
I like telling of us, Cathie Wooden launched an ESG ETF in, I don’t know, 2000 after which closed it 18 months later ’trigger she couldn’t increase cash in ESG ETFs. So actually you possibly can be probably the most well-known human being on earth. You continue to want to seek out the distribution connection between the product that you simply’re wrapping and the necessity, after which you want to not screw up the efficiency and all that type of stuff.
Meb:
In the case of, you’ve acquired a number of totally different takes on this house, however one of many questions we’ve been asking a lot of the company is, if you happen to sit right down to espresso or lunch with a bunch of advisors which can be type of in your world, what’s a perception you maintain that say if you happen to sat on the desk, 75% of the attendees would shake their head and say, “Liz, I disagree with you,” on funding associated, portfolio associated, ESG, DEI associated, something come to thoughts?
Liz:
Yeah, lots. I might go two instructions right here, so …
Meb:
Identify them each. Do each of them. We acquired time.
Liz:
So I don’t consider you’ll be able to 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 oldsters 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 oldsters don’t consider in market. And to be tremendous good it’s predicting the timing of the market too.
I feel there’s danger in timing. I feel all of the research recommend that the timing danger of energetic safety choice is among the largest issues. That’s why we’re macro agnostic. We’re the whole lot 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 trade. In order that’s my normal take.
My ESG take, and I hear this lots, is ESG information will not be standardized and may’t be standardized. And while you have a look at the businesses that we maintain within the portfolio, greater than half the portfolio has externally assured environmental information. And so not solely is it standardized, not solely are they reporting by means of the identical framework. They’re getting exterior auditors to assessment their emissions information and a bunch of their environmental information. And the Division of Labor is reviewing their variety information.
Whereas 5 years in the past for certain, it undoubtedly regarded like stuff was not standardized when it comes to ESG information, all the businesses we’re taking a look at have moved in direction of this. It’s referred to as the GRI template. There’s like a billion totally different frameworks in ESG, however if you happen to 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, in all probability like 400 of the S&P 500 corporations 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 yr information for many of those metrics for many of our corporations.
Meb:
As you look again in your profession, what’s been probably the most memorable funding? Good, dangerous, in between?
Liz:
Most likely beginning the agency, however I’m going to say this ETF principally as a result of it’s public. I imply, while you’re working in separate accounts, we might share stuff with what we’re doing, however now it’s like, hey, we’re on the market. Efficiency has been fairly good since we began, which is a coin toss to be tremendous clear. We 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 course 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 corporations 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 need to decide a great workforce. So it’s, I’ll by no means reply a single safety as being a great funding or my favourite ’trigger once more, that’s simply not how we method portfolio building.
Meb:
Proper on. The place do folks discover out extra data? The place do they go? Comply with you, observe 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. In case you simply google Honeytree Funding or Honeytree ETF, you’ll see numerous articles and podcasts and issues like that.
I, regardless of Twitter or no matter of us need to name it present shit present, I’m nonetheless on there. I’ll be on there till it goes down for a wide range of totally different causes. ‘Trigger I like the neighborhood and there’s numerous nice of us there, and it’s how we met Wes and all these items. So Liz Simmie on Twitter, if you would like obnoxious, occasional ESG takes. I principally simply rant about how BlackRock will not be woke and other people shouldn’t be satisfied that any asset supervisor is woke. That’s us in a nutshell.
And naturally you’ll be able to go by B-E-E-Z on choose custody platforms within the US. In case you’re a retail investor, it’s in all probability even simpler to entry than an advisor, however in fact, we’re primarily centered on advisors on this. So if you happen to’re an advisor focused on ESG and is aware of nothing about it otherwise you’re a deep ESG practitioner, please be happy to achieve out to us on our web site ’trigger that’s who we’re seeking to join with.
Meb:
Liz, thanks a lot for becoming a member of us in the present day.
Liz:
Thanks for having me.
Meb:
Podcast listeners we’ll publish present notes to in the present day’s dialog at mebfaber.com/podcast. In case you love the present, if you happen to hate it, shoot us suggestions at suggestions@themebfabershow.com. We like to learn the evaluations. Please assessment us on iTunes and subscribe the present anyplace good podcasts are discovered. Thanks for listening, associates, and good investing.
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