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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 right now’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising corporations which might be stakeholder ruled, function pushed, and make a internet optimistic affect on the world. Then she shares some scorching takes on the state of each ESG and lively administration. As we wind down, Liz talks in regards to the means of launching an ETF with our buddies at Alpha Architect and shares recommendation for anybody eager about launching one themselves.
Feedback or solutions? Excited about sponsoring an episode? E-mail us Suggestions@TheMebFaberShow.com
Hyperlinks from the Episode:
- 1:15 – Welcome Liz to the present
- 1:46 – Launching BEEZ
- 7:11 – Discovering accountable development and being ‘quantamental’
- 10:19 – Lively administration and index hugging
- 15:14 – Important components that filter out sectors and corporations
- 21:30 – Overview of stakeholder governance
- 25:16 – How energy balances inform Liz’s funding philosophy
- 34:56 – Place sizing
- 38:44 – What it’s like to start out an ETF
- 44:24 – Episode #318: Perth Tolle, Life + Liberty Indexes
- 46:23 – Beliefs Liz holds her that her friends would disagree with
- 49:11 – Liz’s most memorable funding
- Be taught extra about Liz: Honey Tree Make investments; X
Transcript:
Welcome Message:
Welcome to The Meb Faber Present, the place the main target is on serving to you develop and protect your wealth. Be part of us as we focus on the craft of investing and uncover new and worthwhile concepts, all that 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. As a consequence of business laws, he won’t focus on any of Cambria’s funds on this podcast. All opinions expressed by podcast individuals are solely their very own opinions and don’t mirror the opinion of Cambria Funding Administration or its associates. For extra info, go to cambriainvestments.com.
Meb:
Hey, hey everyone. A enjoyable present once more right now. 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 now’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising corporations which might be stakeholder-governed, purpose-driven and make a internet optimistic affect on the world. And she or he shares some scorching takes on the state of each ESG and lively administration. As we wind down, Liz talks in regards to the means of launching an ETF with our buddies 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 right now?
Liz:
Toronto, the good white north up right here.
Meb:
I heard an A in your diction earlier. Are you initially a Canadian?
Liz:
Yep, born and raised in Toronto my complete life. I’ve by no means gone wherever else. Really I went to Montreal for varsity after which got here again and can by no means depart this nice metropolis and nation.
Meb:
Superior. I adore it up there. We’re going to speak about loads right now. One of many subjects listeners, which you most likely actually need to stick round for is this idea of beginning ETFs. I get a variety of questions. Every single day individuals need to begin an ETF, they received an concept for an ETF. We’re going to speak about somebody who’s carried out 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 somewhat little bit of that later. However I need to discuss somewhat bit about you, your concepts, your course of. Give us somewhat background.
Liz:
I’ve an economics diploma, economics and historical past diploma, and I needed nothing to do with this nice business 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 large 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 received 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 business past somewhat little bit of publicity right here and there.
And I used to be fortunate. I joined a bootstrapped dividend development fairness supervisor at about 10 million AUM and was there till about 1.5 billion AUM after which left to start out Honeytree. And to be tremendous clear, it’s ’trigger my dad was a founder. There’s a complete pile of privilege in there, but when I had gone the standard 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 referred to as Bristol Gate for people 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 they usually’re all lacking what we expect the top shopper for these ESG merchandise need. And this, to be tremendous clear, is lengthy solely fairness universe, not alter hedge funds or something like that.
And so in 2018, we set out, which is similar yr we launched the ETFs up right here. 2018, we got down to discovered Honeytree. We had been registered in 2019. It takes loads longer up right here to get authorized by the regulators. We began our observe data in 2019 for our world fairness technique. We did that in order that we didn’t have to launch a car off the bat as a result of automobiles price some huge cash they usually take a variety of effort to distribute. They take a variety of consciousness and all these things.
Anyhow, we had all the time supposed to launch a retail car. We didn’t ever desire 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 pretty much as good, however we thought we might launch a subadvised Canadian car up right here.
After which we met Wes. And Wes determined that we wanted 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 one cares that we’re girl owned. We’re the fifth or sixth public markets asset supervisor owned by girl in Canada. That’s what number of there are up right here. So there’s no supervisor variety initiatives up right here institutionally or from advisors, whereas everyone is aware of within the US, plenty of states have numerous supervisor initiatives at their pensions and issues like that.
So we thought, if we’re going to do that car, let’s do it within the US, let’s do it as an ETF and let’s do it with Wes. And growth, November seventh, we launched our first ETF and the ticker is BEEZ, B-E-E-Z, ’trigger branding issues and it’s a US massive cap and it’s targeted on accountable development.
So it’s the identical funding thesis we’ve been engaged on our complete agency historical past, which is responsibly rising corporations, stakeholder-governed, purpose-driven corporations who maintain their stakeholders outperform in the long term.
What’s actually fascinating is we didn’t like several of the prevailing 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 variety 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 the 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 critiques over right here on different aspect. We deal with the ESG information that we use as elementary firm information when selecting these corporations for the portfolio.
Meb:
So let’s dig in on the method as a result of plenty of the phrases you used might imply a variety of various things. ESG means a variety of various things to a variety of completely different individuals. So let’s hear somewhat bit about y’all’s course of. You’ve got a pleasant deck. If we will embody it within the present notes, listeners, we definitely will on the method, which I believe may be very useful. However why don’t you stroll us via it. How do you guys discover accountable development? What does that imply? And once we hit a few of these phrases, let’s attempt to give y’all’s interpretation of what you suppose it means to you as effectively.
Liz:
So quantum psychological means we’re not purely elementary and we’re not purely quant. We use each processes. And for people on the market who should not deeply steeped in fairness, elementary fairness land, elementary is taken into account deep dive qualitative analysis and quantitative analysis into an organization versus quant processes are usually extra quantitative, much less deep dive into an organization 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 could be. On this case for the ETF, it’s the US. And we run 25 qualification standards. And most of these are quantitative information factors. We don’t do a fancy-schmancy predictive advanced quant like a few of other people would possibly suppose quants are. However we have now 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 to be like is there’s some useful stuff. Can we purchase it in custody in North America 5 billion minimal market cap? Some monetary. If we have now a dividend, it needs to be rising funding above funding grade credit standing. Then there’s a variety of conventional ESG exclusions. So conventional ESG exclusions are form like the unique non secular investor exclusion as a result of ESG has its roots in non secular investing. So no weapons, no weapons, no playing. We don’t exclude pot, however no pot corporations make our display. 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 basic Canadians, man, the mining and power, they’re most likely similar to, “Liz, what are you speaking about?”
Liz:
Properly, it makes it very fascinating up right here as a result of we have now all the foremost pensions are deeply dedicated to ESG and deeply dedicated to power funding. And I prefer to level out to people who the power corporations are actually good at DEI and reporting rather more so than tech corporations 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 corporations are somewhat too cyclical to have excessive constant dividend development. So from becoming in into qualifying and stepping into the portfolio, they’re prone to fail anyway. So it’s type 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 corporations in our portfolio.
Meb:
Properly additionally, I imply while you transfer from a universe of hundreds right down to 50, you’re invariably going to kick out all kinds of issues and areas and sectors and industries, whether or not it’s from the broad standards, whether or not it’s from the secondary type of standards as effectively. In order that’s the entire level of lively administration. You desire a concentrated portfolio as a result of should you’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 considered one of my large points with lively 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 downside as a result of a variety 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 completely different as a result of there’s solely draw back danger. The cash is already captive. And we all know that cash as soon as it’s sitting someplace, doesn’t prefer to go wherever until it will get abused or does very poorly. If you happen to have a look at a variety 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, individuals like to choose on ESG for index hugging. Lively is index hugging all the way in which. I imply, I’m a giant believer that a variety of lively underperformance comes from not taking dangers and never having excessive lively share and index hugging and making a bunch of silly selections as a part of that.
However you’re proper, our qualification course of kicks out complete sectors. Once we run our world, we exclude dictatorships in our world fairness technique. So we’re okay not having exposures to a bunch of issues, whether or not they be sectors or nations or kind of corporations.
In our non-traditional ESG qualification standards, we have a look at board variety past gender. So we embody racial variety of board members, 33% or extra. So we gained’t have a look at an organization who has not discovered learn how to put a pair token variety hires on their board but, principally as a result of should you haven’t discovered how to try this from a governance perspective, you’re not very competent.
Meb:
I imply, does that display alone kick out half of the universe it seems like?
Liz:
No, persons are a lot … Within the US, particularly the US boards are fairly numerous. Canada’s fairly dangerous, however clearly we’ve received none of these within the ETF. However even once we began, if we had a 40% bar, it will 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 things for some time. So it doesn’t kick any of these out.
Funding grade credit standing would possibly kick out extra corporations. If you happen to have a look at the final cohort of our qualification course of, there’s most likely extra boards that fail or extra corporations that fail on funding grade credit standing or fraud points and issues like that, lawsuits, than on the board variety. Why? ‘Trigger everyone’s slowly figuring it out. And to be tremendous clear, we’ve elevated that 33% from 30, so finally it’ll be 35 and we have now 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 carried out it 5 instances now. So did 2018 until now and it evolves, but it surely doesn’t change that a lot. It completely spits out chubby IT, chubby industrials supplies. We by no means have any banks. Now we have some monetary stuff. We typically don’t have actual property, and we’re okay with that.
And one factor you’ll discover, should you have a look at our portfolio, there’s a variety 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 possibly can think about there could also be somewhat few steps forward of a West Coast tech firm when it comes to eager about their staff and reporting ESG stuff and employee security and issues. So it’s fascinating the way it nets out.
Meb:
Yeah, I’m saying this from a podcast whose listeners are most likely 90% male. I imply, I keep in mind giving a speech in New York to Quantopian crew they usually did a stay viewers and it was like 95% male. However the enterprise capital has to me, probably the most outsized. I imply, I believe 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 somewhat off-topic.
All proper, so we’re beginning with plenty of these components. You bought a variety of them. What do you suppose 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 usually, I imply clearly participation exclusions. You realize what I’d say? There’s a complete bunch they usually’re all fairly equal. And that want for dividend development, the funding grade credit standing, the variety, the business participation, the standard ESG exclusions, even glass door ranking, it’s type of simply an equal. You’d suppose it was larger in a number of the areas. Aside from dropping complete industries, it’s a really fascinating type of balanced course of.
Once we did it at Bristol Gate, it was the S&P 500, removed all of the non-dividend payers, removed everyone under funding grade credit standing, and 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 keep in mind, what we’re slicing out just isn’t, we will’t simply have the very best dividend growers as a result of if we simply appeared on the highest dividend growers to get the ESG growers too, or the accountable growers too, we’d must type of go somewhat 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 targeted on the long-term, we needed them, however with barely greater degree of ESG. And to be tremendous clear, should you have a look at the Bristol Gate ETF, it has a better ESG ranking than most ESG managers and methods on the market as a result of boring, excessive, constant sustainable dividend growers typically have excessive ESG rankings ’trigger they typically don’t do a complete bunch of silly stuff that will get you pushed down within the rating with controversies or behind on the instances when it comes to board variety, all this stuff that make up ESG rankings.
And also you’ll discover I didn’t point out we use ESG rankings as a result of we don’t use ESG rankings at any half in our course of. And ESG rankings, simply ’trigger I do know individuals hate ESG and rankings, ESG rankings are the identical as purchase/promote rankings, proper? So it’s simply exterior sourced analysis {that a} portfolio supervisor should buy or not.
And so we run that qualification as soon as yearly. That will get us to about 50-ish corporations. After which we do our elementary deep dive. And what we do is we take all of the financials we did at Bristol Gate, which skews 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 underneath 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 provide you with some examples.
So turnover. Turnover prices you cash. It’s an ESG measure, however the greater turnover you’ve got, the extra it prices to rent new individuals. Water use, if it can save you the fee that you just spend on water, it’s a monetary factor. It’s undoubtedly an ESG factor, but it surely’s tied to the operations and the prices of an organization. It’s not a separate consideration. Waste is a superb instance. It prices plenty of cash to get rid of waste.
And you then get into the stuff that’s somewhat 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 searching for and that we personal perceive that the extra girls you’ve got in management roles, the larger your pool of candidates it’s important to recruit from. So it really will increase the various optimistic advantages to the corporate of doing this fundamental stuff that some would say is silly DEI stuff. However the corporations that we’re holding are doing it for operational and enterprise causes, not as a result of it makes them look good on a questionnaire.
We have a look at science-based targets, that are net-zero associated. We have a look at parental depart. We have a look at what information we will discover that’s comparatively systematizable throughout the consideration set of corporations.
So if you concentrate on it, we’re taking a look at most likely, of the 50 corporations we’re doing this deep dive on, we’re taking a look at a number of the prime ESG reporters and scoring issues. So we really 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 possibly can’t get it for the entire S&P 500 for instance as a result of a complete bunch of these corporations aren’t reporting that degree of knowledge but. However as a result of we’re taking a look at this type of extra superior ESG-esque pool of corporations, we’re getting all these information factors that we might not be capable of purchase from an index supplier who’s promoting ESG information throughout their index.
Finally, we’re constructing a excessive lively share, 25 positions, tremendous concentrated ETF of probably the most boring, sustainably rising, responsibly rising corporations. And in a nutshell, these corporations that we’re holding perceive that the optimistic impacts that they make on all of their stakeholders, so their staff, their prospects, the local people, their shareholders, they perceive that the optimistic impacts they make on these teams drives their backside line. So it’s not separate from their backside line. Doing good by their staff or their prospects is core to their mission and core to their function.
And these corporations are based on that and it doesn’t matter what their political opinions are. Properly-managed, long-term targeted corporations 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:
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 position of a company. So a company’s job is to manipulate on behalf of their shareholders and make their shareholders cash. The issue with that’s staff and prospects and a complete bunch of different components affect an organization’s capability to generate income.
So stakeholder governance, which isn’t one thing I invented, I’d argue authentic governance was stakeholder governance, however that’s a extra advanced matter. Stakeholder governance is only a firm that claims, “You realize what? Our staff and our prospects and all this stuff 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 basically 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 searching for these corporations the place there’s proof of their metrics, no matter these metrics could be, that they’re contemplating their stakeholders. ‘Trigger you possibly can’t simply say you or your stakeholders are ruled and also you care about all these things similar to you possibly can’t say you care about variety. Saying you care about variety or the setting is nice, however what you really do in your corporation and the modifications that you just make and the outputs which you can see within the enterprise let you know whether or not one thing’s caring about any of these items.
So stakeholder governance is, I believe it’s one thing firms do extra naturally. I believe it’s within the funding business I believe a variety of our conventional finance idea assumes that stakeholders don’t matter. And so what you see in ESG is you see conventional monetary fashions over right here and also you see individuals making an attempt to suit all this local weather and variety into these fashions they usually don’t match as a result of the standard fashions assume shareholder primacy and shareholder governance. The one means ESG works in a company is when its core to their operations and core to their function, not as a separate exercise on the aspect.
Our corporations should not doing ESG stuff to really feel good or to look good. They’re doing it as a result of it’s a part of their function and their core, and it’s how they 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 realized loads about in governance coaching and in advertising and marketing, which is it’s actually tough to speak persistently to individuals.
And so these corporations that we’re searching for know that it’s actually arduous and know that sharing, having a shared function, getting a complete hundreds of staff to work collectively in the direction of the identical aim persistently and speaking that aim is a tough exercise that they as a board and a administration staff have to work on. And that shared function just isn’t solely having a transparent function for the group, however serving to all of your staff, all your stakeholders, all your prospects perceive why you’re there and what you’re doing makes for a extra environment friendly ship if one would possibly need to say. When you’ve got disparate targets and disparate concepts in a company about the place one ought to go, it’s much less environment friendly, and people get confused and don’t perceive as clearly what they’re purported 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 believe everyone can agree that if everyone’s working round with their head minimize off and no one is aware of what they’re doing at an organization, it’s lowering productiveness. And the extra everyone could be on the identical web page when it comes to long-term targets, the extra effectivity which you can obtain.
Meb:
As you concentrate on governance, there’s areas that you could be or will not be concerned, however you possibly can communicate to it. I’m pondering of issues like within the US, notably with a number of the tech corporations 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 position in any respect in your numerous screens and the way do you concentrate on this push-pull story as previous as time with the steadiness 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 start out with a narrative. So Google again, should’ve been 2018, 2019 once we began, had two senior dudes sexually harassing a complete bunch of their staff and the board discovered this out. After which the board spent 12 or 14 months debating what they need to do with them. And the one girl on Google’s board mentioned, “Most likely we must always inform individuals and hearth them, most likely we must always do this.” They usually all simply sat there and twiddled their thumbs.
And that is all extremely certified group of people who find themselves CEOs and on a complete bunch of boards they usually’re professionals at this, but one of many largest corporations on the earth sat there and twiddled their thumbs. After which finally they gave the fellows 50 million every and paid them off and brought about a giant controversy with all their staff, all stuff that they may have been prevented. It’s not their fault they received a bunch of sexually harassing dudes. The board’s job is to rent and hearth the CEO. And when the CEO’s not hiring and firing the dude sexually harassing of us, that’s a governance challenge.
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 numerous different issues. And that exhibits useful governance.
The reply to your query is what’s useful governance? Is it a complete bunch of unbiased board members? Properly, that’s what the ESG rankings would let you know is nice governance. The issue is 10 unbiased extremely certified of us don’t create good governance. Good governance is created by a governance tradition, by a shared function, by individuals really working collectively on governance points.
So you possibly can have good governance with bizarre compensation and all this type of stuff on the similar time, completely. However I’d argue a variety of that large tech is poorly ruled. We don’t have any financial institution shares in our portfolio for a motive. And it’s not ’trigger they get excluded for producing fossil gas. However there’s a sturdy perception that non-independent administrators should not ESG. We don’t essentially share that perception. Whereas we’d desire … Clearly we search for audit committee independence for instance. That’s considered one of our necessities. We gained’t put money into an organization. However that ship’s sailed. Everyone is aware of learn how to make their audit committee unbiased at this level and there’s no magic bullet on compensation.
And simply going again to CEO compensation, individuals hear loads about CEO compensation, and there definitely are a variety of extremely paid CEOs. The issue is we don’t have any good measures proper now to 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 relies on 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 should you’ve received a person and a girl in senior management roles and the lady simply because she’s had decrease incomes all through her profession is getting paid much less, and that is stuff that corporations can repair.
What issues is Walmart’s base pay versus one other retailers base pay, not essentially the ratio of what their executives make versus what that pay is. As a result of an organization paying a low quantity to executives doesn’t naturally imply it’s doing higher for the world. And executives price plenty of cash. So it’s a extremely 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 degree, 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 everyone and everyone’s going to hate it apart from the businesses which were reporting this already.
Meb:
How do you guys cope with shifting sands over time? Not on issues which 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 individuals had been like, “These are the most effective factor ever.” And now they’re like, “Oh my god, these are accountable for lots of misuse and issues like …” I imply we wrote an investing paper some time again on the investing pyramid, however the instance we gave was the meals pyramid from my youth, which is such as you actually ought to simply be consuming pasta and frosted flakes and muffins. Your base of meals must be carbs and the very last thing you need is fat or protein, no matter it was, and right now 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 into extra accepted? How do you concentrate on a few of these subjects?
Liz:
I prefer to level out virtually every little thing we do kills individuals and people within the ESG aspect of the stuff give particular sectors a go, like prescribed drugs for instance. Now we have no pharma corporations in our portfolio. Now we have a variety of well being tech although, like medical gear and issues like that. One of many causes we have now no pharma corporations is ’trigger all of them have worth fixing scandals. And so no matter their capability to kill of us with their product or no matter, which is clearly don’t even get me began on the opioids and the Sacklers as a result of that may very well be a complete different podcast, the value fixing, which is they simply, I don’t know, all of them simply determined to do that previously 5 years, all of the executives simply working for costs or no matter after which the massive congress factor.
However right here’s what occurs in ESG and affect, and I say ESG and affect as a result of affect rankings occur in public markets too. Generally individuals after they discuss affect investing, it’s simply non-public markets, however for probably the most half we have now affect rankings on these corporations. The issue with affect rankings is they typically are based mostly on the SDGs, so the sustainable growth targets that are developed for nations by the UN.
So an organization to be impactful in accordance with this framework, and I’ve received a complete bunch of air quotes right here for people who find themselves not watching my try to framing the sarcasm, to be impactful an organization wants to handle an SDG. And so what occurs is all of the pharmaceutical corporations get 100% affect ranking as a result of they make a drug that’s serving to individuals. They don’t get any detrimental ranking for worth fixing.
And so we might 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 believe it’s the Atlantic piece on the complete 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 corporations simply to be tremendous clear. There’s a complete bunch of analysis that company pursuits … That is considered one of my passionate areas. Tariq Fancy was the previous CIO of BlackRock, ESG at BlackRock, and he 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 a company via a complete bunch of promoting selections and a necessity to make more cash began and created an enormous detrimental affect far past their product, proper? With all of the lies and the paying off docs and continued points, they created a detrimental affect that no authorities or nonprofit might cease.
And so the reply is corporations make big, big impacts, optimistic and detrimental. What we’re making an attempt to purpose for on this portfolio is corporations making a internet optimistic affect. So corporations who’re lowering their detrimental externalities as a result of they price cash, they damage individuals, they appear dangerous from a PR perspective, a complete bunch of the explanation why you would scale back your detrimental affect on the world whereas growing your optimistic affect. So whether or not that’s higher first rate pay, safer work circumstances, higher high quality merchandise, extra progressive that clear up issues, discount in packaging so it prices much less, all these detrimental and optimistic impacts.
Meb:
So so far as portfolio building, you get down to those small group of names, 25 whatnot. Do you’ve 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 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 preventing over place dimension. We run a correlation evaluation, but it surely’s sector agnostic. We used to personal McDonald’s and KFC in my dad’s technique. And folks would say, “Aren’t they the identical firm?” And while you have a look at the geographic income of them, they had been utterly reverse. And similar factor, there’s plenty of corporations that look very related and appear very related on this massive cap house that aren’t essentially.
So while you have a look at our portfolio, we received a complete bunch of comparable stuff in there. And that’s the character of 1, we’re being actually selective. Two, we’re kicking out a complete bunch of stuff, however we undoubtedly don’t care about what the weights of the index are at any level in our choice making.
And we all know we’re going to be chubby 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 might be on a small cap within the portfolio.
After which that’s a part of the lively share. We’re okay not holding the highest 30 one thing p.c of the index. Now we have not one of the faux shares. You’ll be able to’t have excessive lively share should you’re holding a bunch of these corporations. And everyone else, I imply everyone’s going to have these of their portfolio anyhow. However it’s actually, we’re searching for the 25 most responsibly rising corporations out of that 50-ish set of corporations that we have now. It turns into our bench too. So the following set of ranked corporations in there are who will use when we have to hearth an organization, whether or not it’s for quarterly earnings or doing one thing silly on the ESG aspect or the non-ESG aspect.
However once more, a variety of our stuff is annual information. Whereas annual reporting and studies come out midyear and issues like that, a variety of our board variety modifications after they change someone on a board, and we have now fired an organization for going under our threshold, however you possibly can think about the businesses that we’re holding are very cognizant of not, should you’ve received 76% board variety, after all you possibly can put a complete bunch of white dudes in your board, however should you received 31 and each investor that exhibits up is participating with you in your board variety or one thing, you’re going to be cognizant of it.
And that’s what’s so humorous about ESG. The entire world tries responsible BlackRock and the funding business on ESG. They’re the laggards on this. The pensions for probably the most half do a variety of the engagement round and many managers to be tremendous clear, ESG managers do a variety of pushing on variety and environmental stuff and governance and all these sorts of issues, but it surely’s the businesses themselves who notice that it’s a advertising and marketing profit, it’s a recruiting profit. It’s their large 4 accountants saying that they’ll audit this information and serving to them arrange it. It’s the firms driving ESG. It’s not BlackRock driving ESG. It’s not … undoubtedly not Vanguard driving ESG stuff. Actually Vanguard is simply being referred to as into congress for pushing local weather change narrative, which is the funniest factor in the 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 a complete bunch of buyers who care they usually may very well be foundations, pensions, people who care about progress on these things and staff who care about progress on these things.
Meb:
Give us a behind-the-scenes have a look at what it’s like to start out an ETF. We get this query loads. Lots of people see the pot of gold on the finish of the rainbow. There’s clearly a variety of work that goes into it and also you guys are comparatively new launch, so congratulations. However inform us somewhat bit in regards to the expertise, the way it’s been, have you ever made it right down to Puerto Rico but? What’s the general agony and ecstasy of being not solely a founder however a cash supervisor and now a ETF issuer as effectively?
Liz:
And a wholesaler and a marketer and all that type of stuff. I believe it’s fascinating that individuals suppose ETFs are like concepts. I believe there’s a lot room for innovation on this business. I believe it’s going to look completely-ish completely different in 20 years, however I believe there’s some stuff that’s not going to alter.
I believe there’s all the time going to be public markets buyers and personal markets buyers and people who do each. I believe persons are all the time going to suppose geographically when it comes to allocation in sure issues. I believe there’s definitely a spot for thematics. While you launch a product, it doesn’t matter what it’s, this SMA mannequin, ETF fund index ’trigger that’s a complete fascinating aspect of the enterprise, it’s important to know who’s going to purchase it regardless of how cool the concept is, and it’s important to know the way it’s going to get distributed.
The nice factor with an ETF car is individuals should buy it, common individuals should buy it, and advisors should buy it in a bunch of locations, however there’s a complete bunch of restrictions and issues. They make issues extra sophisticated than simply launching an ETF. Just like the crypto ones, for instance, you most likely are buddies 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.
Apparently up in Canada, not one of the warehouses locked their cabinets to Canadian or US listed ETFs. So any advisor in Canada should buy any ETFs besides the crypto ones. The large banks up right here has put a particular ruling on crypto ETFs, they usually mainly mentioned to advisors, you can not purchase them. You’ll be able to solely purchase them in case your shopper indicators a giant waiver and it will get a excessive danger ranking of their portfolio.
So though these are presumably the good, most talked about ETFs in the complete, complete world, a complete bunch of Merrill Lynch and UBS and Citi of us should not going to have the ability to purchase them of their accounts anytime quickly as a result of they’re going to must get authorized, they’ll most likely create inner ones in order that they’ll, ’trigger there’s a pay to play facet there too, that folk want to grasp. You will 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 must be, there’s going to be like, I don’t know, what number of are there? 18 now, all the massive asset managers, they usually’re going to observe and a few of them are going to get on some platforms, however a complete bunch of them are going to get locked off a bunch of platforms. So though it looks as if an ETF is a magic bullet when it comes to wrapper for these merchandise, there’s a complete bunch of different issues.
In order that’s simply my rant to inform everyone that your product concept is nice. Who’s going to purchase your product and the way they entry it’s most likely greater than 50% of the consideration that you must make earlier than spending a complete 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 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 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 easier ETF fashions, and that’s why we didn’t go together with Wes ’trigger we love Wes. We went with Wes as a result of we undoubtedly weren’t going to do a mutual fund, and he has an incredible 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 mentioned that seems like someone we all know.
Liz:
And I simply suppose it’s so fascinating. Perth’s most likely considered one of my favourite examples clearly, of constructing a profitable product. She knew there was a scarcity of rising market systematic merchandise that she knew there was none that excluded dictatorships and that there can be a complete host of advisors throughout the US who can be completely wonderful with their rising market slice of the pie to not embody Chinese language holdings or Russian holdings or Qatari holdings or no matter as a result of there’s sufficient rising markets corporations on the market to get the publicity. And yeah, you’re not going to appear to be the index. However who cares? Numerous of us are searching for systematic or lively choices, not the entire index. We’re by no means going to persuade a bunch of passive of us to make use of this as a core possibility, even when we’re the most effective on the earth. You’ll be able to’t change the patron habits.
So Perth actually constructed a product to unravel the top person’s wants. And I imply, she received a tremendous timing with the Russian invasion, however she was already doing the work of discovering the market match and getting groups to construct her into the mannequin lengthy earlier than that occurred. And so everyone ought to simply go be taught 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 property. So go Perth. That’s rad.
Liz:
Perth is superb. She’s simply the proper instance of you want to discover who’s going to purchase your nice concept earlier than going and determining learn how to make your nice concept. And perhaps you had been an advisor, perhaps you labored as a wholesaler, perhaps you labored someplace within the distribution of the business, however particularly should you’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 selections which might be going to price you cash that you just’re going to wish to go change.
The way in which to launch an ETF is to have a complete bunch of cash and be prepared to spend it, I believe 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 have now, 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. However it actually is, you have a look at the checklist of … any checklist 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% big asset managers who’ve received automobiles 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 elevate cash in ESG ETFs. So actually you would 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 want to not screw up the efficiency and all that type of stuff.
Meb:
In relation to, you’ve received a variety of completely different takes on this house, however one of many questions we’ve been asking a lot of the friends is, should you sit right 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 should you sat on the desk, 75% of the attendees would shake their head and say, “Liz, I disagree with you,” on funding associated, portfolio associated, ESG, DEI associated, something come to thoughts?
Liz:
Yeah, loads. I might go two instructions right here, so …
Meb:
Title them each. Do each of them. We received time.
Liz:
So I don’t consider you possibly can predict the market. As someone who was raised in a really evidence-based quantum psychological store the place we did no predicting of the market, it’s fascinating to see this complete ecosystem of parents yelling about shares all day, on daily basis and guessing the place macro goes to go and all this stuff. I don’t suppose it’s 75% of parents don’t consider in market. And to be tremendous good it’s predicting the timing of the market too.
I believe there’s danger in timing. I believe all of the research recommend that the timing danger of lively safety choice is likely one of the greatest issues. That’s why we’re macro agnostic. We’re every little thing apart from responsibly rising agnostics regardless of the fixed barrage on Twitter or CNBC or wherever. This concept that individuals simply sit on TV yelling about future numbers and what they’re going to foretell pushes cool, certified math expertise individuals away from the business. In order that’s my common take.
My ESG take, and I hear this loads, is ESG information just isn’t 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 via the identical framework. They’re getting exterior auditors to overview their emissions information and a bunch of their environmental information. And the Division of Labor is reviewing their variety information.
Whereas 5 years in the past for positive, it undoubtedly appeared like stuff was not standardized when it comes to ESG information, all the businesses we’re taking a look at have moved in the direction of this. It’s referred to as the GRI template. There’s like a billion completely different frameworks in ESG, however should you go into any massive 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 corporations are reporting this framework. Are they reporting year-over-year? No. You’ll be able to return to their earlier report and a few are laggards and a few are forward, however we’re in a position to have a look at three yr 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 instances as many people. There’s random 4 billion RIAs in the course of states that no one’s ever heard of, which might be the twelfth largest RIA or asset wealth store in Canada.
And so I received to say, our ETF BEEZ is my favourite funding. We don’t love our corporations one after the other. We consider them as a staff. We’re fielding a staff of gamers. I imply, we don’t play favorites. We simply need to choose 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 individuals discover out extra info? The place do they go? Comply with you, comply with the agency, the fund, all that.
Liz:
So we have now an ETF web site, which is honeytreeinvestetfs, which is all that formal one. After which we have now honeytreeinvest.com, which is our common one which has tons of blogs. If you happen to 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 like the neighborhood and there’s plenty of nice of us there, and it’s how we met Wes and all this stuff. So Liz Simmie on Twitter, if you’d like obnoxious, occasional ESG takes. I principally simply rant about how BlackRock just isn’t woke and folks shouldn’t be satisfied that any asset supervisor is woke. That’s us in a nutshell.
And naturally you possibly can go by B-E-E-Z on choose custody platforms within the US. If you happen to’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 should you’re an advisor enthusiastic about ESG and is aware of nothing about it otherwise you’re a deep ESG practitioner, please be happy 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 now.
Liz:
Thanks for having me.
Meb:
Podcast listeners we’ll submit present notes to right now’s dialog at mebfaber.com/podcast. If you happen to love the present, should you hate it, shoot us suggestions at suggestions@themebfabershow.com. We like to learn the critiques. Please overview us on iTunes and subscribe the present wherever good podcasts are discovered. Thanks for listening, buddies, and good investing.
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