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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 immediately’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising firms which can be stakeholder ruled, goal pushed, and make a internet optimistic 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 strategy of launching an ETF with our mates at Alpha Architect and shares recommendation for anybody excited about launching one themselves.
Feedback or options? Involved in sponsoring an episode? E-mail us [email protected]
Hyperlinks from the Episode:
- 1:15 – Welcome Liz to the present
- 1:46 – Launching BEEZ
- 7:11 – Discovering accountable progress and being ‘quantamental’
- 10:19 – Lively administration and index hugging
- 15:14 – Fundamental components that filter out sectors and firms
- 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 a part of us as we talk about the craft of investing and uncover new and worthwhile concepts, all that will help you develop wealthier and wiser. Higher investing begins right here.
Disclaimer:
Med Faber is the co-founder and Chief Funding Officer at Cambria Funding Administration. Attributable to 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 immediately. 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 immediately’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising firms which can be stakeholder-governed, purpose-driven and make a internet optimistic 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 strategy of launching an ETF with our mates at Alpha Architect, and shares recommendation for anybody excited about launching one themselves.
Please take pleasure in this episode with Liz Simmie.
Liz, welcome to the present.
Liz:
Thanks for having me.
Meb:
The place do we discover you immediately?
Liz:
Toronto, the nice 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. Really I went to Montreal for college after which got here again and can by no means go away this nice metropolis and nation.
Meb:
Superior. I find it irresistible up there. We’re going to speak about rather a lot immediately. One of many matters listeners, which you in all probability actually need to stick round for is this idea of beginning ETFs. I get numerous questions. Each day folks need to begin an ETF, they received an concept for an ETF. We’re going to speak about somebody who’s accomplished it very not too long ago, placing out their first fund in November with our loopy good friend, Wes Grey and crew. So we’ll undoubtedly get into somewhat little bit of that later. However I need to speak 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 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 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, and so they had this third man who was American and he received divorced. So whenever you get divorced and also you’re right here on a spousal visa, you get despatched again to the US, which it’s what it’s. So my dad wanted a 3rd individual to return in. I begrudgingly mentioned, “Certain, it feels like an attention-grabbing concept,” having actually no idea of the funding trade past somewhat little bit of publicity right here and there.
And I used to be fortunate. I joined a bootstrapped dividend progress fairness supervisor at about 10 million AUM and was there till about 1.5 billion AUM after which left to start out Honeytree. And to be tremendous clear, it’s ’trigger my dad was a founder. There’s an entire pile of privilege in there, but when I had gone the normal path to be a portfolio supervisor at an even bigger store or a pension or no matter, it’d be a really completely different expertise that wouldn’t essentially set you as much as going to bootstrap your personal rising supervisor.
The agency’s known as Bristol Gate for folk who need to google issues. We launched ETFs in 2018, and I had met my co-founder on the similar time, and we thought all these of us try to launch ESG methods and so they’re all lacking what we predict the top shopper for these ESG merchandise need. And this, to be tremendous clear, is lengthy solely fairness universe, not alter hedge funds or something like that.
And so in 2018, we set out, which is similar 12 months we launched the ETFs up right here. 2018, we got down to discovered Honeytree. We had been registered in 2019. It takes rather a lot longer up right here to get accredited by the regulators. We began our monitor 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 automobiles price some huge cash and so they take numerous effort to distribute. They take numerous consciousness and all these items.
In any case, we had at all times meant to launch a retail car. We didn’t ever need a personal fund. Lengthy-only boring methods undoubtedly don’t make sense in personal funds in Canada or the US and we thought we’d have a Canadian car first. So we went round. There’s not as many white label choices up right here, and those that they’ve are, we’ll name it not 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 greater, there’s simply as a lot if no more demand for ESG merchandise. One main distribution distinction between Canada and the US is in Canada, no person cares that we’re girl owned. We’re the fifth or sixth public markets asset supervisor owned by girl in Canada. That’s what number of there are up right here. So there’s no supervisor variety initiatives up right here institutionally or from advisors, whereas all people is aware of within the US, a number of states have numerous supervisor initiatives at their pensions and issues like that.
So we thought, if we’re going to do that car, let’s do it within the US, let’s do it as an ETF and let’s do it with Wes. And increase, November seventh, we launched our first ETF and the ticker is BEEZ, B-E-E-Z, ’trigger branding issues and it’s a US giant cap and it’s targeted on accountable progress.
So it’s the identical funding thesis we’ve been engaged on our whole agency historical past, which is responsibly rising firms, stakeholder-governed, purpose-driven firms who care for their stakeholders outperform in the long term.
What’s actually attention-grabbing is we didn’t like every of the prevailing ESG frameworks. We thought, and I may discuss for 10 years in regards to the issues with present ESG and funding frameworks, however we threw out numerous the scores and present fashions and present 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 identified on is ESG integration. So full ESG integration, which suggests we deal with ESG information as basic firm information in safety choice, not right here’s our monetary mannequin over right here on one facet and right here’s our ESG mannequin and opinions over right here on different facet. We deal with the ESG information that we use as basic firm information when selecting these firms for the portfolio.
Meb:
So let’s dig in on the method as a result of quite a lot of the phrases you used may imply numerous various things. ESG means numerous various things to numerous completely different folks. So let’s hear somewhat bit about y’all’s course of. You’ve a pleasant deck. If we will embody it within the present notes, listeners, we definitely will on the method, which I feel could be very useful. However why don’t you stroll us via it. How do you guys discover accountable progress? What does that imply? And once we hit a few of these phrases, let’s attempt to give y’all’s interpretation of what you suppose it means to you as nicely.
Liz:
So quantum psychological means we aren’t purely basic and we aren’t purely quant. We use each processes. And for folk on the market who should not deeply steeped in fairness, basic fairness land, basic is taken into account deep dive qualitative analysis and quantitative analysis into an organization versus quant processes are typically extra quantitative, much less deep dive into an organization sort measures. And there’s many alternative managers who do each. We do each.
And what that appears like in our course of is we begin with the entire index, no matter index that 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 suppose quants are. However now we have 25 qualification standards that’s attempting to get us right down to a consideration set about 50 firms.
And what that qualification standards seems to be like is there’s some 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 numerous 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 firms 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 identical to, “Liz, what are you speaking about?”
Liz:
Effectively, it makes it very attention-grabbing up right here as a result of now we have all the main pensions are deeply dedicated to ESG and deeply dedicated to power funding. And I wish to level out to those that the power firms are actually good at DEI and reporting far more so than tech firms and asset managers, however that’s a unique story. However we exclude fossil gas.
There’s a few causes we exclude fossil gas. We by no means held an power firm at Bristol Gate as a result of power firms are somewhat too cyclical to have excessive constant dividend progress. So from becoming in into qualifying and stepping into the portfolio, they’re prone to fail anyway. So it’s form of only a bit simpler to display screen them out ’trigger you already know they’re not going to make it. We additionally don’t have any renewable power firms in our portfolio.
Meb:
Effectively additionally, I imply whenever you transfer from a universe of hundreds right down to 50, you’re invariably going to kick out all types of issues and areas and sectors and industries, whether or not it’s from the broad standards, whether or not it’s from the secondary kind of standards as nicely. In order that’s the entire level of energetic administration. You need a concentrated portfolio as a result of for those who’re charging greater than zero, you need it to have a look at bizarre and completely different.
Liz:
Yeah. And it’s humorous ’trigger I’ve by no means understood why of us don’t need it to look bizarre and completely different. It’s one among my massive points with energetic administration index hugging.
Meb:
It’s quite simple. They need it to look bizarre and completely different when it’s going up. They need it to look bizarre and completely different if it’s taking place and also you’re not taking place. However primarily it creates a bizarre precept agent downside as a result of numerous 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 wish to go anyplace except it will get abused or does very poorly. If you happen to take a look at numerous the old fashioned hedge funds too, their early years the place they did 150% or these large returns and now all of them do 7% with 10% volatility.
Liz:
They usually’re all chasing FANG shares and it’s like, what are you doing? However the index hugging factor, folks like to select on ESG for index hugging. Lively is index hugging all the best way. I imply, I’m an enormous believer that numerous 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. After 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 nations or sort of firms.
In our non-traditional ESG qualification standards, we take a look at board variety past gender. So we embody racial variety of board members, 33% or extra. So we gained’t take a look at an organization who has not found out find out how to put a pair token variety hires on their board but, principally as a result of for those who haven’t found out how to do this from a governance perspective, you’re not very competent.
Meb:
I imply, does that display screen alone kick out half of the universe it 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 might kick out a number of of us. It’s humorous ’trigger actually it finally ends up kicking out cool tech renewable power boards that you just … not typical stuff that we maintain in our portfolio like boring industrials and boring retailers and semiconductors as a result of they’ve all been engaged on these items for some time. So it doesn’t kick any of these out.
Funding grade credit standing may kick out extra firms. If you happen to take a look at the final cohort of our qualification course of, there’s in all probability extra boards that fail or extra firms that fail on funding grade credit standing or fraud points and issues like that, lawsuits, than on the board variety. Why? ‘Trigger all people’s slowly figuring it out. And to be tremendous clear, we’ve elevated that 33% from 30, so finally it’ll be 35 and now we have to cope with the universe as it’s. ‘Trigger our purpose is to get from the universe right down to a manageable consideration set that we will cowl from a basic deep dive perspective in probably the most environment friendly method attainable.
And we run that consideration set as soon as yearly. So we’ve accomplished it 5 instances now. So did 2018 until now and it evolves, however it doesn’t change that a lot. It completely spits out obese IT, obese industrials supplies. We by no means have any banks. We’ve got some monetary stuff. We usually don’t have actual property, and we’re okay with that.
And one factor you’ll discover, for those who take a look at our portfolio, there’s numerous manufacturing concerned firms. And that’s the place the semis form of pop in. It’s ’trigger these firms who’ve needed to handle labor, handle manufacturing amenities, handle worker security, you may think about there could also be somewhat few steps forward of a West Coast tech firm when it comes to excited about their workers and reporting ESG stuff and employee security and issues. So it’s attention-grabbing the way it nets out.
Meb:
Yeah, I’m saying this from a podcast whose listeners are in all probability 90% male. I imply, I 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 ladies get 2% of enterprise capital {dollars}. It’s some extremely low quantity that’s nowhere close to 50. However anyway. Okay, so we’re getting somewhat off-topic.
All proper, so we’re beginning with quite a lot of these components. You bought numerous them. What do you suppose are the principle drivers of those that kind of filter out probably the most issues? Are there any of the 25 or so which can be significantly extra distinguished?
Liz:
Checked out it year-over-year and so they are typically, I imply clearly participation exclusions. what I’d say? There’s an entire bunch and so they’re all fairly equal. And that want for dividend progress, the funding grade credit standing, the range, the trade participation, the everyday ESG exclusions, even glass door score, it’s form of simply an equal. You’d suppose it was greater in a few of the areas. Aside from shedding entire industries, it’s a really attention-grabbing form of balanced course of.
After we did it at Bristol Gate, it was the S&P 500, removed all of the non-dividend payers, removed all people under funding grade credit standing, and based mostly on subsequent 12 months’s predicted dividend, we selected the highest 50 and did the basic deep dive on these. And what we’re getting with the identical however a unique course of ’trigger bear 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 form 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 increased degree of ESG. And to be tremendous clear, for those who take 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 usually have excessive ESG scores ’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 instances when it comes to board variety, all this stuff that make up ESG scores.
And also you’ll discover I didn’t point out we use ESG scores as a result of we don’t use ESG scores at any half in our course of. And ESG scores, simply ’trigger I do know folks hate ESG and scores, ESG scores are the identical as purchase/promote scores, 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 firms. After which we do our basic deep dive. And what we do is we take all of the financials we did at Bristol Gate, which skews debt capability, how conservatively they’re managing their debt, earnings progress, dividend progress, aggressive market share, and we usher in ESG information and put it equally beside that monetary basic 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 contemplate basic to the corporate. And I’ll offer you some examples.
So turnover. Turnover prices you cash. It’s an ESG measure, however the increased turnover you’ve, the extra it prices to rent new folks. Water use, if it can save you the price that you just spend on water, it’s a monetary factor. It’s undoubtedly an ESG factor, however it’s tied to the operations and the prices of an organization. It’s not a separate consideration. Waste is a superb instance. It prices a number of cash to get rid of waste.
And then you definitely 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. Effectively, firms that we’re searching for and that we personal perceive that the extra ladies you’ve in management roles, the larger your pool of candidates you must recruit from. So it truly will increase the various optimistic advantages to the corporate of doing this primary stuff that some would say is silly DEI stuff. However the firms that we’re holding are doing it for operational and enterprise causes, not as a result of it makes them look good on a questionnaire.
We take a look at science-based targets, that are net-zero associated. We take a look at parental go away. We take a look at what information we will discover that’s comparatively systematizable throughout the consideration set of firms.
So if you concentrate on it, we’re in all probability, of the 50 firms we’re doing this deep dive on, we’re a few of the high ESG reporters and scoring issues. So we truly can run comparatively customized information units throughout this 50-ish group of firms like racial variety and management year-over-year, three-year change in that, three-year change in water depth, three-year change in water use. As a result of you may’t get it for the entire S&P 500 for instance as a result of an entire bunch of these firms aren’t reporting that degree of information but. However as a result of we’re this sort of extra superior ESG-esque pool of firms, we’re getting all these information factors that we’d not have the ability 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 firms. And in a nutshell, these firms that we’re holding perceive that the optimistic impacts that they make on all of their stakeholders, so their workers, their clients, the local people, their shareholders, they perceive that the optimistic impacts they make on these teams drives their backside line. So it’s not separate from their backside line. Doing good by their workers or their clients is core to their mission and core to their goal.
And these firms are based on that and it doesn’t matter what their political views are. Effectively-managed, long-term targeted firms which can be stakeholder-governed and purpose-driven will outperform in the long term. And that’s our funding thesis and I ought to 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 usually educated that shareholder primacy and shareholder governance is the function of an organization. So an organization’s job is to manipulate on behalf of their shareholders and make their shareholders cash. The issue with that’s workers and clients and an entire bunch of different components affect an organization’s capacity to earn cash.
So stakeholder governance, which isn’t one thing I invented, I’d argue unique governance was stakeholder governance, however that’s a extra advanced matter. Stakeholder governance is only a firm that claims, “ what? Our workers and our clients and all this stuff have to 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 basically all of our stakeholders.”
So there’s tons of firms on the market that imagine in a stakeholder governance framework. So as a substitute of being our solely purpose is to return returns to shareholders. That turns into simply one of many roles of the board. And so we’re searching for these firms the place there’s proof of their metrics, no matter these metrics is likely to be, that they’re contemplating their stakeholders. ‘Trigger you may’t simply say you or your stakeholders are ruled and also you care about all these items identical to you may’t say you care about variety. Saying you care about variety or the atmosphere is nice, however what you truly do in what you are promoting and the adjustments that you just make and the outputs which you could see within the enterprise let you know whether or not one thing’s caring about any of these things.
So stakeholder governance is, I feel it’s one thing firms do extra naturally. I feel it’s within the funding trade I feel numerous our conventional finance principle assumes that stakeholders don’t matter. And so what you see in ESG is you see conventional monetary fashions over right here and also you see folks attempting to suit all this local weather and variety into these fashions and so they don’t match as a result of the normal fashions assume shareholder primacy and shareholder governance. The one method ESG works in an organization is when its core to their operations and core to their goal, not as a separate exercise on the facet.
Our firms 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 goal and their core, and it’s how they had been at all times based and the way they’ve at all times operated. And purpose-driven is basically advanced as a result of it’s one thing I discovered rather a lot about in governance coaching and in advertising and marketing, which is it’s actually troublesome to speak persistently to folks.
And so these firms that we’re searching for know that it’s actually onerous and know that sharing, having a shared goal, getting an entire hundreds of workers to work collectively in the direction of the identical purpose persistently and speaking that purpose is a troublesome exercise that they as a board and a administration crew must work on. And that shared goal just isn’t solely having a transparent goal for the group, however serving to all of your workers, your entire stakeholders, your entire clients perceive why you’re there and what you’re doing makes for a extra environment friendly ship if one may need to say. When you’ve disparate objectives and disparate concepts in a corporation about the place one ought to go, it’s much less environment friendly, and people get confused and don’t perceive as clearly what they’re alleged to be doing.
That is all management and governance science that’s simply within the early phases of academia when it comes to quantifying and analyzing all these items. However I feel all people can agree that if all people’s working round with their head reduce off and no person is aware of what they’re doing at an organization, it’s lowering productiveness. And the extra all people may be on the identical web page when it comes to long-term objectives, the extra effectivity which you could obtain.
Meb:
As you concentrate on governance, there’s areas that you could be or might not be concerned, however you may communicate to it. I’m pondering of issues like within the US, significantly with a few of the tech firms this previous cycle who’ve been very kind 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 concentrate on this push-pull story as outdated 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 matters there and so they’re all tremendous fascinating. I’m going to start out with a narrative. So Google again, should’ve been 2018, 2019 once 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, “In all probability we should always inform folks and fireplace them, in all probability we should 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 an entire bunch of boards and so they’re professionals at this, but one of many largest firms on the planet sat there and twiddled their thumbs. After which finally they gave the fellows 50 million every and paid them off and precipitated an enormous controversy with all their workers, all stuff that they might have been averted. It’s not their fault they received a bunch of sexually harassing dudes. The board’s job is to rent and fireplace the CEO. And when the CEO’s not hiring and firing the dude sexually harassing of us, that’s a governance subject.
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 reveals practical governance.
The reply to your query is what’s practical governance? Is it an entire bunch of unbiased board members? Effectively, that’s what the ESG scores 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 goal, by folks truly working collectively on governance points.
So you may have good governance with bizarre compensation and all this sort of stuff on the similar time, completely. However I’d argue numerous that massive 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 should not ESG. We don’t essentially share that perception. Whereas we’d choose … Clearly we search for audit committee independence for instance. That’s one among our necessities. We gained’t spend money on an organization. However that ship’s sailed. All people is aware of find out 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, folks hear rather a lot about CEO compensation, and there definitely are numerous extremely paid CEOs. The issue is we don’t have any good measures proper now to actually assess CEO pay. And what I imply is what we’re usually utilizing proper now could be common employee pay to CEO pay. So it actually will depend on what trade and which set of information that you just’re utilizing. And what issues extra is, to me, who cares in regards to the CEO pay. What issues extra is the baseline worker pay. What issues extra is pay fairness. So for those who’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 firms can repair.
What issues is Walmart’s base pay versus one other retailers base pay, not essentially the ratio of what their executives make versus what that pay is. As a result of an organization paying a low quantity to executives doesn’t naturally imply it’s doing higher for the world. And executives price a number of cash. So it’s a very attention-grabbing, 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 at all times 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 attention-grabbing 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 aside 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 one of the 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 ought to be carbs and the very last thing you need is fat or protein, no matter it was, and immediately it’s inverted.
In order data change and shifts, how do you guys cope with that? I do know you mentioned it’s an annual course of, however do you kind of replace these standards and concepts as they develop into extra accepted? How do you concentrate on a few of these matters?
Liz:
I wish to level out virtually every little thing we do kills folks and people within the ESG facet of the stuff give particular sectors a go, like prescribed drugs for instance. We’ve got no pharma firms in our portfolio. We’ve got numerous well being tech although, like medical tools and issues like that. One of many causes now we have no pharma firms is ’trigger all of them have value fixing scandals. And so no matter their capacity to kill 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 might be an entire different podcast, the value fixing, which is they simply, I don’t know, all of them simply determined to do that previously 5 years, all of the executives simply 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 scores occur in public markets too. Generally folks once they discuss impression investing, it’s simply personal markets, however for probably the most half now we have impression scores on these firms. The issue with impression scores is they typically are based mostly on the SDGs, so the sustainable improvement objectives that are developed for nations by the UN.
So an organization to be impactful in accordance with this framework, and I’ve received an entire bunch of air quotes right here for people who find themselves not watching my try and framing the sarcasm, to be impactful an organization wants to deal with an SDG. And so what occurs is all of the pharmaceutical firms get 100% impression score as a result of they make a drug that’s serving to folks. They don’t get any adverse 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 and marketing behind that, ’trigger once more, the meals pyramid that you just talked about, are you aware who paid for that? It was not the FDA. It was the cereal firms simply to be tremendous clear. There’s an entire bunch of analysis that company pursuits … That is one among my passionate areas. Tariq Fancy was the previous CIO of BlackRock, ESG at BlackRock, and he give up and he went on an enormous, massive talking tour of the world to say, “Firms don’t make an impression. Solely governments and nonprofits could make an impression.”
However the Sackler household in an organization via an entire bunch of promoting choices and a necessity to earn more money began and created a large adverse impression far past their product, proper? With all of the lies and the paying off medical doctors and continued points, they created a adverse impression that no authorities or nonprofit may cease.
And so the reply is firms make large, large impacts, optimistic and adverse. What we’re attempting to intention for on this portfolio is firms making a internet optimistic impression. So firms who’re decreasing their adverse externalities as a result of they price cash, they damage folks, they appear dangerous from a PR perspective, an entire bunch of the reason why you would cut back your adverse impression on the world whereas growing your optimistic impression. So whether or not that’s higher respectable pay, safer work situations, higher high quality merchandise, extra modern that remedy issues, discount in packaging so it prices much less, all these adverse and optimistic impacts.
Meb:
So so far as portfolio development, you get down to those small group of names, 25 whatnot. Do you’ve some kind of sector composition display screen so it’s not all 25 in MedTech for instance, or how do you guys do any kind of place sizing on this remaining portfolio?
Liz:
Yeah, so they’re equal weighted, so we take away the place measurement decision-making. My dad at all times mentioned it was so that you didn’t have a bunch of PMs combating over place measurement. We run a correlation evaluation, however it’s sector agnostic. We used to personal McDonald’s and KFC in my dad’s technique. And other people would say, “Aren’t they the identical firm?” And whenever you take a look at the geographic income of them, they had been fully reverse. And similar factor, there’s a number of firms that look very related and appear very related on this giant cap area that aren’t essentially.
So whenever you take a look at our portfolio, we received an entire bunch of comparable stuff in there. And that’s the character of 1, we’re being actually selective. Two, we’re kicking out an entire bunch of stuff, however we undoubtedly don’t care about what the weights of the index are at any level in our determination making.
And we all know we’re going to be obese tech and industrials and normally 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 p.c of the index. We’ve got not one of the faux shares. You may’t have excessive energetic share for those who’re holding a bunch of these firms. And all people else, I imply all people’s going to have these of their portfolio anyhow. However it’s actually, we’re searching for the 25 most responsibly rising firms out of that 50-ish set of firms that now we have. It turns into our bench too. So the subsequent set of ranked firms in there are who will use when we have to fireplace an organization, whether or not it’s for quarterly earnings or doing one thing silly on the ESG facet or the non-ESG facet.
However once more, numerous our stuff is annual information. Whereas annual reporting and reviews come out midyear and issues like that, numerous our board variety adjustments once they change any individual on a board, and now we have fired an organization for going under our threshold, however you may think about the businesses that we’re holding are very cognizant of not, for those who’ve received 76% board variety, after all you may put an entire bunch of white dudes in your board, however for those who received 31 and each investor that reveals up is partaking with you in your board variety or one thing, you’re going to be cognizant of it.
And that’s what’s so humorous about ESG. The entire world tries guilty BlackRock and the funding trade on ESG. They’re the laggards on this. The pensions for probably the most half do numerous the engagement round and many managers to be tremendous clear, ESG managers do numerous pushing on variety and environmental stuff and governance and all these sorts of issues, however it’s the businesses themselves who understand that it’s a advertising and marketing profit, it’s a recruiting profit. It’s their massive 4 accountants saying that they will 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 known as into congress for pushing local weather change narrative, which is the funniest factor in your complete world for a passive store.
The oil sands firms up right here in Canada are working, doing much more work than most asset managers on variety and decreasing their emissions. Why? As a result of they’ve an entire bunch of traders who care and so they might be foundations, pensions, people who care about progress on these items and workers who care about progress on these items.
Meb:
Give us a behind-the-scenes take a look at what it’s like to start out an ETF. We get this query rather a lot. Lots of people see the pot of gold on the finish of the rainbow. There’s clearly numerous work that goes into it and also you guys are comparatively new launch, so congratulations. However inform us 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 nicely?
Liz:
And a wholesaler and a marketer and all that form of stuff. I feel it’s fascinating that individuals suppose 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 completely different in 20 years, however I feel there’s some stuff that’s not going to vary.
I feel there’s at all times going to be public markets traders and personal markets traders and people who do each. I feel persons are at all times going to suppose geographically when it comes to allocation in sure issues. I feel there’s definitely a spot for thematics. If you launch a product, it doesn’t matter what it’s, this SMA mannequin, ETF fund index ’trigger that’s an entire attention-grabbing facet of the enterprise, you must know who’s going to purchase it irrespective of how cool the concept is, and you must 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 mates 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. Effectively, many of the warehouse cabinets are locked within the US.
Apparently up in Canada, not one of the warehouses locked their cabinets to Canadian or US listed ETFs. So any advisor in Canada 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 an enormous waiver and it will get a excessive danger score of their portfolio.
So although these are probably the best, most talked about ETFs in your complete, whole world, an entire 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 accredited, 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 money and a bunch of random stuff.
So this crypto one’s actually attention-grabbing ’trigger these ought to be, there’s going to be like, I don’t know, what number of are there? 18 now, all the 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 although 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 must make earlier than spending an entire bunch of cash to launch an ETF.
For retail platforms, after I say retail platforms, I imply advisors utilizing platforms to handle their fashions, an ETF is turning into an more and more higher possibility than a mutual fund as a result of one, you’re normally going to cost it decrease. Two, they’re altering all of the charges and value buildings of how ETFs and funds and commerce prices and issues like that. And so that you see an enormous transfer in the direction of arguably less complicated ETF fashions, and that’s why we didn’t go 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. Effectively, I seen your dictator’s remark earlier, and so I mentioned that feels like any individual we all know.
Liz:
And I simply suppose it’s so fascinating. Perth’s in all probability one among my favourite examples clearly, of constructing a profitable product. She knew there was an absence of rising market systematic merchandise that she knew there was none that excluded dictatorships and that there can be an entire host of advisors throughout the US who can be completely effective with their rising market slice of the pie to not embody Chinese language holdings or Russian holdings or Qatari holdings or no matter as a result of there’s sufficient rising markets firms on the market to get the publicity. And yeah, you’re not going to seem like the index. However who cares? Numerous of us are searching for systematic or energetic choices, not the entire index. We’re by no means going to persuade a bunch of passive of us to make use of this as a core possibility, even when we’re one of the best on the planet. You may’t change the patron conduct.
So Perth actually constructed a product to resolve 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 all people ought to simply go study every little thing about Perth as a result of if you wish to launch an ETF, actually simply go watch all Perth’s movies.
Meb:
Perth has been on the present. She’s an alum. She, listeners, runs the Freedom ETF, FRDM, which is closing in on a billion {dollars} in belongings. So go Perth. That’s rad.
Liz:
Perth is wonderful. She’s simply the proper instance of you might want to discover who’s going to purchase your nice concept earlier than going and determining find out how 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 for those who’re a pure portfolio supervisor otherwise you’re outdoors of the trade, do some work on who and why and who’s shopping for this product and the place are they going to place it, since you want a few of these primary solutions earlier than you make a bunch of choices which can be going to price you cash that you just’re going to want to go change.
The way in which to launch an ETF is to have an entire bunch of cash and be prepared to spend it, I feel is the easiest way. Launching a car, whether or not you’re BlackRock or a startup, is a little bit of a coin toss.
I used to be speaking to my buddy who works at a 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 form of the place that first 20 million is, after which it’s by no means going to return as quick as you need it to return, and that’s why you might want to have cash. However it actually is, you take a look at the record of … any record of ETFs and also you go to the underside ones. And it’s not identical to 30 little startup firms you’ve by no means heard of. It’s actually 90% large asset managers who’ve received automobiles from 2 to $10 million.
I really like telling of us, Cathie Wooden launched an ESG ETF in, I don’t know, 2000 after which closed it 18 months later ’trigger she couldn’t increase cash in ESG ETFs. So actually you could possibly be probably the most well-known human being on earth. You continue to want to search out the distribution connection between the product that you just’re wrapping and the necessity, after which you might want to not screw up the efficiency and all that form of stuff.
Meb:
In terms of, you’ve received numerous completely different takes on this area, however one of many questions we’ve been asking many of the friends is, for those who sit right down to espresso or lunch with a bunch of advisors which can be kind of in your world, what’s a perception you maintain that say for those who sat on the desk, 75% of the attendees would shake their head and say, “Liz, I disagree with you,” on funding associated, portfolio associated, ESG, DEI associated, something come to thoughts?
Liz:
Yeah, rather a lot. I may go two instructions right here, so …
Meb:
Title them each. Do each of them. We received time.
Liz:
So I don’t imagine you may 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, on daily basis and guessing the place macro goes to go and all this stuff. I don’t suppose it’s 75% of oldsters don’t imagine in market. And to be tremendous good it’s predicting the timing of the market too.
I feel there’s danger in timing. I feel all of the research recommend that the timing danger of energetic safety choice is among the greatest issues. That’s why we’re macro agnostic. We’re every little thing aside from responsibly rising agnostics regardless of the fixed barrage on Twitter or CNBC or wherever. This concept that individuals 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 rather a lot, is ESG information just isn’t standardized and might’t be standardized. And whenever you take a look at the businesses that we maintain within the portfolio, greater than half the portfolio has externally assured environmental information. And so not solely is it standardized, not solely are they reporting via the identical framework. They’re getting exterior auditors to evaluate 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 appeared like stuff was not standardized when it comes to ESG information, all the businesses we’re have moved in the direction of this. It’s known as the GRI template. There’s like a billion completely different frameworks in ESG, however for those who go into any giant cap sustainability report, aside from a Tesla or all the parents who refuse to report primary ESG stuff, which is a really small group now, the overwhelming majority, in all probability like 400 of the S&P 500 firms are reporting this framework. Are they reporting year-over-year? No. You may return to their earlier report and a few are laggards and a few are forward, however we’re in a position to have a look at three 12 months information for many of those metrics for many of our firms.
Meb:
As you look again in your profession, what’s been probably the most memorable funding? Good, dangerous, in between?
Liz:
In all probability beginning the agency, however I’m going to say this ETF principally as a result of it’s public. I imply, whenever you’re working in separate accounts, we may share stuff with what we’re doing, however now it’s like, hey, we’re on the market. Efficiency has been fairly good since we began, which is a coin toss to be tremendous clear. We identical to the product. We just like the branding. We like Wes. We just like the US market. It’s nice. There’s so many alternatives. I imply, Canada’s nice too, to be tremendous clear, however we love what number of of you there are, 10 instances 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 received to say, our ETF BEEZ is my favourite funding. We don’t love our firms one after the other. We consider them as a crew. We’re fielding a crew of gamers. I imply, we don’t play favorites. We simply need to decide a very good crew. So it’s, I’ll by no means reply a single safety as being a very good funding or my favourite ’trigger once more, that’s simply not how we strategy portfolio development.
Meb:
Proper on. The place do folks discover out extra data? The place do they go? 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. If you happen to simply google Honeytree Funding or Honeytree ETF, you’ll see a number 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 a wide range of completely different causes. ‘Trigger I really like the neighborhood and there’s a number 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 may go by B-E-E-Z on choose custody platforms within the US. If you happen to’re a retail investor, it’s in all probability even simpler to entry than an advisor, however after all, we’re primarily targeted on advisors on this. So for those who’re an advisor fascinated by 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 immediately.
Liz:
Thanks for having me.
Meb:
Podcast listeners we’ll submit present notes to immediately’s dialog at mebfaber.com/podcast. If you happen to love the present, for those who hate it, shoot us suggestions at [email protected]. We like to learn the opinions. Please evaluate us on iTunes and subscribe the present anyplace good podcasts are discovered. Thanks for listening, mates, and good investing.
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