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 firms which can be stakeholder ruled, objective pushed, and make a web constructive influence on the world. Then she shares some scorching takes on the state of each ESG and energetic administration. As we wind down, Liz talks concerning the technique of launching an ETF with our mates at Alpha Architect and shares recommendation for anybody serious about launching one themselves.

Feedback or recommendations? Curious 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 progress and being ‘quantamental’
• 10:19 – Energetic administration and index hugging
• 15:14 – Essential 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 focus is on serving to you develop and protect your wealth. Be a 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 trade rules, he is not going to focus on any of Cambria’s funds on this podcast. All opinions expressed by podcast members are solely their very own opinions and don’t mirror the opinion of Cambria Funding Administration or its associates. For extra data, go to cambriainvestments.com.

Meb:

Hey, hey all people. A enjoyable present once more right 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 firms which can be stakeholder-governed, purpose-driven and make a web constructive influence on the world. And she or he shares some scorching takes on the state of each ESG and energetic administration. As we wind down, Liz talks concerning the technique of launching an ETF with our mates at Alpha Architect, and shares recommendation for anybody serious about launching one themselves.

Please get pleasure from this episode with Liz Simmie.

Liz, welcome to the present.

Liz:

Thanks for having me.

Meb:

The place do we discover you right 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 entire 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 go away this nice metropolis and nation.

Meb:

Superior. I adore it up there. We’re going to speak about lots right now. One of many subjects listeners, which you in all probability actually wish to stick round for is this idea of beginning ETFs. I get plenty of questions. On daily basis folks wish to begin an ETF, they acquired an concept for an ETF. We’re going to speak about somebody who’s performed it very not too long ago, placing out their first fund in November with our loopy buddy, Wes Grey and crew. So we’ll positively get into somewhat little bit of that later. However I wish 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 wished nothing to do with this nice trade of ours as a result of I wished to make the world a greater place and do cool stuff. So I ended up in market analysis, so 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 acquired divorced. So if 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 appears 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 a complete pile of privilege in there, but when I had gone the standard path to be a portfolio supervisor at a much bigger store or a pension or no matter, it’d be a really totally different expertise that wouldn’t essentially set you as much as going to bootstrap your individual rising supervisor.

The agency’s referred to as Bristol Gate for folk who wish to google issues. We launched ETFs in 2018, and I had met my co-founder on the similar time, and we thought all these of us try to launch ESG methods they usually’re all lacking what we predict the top consumer for these ESG merchandise need. And this, to be tremendous clear, is lengthy solely fairness universe, not alter hedge funds or something like that.

And so in 2018, we set out, which is similar yr we launched the ETFs up right here. 2018, we got down to discovered Honeytree. We have been registered in 2019. It takes lots longer up right here to get authorised by the regulators. We began our monitor information in 2019 for our international fairness technique. We did that in order that we didn’t must launch a car off the bat as a result of autos value some huge cash they usually take plenty of effort to distribute. They take plenty of consciousness and all these things.

In any case, we had all the time supposed to launch a retail car. We didn’t ever desire a personal fund. Lengthy-only boring methods positively don’t make sense in personal funds in Canada or the US and we thought we’d have a Canadian car first. So we went round. There’s not as many white label choices up right here, and those that they’ve are, we’ll name it not nearly 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 lady owned. We’re the fifth or sixth public markets asset supervisor owned by lady 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 centered 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 deal with their stakeholders outperform in the long term.

What’s actually attention-grabbing is we didn’t like several of the prevailing ESG frameworks. We thought, and I may discuss for 10 years concerning the issues with present ESG and funding frameworks, however we threw out plenty of 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 knowledge on equal footing with the monetary knowledge all through your entire course of.

What we’re identified on is ESG integration. So full ESG integration, which implies we deal with ESG knowledge as elementary firm knowledge in safety choice, not right here’s our monetary mannequin over right here on one aspect and right here’s our ESG mannequin and evaluations over right here on different aspect. We deal with the ESG knowledge that we use as elementary firm knowledge when choosing these firms for the portfolio.

Meb:

So let’s dig in on the method as a result of plenty of the phrases you used may imply plenty of various things. ESG means plenty of various things to plenty of totally different folks. So let’s hear somewhat bit about y’all’s course of. You might have a pleasant deck. If we are able to embody it within the present notes, listeners, we definitely will on the method, which I feel may be very useful. However why don’t you stroll us by way of 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 properly.

Liz:

So quantum psychological means we aren’t purely elementary and we aren’t purely quant. We use each processes. And for folk on the market who usually are 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 typically extra quantitative, much less deep dive into an organization sort measures. And there’s many various managers who do each. We do each.

And what that appears like in our course of is we begin with the entire index, no matter index that is perhaps. On this case for the ETF, it’s the US. And we run 25 qualification standards. And most of these are quantitative knowledge factors. We don’t do a fancy-schmancy predictive complicated quant like a few of people may suppose quants are. However we’ve got 25 qualification standards that’s making an attempt to get us right down to a consideration set about 50 firms.

And what that qualification standards seems like is there’s some purposeful stuff. Can we purchase it in custody in North America 5 billion minimal market cap? Some monetary. If we’ve got a dividend, it needs to be rising funding above funding grade credit standing. Then there’s plenty of conventional ESG exclusions. So conventional ESG exclusions are variety like the unique non secular investor exclusion as a result of ESG has its roots in non secular investing. So no weapons, no weapons, no playing. We don’t exclude pot, however no pot firms make our display. We exclude fossil gas manufacturing.

Meb:

That’s sacrilege up there in Toronto. Man, no surprise you’re launching this within the US. There’s all of the traditional Canadians, man, the mining and power, they’re 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 we’ve got all the key pensions are deeply dedicated to ESG and deeply dedicated to power funding. And I prefer to level out to people who the power firms are actually good at DEI and reporting rather more so than tech firms and asset managers, however that’s a special story. However we exclude fossil gas.

There’s a few causes we exclude fossil gas. We by no means held an power firm at Bristol Gate as a result of power firms are somewhat too cyclical to have excessive constant dividend progress. So from becoming in into qualifying and stepping into the portfolio, they’re more likely to fail anyway. So it’s form of only a bit simpler to display them out ’trigger you understand they’re not going to make it. We additionally don’t have any renewable power firms in our portfolio.

Meb:

Effectively additionally, I imply if you transfer from a universe of 1000’s right down to 50, you’re invariably going to kick out all types of issues and areas and sectors and industries, whether or not it’s from the broad standards, whether or not it’s from the secondary type of standards as properly. In order that’s the entire level of energetic administration. You desire a concentrated portfolio as a result of should you’re charging greater than zero, you need it to take a look at bizarre and totally different.

Liz:

Yeah. And it’s humorous ’trigger I’ve by no means understood why of us don’t need it to look bizarre and totally different. It’s certainly one of my huge points with energetic administration index hugging.

Meb:

It’s quite simple. They need it to look bizarre and totally different when it’s going up. They need it to look bizarre and totally different if it’s happening and also you’re not happening. However primarily it creates a bizarre precept agent drawback as a result of plenty of the massive asset managers, as soon as they get to scale, after you have 10, 50, 100 billion, 500 billion, you don’t wish to look that totally different as a result of there’s solely draw back threat. The cash is already captive. And we all know that cash as soon as it’s sitting someplace, doesn’t prefer to go wherever except it will get abused or does very poorly. If you happen to take a look at plenty of the old fashioned hedge funds too, their early years the place they did 150% or these large returns and now all of them do 7% with 10% volatility.

Liz:

And so they’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. Energetic is index hugging all the best way. I imply, I’m an enormous believer that plenty of energetic underperformance comes from not taking dangers and never having excessive energetic share and index hugging and making a bunch of silly selections as a part of that.

However you’re proper, our qualification course of kicks out entire sectors. Once we run our international, we exclude dictatorships in our international fairness technique. So we’re okay not having exposures to a bunch of issues, whether or not they be sectors or international locations or 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 discovered easy methods to put a pair token variety hires on their board but, largely as a result of should you haven’t discovered how to do this from a governance perspective, you’re not very competent.

Meb:

I imply, does that display alone kick out half of the universe it looks like?

Liz:

No, persons are a lot … Within the US, particularly the US boards are fairly numerous. Canada’s fairly unhealthy, however clearly we’ve acquired none of these within the ETF. However even once we began, if we had a 40% bar, it could 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 simply … not typical stuff that we maintain in our portfolio like boring industrials and boring retailers and semiconductors as a result of they’ve all been engaged on these things for some time. So it doesn’t kick any of these out.

Funding grade credit standing may kick out extra 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 we’ve got to take care of the universe as it’s. ‘Trigger our aim is to get from the universe right down to a manageable consideration set that we are able to cowl from a elementary deep dive perspective in probably the most environment friendly means doable.

And we run that consideration set as soon as yearly. So we’ve performed it 5 occasions now. So did 2018 until now and it evolves, nevertheless it doesn’t change that a lot. It completely spits out chubby IT, chubby industrials supplies. We by no means have any banks. We have now some monetary stuff. We typically don’t have actual property, and we’re okay with that.

And one factor you’ll discover, should you take a look at our portfolio, there’s plenty of 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 services, handle worker security, you possibly can think about there could also be somewhat few steps forward of a West Coast tech firm by way of serious about their staff and reporting ESG stuff and employee security and issues. So it’s attention-grabbing the way it nets out.

Meb:

Yeah, I’m saying this from a podcast whose listeners are in all probability 90% male. I imply, I bear in mind giving a speech in New York to Quantopian crew they usually did a reside 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 plenty of these components. You bought plenty 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 can be notably extra distinguished?

Liz:

Checked out it year-over-year they usually are typically, I imply clearly participation exclusions. You understand what I’d say? There’s a complete bunch they usually’re all fairly equal. And that want for dividend progress, the funding grade credit standing, the variety, the trade participation, the standard ESG exclusions, even glass door score, it’s form of simply an equal. You’d suppose it was larger in a few of the areas. Aside from dropping entire industries, it’s a really attention-grabbing form of balanced course of.

Once we did it at Bristol Gate, it was the S&P 500, removed all of the non-dividend payers, removed all people beneath funding grade credit standing, and based mostly on subsequent yr’s predicted dividend, we selected the highest 50 and did the basic deep dive on these. And what we’re getting with the identical however a special course of ’trigger bear in mind, what we’re slicing out is just not, we are able to’t simply have the very best dividend growers as a result of if we simply seemed on the highest dividend growers to get the ESG growers too, or the accountable growers too, we’d need to 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 wished the identical issue publicity. So these excessive constant dividend growers who’re well-managed and well-governed and centered on the long-term, we wished them, however with barely larger degree of ESG. And to be tremendous clear, should you take a look at the Bristol Gate ETF, it has a better ESG score than most ESG managers and methods on the market as a result of boring, excessive, constant sustainable dividend growers typically have excessive ESG scores ’trigger they often don’t do a complete bunch of silly stuff that will get you pushed down within the rating with controversies or behind on the occasions by way of board variety, all these items 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 elementary deep dive. And what we do is we take all of the financials we did at Bristol Gate, which skews debt capability, how conservatively they’re managing their debt, earnings progress, dividend progress, aggressive market share, and we usher in ESG knowledge and put it equally beside that monetary elementary knowledge. And we purposely arrange it beneath pillars in order that they’re equally weighted. So it’s not like, “Hey, the monetary half will get 66% weighting and the ESG half will get … ” We don’t divide it like that and nor will we simply to be tremendous complicated, will we consider measures as E, S and G. Each ESG enter that we use, we contemplate 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 larger turnover you will have, the extra it prices to rent new folks. Water use, if it can save you the fee that you simply spend on water, it’s a monetary factor. It’s positively an ESG factor, nevertheless it’s tied to the operations and the prices of an organization. It’s not a separate consideration. Waste is a good instance. It prices a number of cash to get rid of waste.

And then you definately 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 on the lookout for and that we personal perceive that the extra ladies you will have in management roles, the larger your pool of candidates it’s important to recruit from. So it truly will increase the various constructive advantages to the corporate of doing this fundamental stuff that some would say is silly DEI stuff. However the 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 knowledge we are able to discover that’s comparatively systematizable throughout the consideration set of firms.

So if you consider it, we’re in all probability, of the 50 firms we’re doing this deep dive on, we’re a few of the prime ESG reporters and scoring issues. So we truly can run comparatively customized knowledge units throughout this 50-ish group of firms like racial variety and management year-over-year, three-year change in that, three-year change in water depth, three-year change in water use. As a result of you possibly can’t get it for the entire S&P 500 for instance as a result of a complete bunch of these firms aren’t reporting that degree of information but. However as a result of we’re this type of extra superior ESG-esque pool of firms, we’re getting all these knowledge factors that we might not have the ability to purchase from an index supplier who’s promoting ESG knowledge throughout their index.

In the end, 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 constructive impacts that they make on all of their stakeholders, so their staff, their prospects, the area people, their shareholders, they perceive that the constructive impacts they make on these teams drives their backside line. So it’s not separate from their backside line. Doing good by their staff or their prospects is core to their mission and core to their objective.

And these firms are based on that and it doesn’t matter what their political views are. Effectively-managed, long-term centered firms which can be stakeholder-governed and purpose-driven will outperform in the long term. And that’s our funding thesis and I ought to in all probability outline a few of these phrases.

Meb:

Certain, let’s hear it.

Liz:

So stakeholder governance. So anyone steeped in investing has been typically educated that shareholder primacy and shareholder governance is the position of a company. So a company’s job is to control 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 potential to earn money.

So stakeholder governance, which isn’t one thing I invented, I’d argue unique governance was stakeholder governance, however that’s a extra complicated subject. Stakeholder governance is only a firm that claims, “You understand what? Our staff and our prospects and all these items must be thought of in our governance and our administration processes. Why? As a result of they influence they usually’re impacted by our selections. And we’ll do higher if we’re partaking all of our stakeholders and serving to and supporting and never screwing over primarily all of our stakeholders.”

So there’s tons of firms on the market that consider in a stakeholder governance framework. So as an alternative of being our solely aim is to return returns to shareholders. That turns into simply one of many roles of the board. And so we’re on the lookout for these firms the place there’s proof of their metrics, no matter these metrics is perhaps, that they’re contemplating their stakeholders. ‘Trigger you possibly can’t simply say you or your stakeholders are ruled and also you care about all these things identical to you possibly can’t say you care about variety. Saying you care about variety or the surroundings is nice, however what you truly do in your corporation and the modifications that you simply make and the outputs which you could see within the enterprise inform you whether or not one thing’s caring about any of these things.

So stakeholder governance is, I feel it’s one thing companies do extra naturally. I feel it’s within the funding trade I feel plenty of our conventional finance concept assumes that stakeholders don’t matter. And so what you see in ESG is you see conventional monetary fashions over right here and also you see folks making an attempt to suit all this local weather and variety into these fashions 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 objective, not as a separate exercise on the aspect.

Our firms usually are not doing ESG stuff to really feel good or to look good. They’re doing it as a result of it’s a part of their objective and their core, and it’s how they have been all the time based and the way they’ve all the time operated. And purpose-driven is de facto complicated as a result of it’s one thing I realized lots about in governance coaching and in advertising, which is it’s actually tough to speak constantly to folks.

And so these firms that we’re on the lookout for know that it’s actually laborious and know that sharing, having a shared objective, getting a complete 1000’s of staff to work collectively in direction of the identical aim constantly and speaking that aim is a tough exercise that they as a board and a administration group must work on. And that shared objective is just not solely having a transparent objective for the group, however serving to all of your staff, your entire stakeholders, your entire prospects perceive why you’re there and what you’re doing makes for a extra environment friendly ship if one may wish to say. When you will have disparate objectives 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 speculated to be doing.

That is all management and governance science that’s simply within the early levels of academia by way of quantifying and analyzing all these things. However I feel all people can agree that if all people’s working round with their head lower off and no one 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 by way of long-term objectives, the extra effectivity which you could obtain.

Meb:

As you consider governance, there’s areas that you could be or might not be concerned, however you possibly can converse to it. I’m pondering of issues like within the US, notably with a few of the tech firms this previous cycle who’ve been very type of me-focused, which means like stock-based compensation that’s simply outrageous, a ton of dilution to shareholders, possibly twin shared courses, all these kind voting issues which have gone on.

Do these play any position in any respect in your varied screens and the way do you consider this push-pull story as outdated as time with the stability of energy between boards and C-suite and compensation? How does that play into what y’all do?

Liz:

There’s like 100 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 lady on Google’s board mentioned, “In all probability we must always inform folks and fireplace them, in all probability we must always do this.” And so they 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 firms on this planet sat there and twiddled their thumbs. After which finally they gave the blokes 50 million every and paid them off and induced an enormous controversy with all their staff, all stuff that they might have been averted. It’s not their fault they acquired a bunch of sexually harassing dudes. The board’s job is to rent and fireplace the CEO. And when the CEO’s not hiring and firing the dude sexually harassing of us, that’s a governance difficulty.

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 varied different issues. And that reveals purposeful governance.

The reply to your query is what’s purposeful governance? Is it a complete bunch of unbiased board members? Effectively, that’s what the ESG scores would inform you is sweet governance. The issue is 10 unbiased extremely certified of us don’t create good governance. Good governance is created by a governance tradition, by a shared objective, by folks truly working collectively on governance points.

So you possibly can have good governance with bizarre compensation and all this type of stuff on the similar time, completely. However I’d argue plenty of that huge tech is poorly ruled. We don’t have any financial institution shares in our portfolio for a cause. And it’s not ’trigger they get excluded for producing fossil gas. However there’s a sturdy perception that non-independent administrators usually are not ESG. We don’t essentially share that perception. Whereas we’d favor … Clearly we search for audit committee independence for instance. That’s certainly one of our necessities. We gained’t spend money on an organization. However that ship’s sailed. All people is aware of easy methods to make their audit committee unbiased at this level and there’s no magic bullet on compensation.

And simply going again to CEO compensation, folks hear lots about CEO compensation, and there definitely are plenty of extremely paid CEOs. The issue is we don’t have any good measures proper now to really assess CEO pay. And what I imply is what we’re typically utilizing proper now could be common employee pay to CEO pay. So it actually depends upon what trade and which set of information that you simply’re utilizing. And what issues extra is, to me, who cares concerning the CEO pay. What issues extra is the baseline worker pay. What issues extra is pay fairness. So should you’ve acquired a person and a girl in senior management roles and the girl simply because she’s had decrease incomes all through her profession is getting paid much less, and that is stuff that firms can repair.

What issues is Walmart’s base pay versus one other retailers base pay, not essentially the ratio of what their executives make versus what that pay is. As a result of an organization paying a low quantity to executives doesn’t naturally imply it’s doing higher for the world. And executives value a number of cash. So it’s a very attention-grabbing, messy subject, however the way forward for ESG is us with the ability to get this knowledge on the proper granularity.

We have already got exec comp. So exec comp clearly was already all the time there. It’s just a bit extra standardized in ESG reporting now. What we’re quickly going to have is management comp divided by group, proper? So we’re going to have lady in management’s comp, males in management’s comp even damaged down by racial variety as a result of the way forward for ESG reporting is the Division of Labor variety knowledge being put in monetary statements as required disclosure, and that features gender and race by 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 by way of pay fairness. It’s going to be a shock to all people and all people’s going to hate it apart from the businesses which were reporting this already.

Meb:

How do you guys take care of 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 have 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 needs to 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 take care of 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 consider a few of these subjects?

Liz:

I prefer to level out nearly the whole lot we do kills folks and people within the ESG aspect of the stuff give particular sectors a cross, like prescription drugs for instance. We have now no pharma firms in our portfolio. We have now plenty of well being tech although, like medical tools and issues like that. One of many causes we’ve got no pharma firms is ’trigger all of them have worth fixing scandals. And so no matter their potential to kill of us with their product or no matter, which is clearly don’t even get me began on the opioids and the Sacklers as a result of that might be a complete different podcast, the value fixing, which is they only, I don’t know, all of them simply determined to do that previously 5 years, all of the executives simply working for costs or no matter after which the massive congress factor.

However right here’s what occurs in ESG and influence, and I say ESG and influence as a result of influence scores occur in public markets too. Generally folks after they discuss influence investing, it’s simply personal markets, however for probably the most half we’ve got influence scores on these firms. The issue with influence scores is they often are based mostly on the SDGs, so the sustainable improvement objectives that are developed for international locations by the UN.

So an organization to be impactful in line with this framework, and I’ve acquired a complete bunch of air quotes right here for people who find themselves not watching my try and framing the sarcasm, to be impactful an organization wants to deal with an SDG. And so what occurs is all of the pharmaceutical firms get 100% influence score as a result of they make a drug that’s serving to folks. They don’t get any damaging score for worth fixing.

And so we might not be solely involved concerning the opioid disaster. We’d be involved with the entire Sackler governance shit present catastrophe that was them creating the opioid disaster. For anyone who has not learn the lengthy, I feel it’s the Atlantic piece on your entire historical past of the advertising behind that, ’trigger once more, the meals pyramid that you simply 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 a complete bunch of analysis that company pursuits … That is certainly one of my passionate areas. Tariq Fancy was the previous CIO of BlackRock, ESG at BlackRock, and he give up and he went on an enormous, huge talking tour of the world to say, “Firms don’t make an influence. Solely governments and nonprofits could make an influence.”

However the Sackler household in a company by way of a complete bunch of selling selections and a necessity to earn more money began and created a large damaging influence far past their product, proper? With all of the lies and the paying off docs and continued points, they created a damaging influence that no authorities or nonprofit may cease.

And so the reply is firms make big, big impacts, constructive and damaging. What we’re making an attempt to goal for on this portfolio is firms making a web constructive influence. So firms who’re decreasing their damaging externalities as a result of they value cash, they damage folks, they appear unhealthy from a PR perspective, a complete bunch of explanation why you would scale back your damaging influence on the world whereas growing your constructive influence. So whether or not that’s higher respectable pay, safer work situations, higher high quality merchandise, extra progressive that remedy issues, discount in packaging so it prices much less, all these damaging and constructive impacts.

Meb:

So so far as portfolio development, you get down to those small group of names, 25 whatnot. Do you will have some type of sector composition display so it’s not all 25 in MedTech for instance, or how do you guys do any type of place sizing on this remaining portfolio?

Liz:

Yeah, so they’re equal weighted, so we take away the place measurement decision-making. My dad all the time mentioned it was so that you didn’t have a bunch of PMs preventing over place measurement. We run a correlation evaluation, nevertheless 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 if you take a look at the geographic income of them, they have 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 if you take a look at our portfolio, we acquired 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 positively don’t care about what the weights of the index are at any level in our resolution making.

And we all know we’re going to be 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 energetic share. We’re okay not holding the highest 30 one thing % of the index. We have now not one of the faux shares. You may’t have excessive energetic share should you’re holding a bunch of these firms. And all people else, I imply all people’s going to have these of their portfolio in any case. However it’s actually, we’re on the lookout for the 25 most responsibly rising firms out of that 50-ish set of firms that we’ve got. It turns into our bench too. So the following set of ranked firms in there are who will use when we have to fireplace an organization, whether or not it’s for quarterly earnings or doing one thing silly on the ESG aspect or the non-ESG aspect.

However once more, plenty of our stuff is annual knowledge. Whereas annual reporting and experiences come out midyear and issues like that, plenty of our board variety modifications after they change any individual on a board, and we’ve got fired an organization for going beneath our threshold, however you possibly can think about the businesses that we’re holding are very cognizant of not, should you’ve acquired 76% board variety, after all you possibly can put a complete bunch of white dudes in your board, however should you acquired 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 plenty of the engagement round and many managers to be tremendous clear, ESG managers do plenty of pushing on variety and environmental stuff and governance and all these sorts of issues, nevertheless it’s the businesses themselves who understand that it’s a advertising profit, it’s a recruiting profit. It’s their huge 4 accountants saying that they will audit this knowledge and serving to them arrange it. It’s the firms driving ESG. It’s not BlackRock driving ESG. It’s not … positively not Vanguard driving ESG stuff. Actually Vanguard is simply being referred to as into congress for pushing local weather change narrative, which is the funniest factor in your entire world for a passive store.

The oil sands firms up right here in Canada are working, doing much more work than most asset managers on variety and decreasing their emissions. Why? As a result of they’ve a complete bunch of traders who care they usually might 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 take a look at what it’s like to start out an ETF. We get this query lots. Lots of people see the pot of gold on the finish of the rainbow. There’s clearly plenty of work that goes into it and also you guys are comparatively new launch, so congratulations. However inform us somewhat bit concerning 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 properly?

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 totally different in 20 years, however I feel there’s some stuff that’s not going to vary.

I feel there’s all the time going to be public markets traders and personal markets traders and people who do each. I feel persons are all the time going to suppose geographically by way of allocation in sure issues. I feel there’s definitely a spot for thematics. While you launch a product, it doesn’t matter what it’s, this SMA mannequin, ETF fund index ’trigger that’s a complete attention-grabbing 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 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 a complete bunch of restrictions and issues. They make issues extra difficult than simply launching an ETF. Just like the crypto ones, for instance, you in all probability are mates with all Eric Balchunas and all of the crypto-obsessed ETF of us, they usually’re going to regardless of the spot Bitcoin ETF goes to launch. 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 large banks up right here has put a particular ruling on crypto ETFs, they usually mainly mentioned to advisors, you can’t purchase them. You may solely purchase them in case your consumer indicators an enormous waiver and it will get a excessive threat score of their portfolio.

So despite the fact that these are probably the best, most talked about ETFs in your entire, whole world, a complete bunch of Merrill Lynch and UBS and Citi of us usually are not going to have the ability to purchase them of their accounts anytime quickly as a result of they’re going to need to get authorised, they’ll in all probability create inside ones in order that they will, ’trigger there’s a pay to play side 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 attention-grabbing ’trigger these needs to be, there’s going to be like, I don’t know, what number of are there? 18 now, all the massive asset managers, they usually’re going to look at 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 despite the fact that it looks as if an ETF is a magic bullet by way of wrapper for these merchandise, there’s a complete 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 a complete bunch of cash to launch an ETF.

For retail platforms, once I say retail platforms, I imply advisors utilizing platforms to handle their fashions, an ETF is turning into an more and more higher choice than a mutual fund as a result of one, you’re often going to cost it decrease. Two, they’re altering all of the charges and value buildings of how ETFs and funds and commerce prices and issues like that. And so that you see an enormous transfer in direction of arguably less complicated ETF fashions, and that’s why we didn’t go along with Wes ’trigger we love Wes. We went with Wes as a result of we positively weren’t going to do a mutual fund, and he has an amazing 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 appears like any individual we all know.

Liz:

And I simply suppose it’s so fascinating. Perth’s in all probability certainly one of my favourite examples clearly, of constructing a profitable product. She knew there was an absence of rising market systematic merchandise that she knew there was none that excluded dictatorships and that there could be a complete host of advisors throughout the US who could be completely positive 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 appear to be the index. However who cares? A lot of of us are on the lookout for systematic or energetic choices, not the entire index. We’re by no means going to persuade a bunch of passive of us to make use of this as a core choice, even when we’re the most effective on this planet. You may’t change the patron habits.

So Perth actually constructed a product to unravel the top consumer’s wants. And I imply, she acquired an incredible 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 the whole lot about Perth as a result of if you wish to launch an ETF, actually simply go watch all Perth’s movies.

Meb:

Perth has been on the present. She’s an alum. She, listeners, runs the Freedom ETF, FRDM, which is closing in on a billion {dollars} in belongings. So go Perth. That’s rad.

Liz:

Perth is superb. She’s simply the right instance of you should discover who’s going to purchase your nice concept earlier than going and determining easy methods to make your nice concept. And possibly you have been an advisor, possibly you labored as a wholesaler, possibly you labored someplace within the distribution of the trade, however particularly should you’re a pure portfolio supervisor otherwise you’re exterior of the trade, do some work on who and why and who’s shopping for this product and the place are they going to place it, since you want a few of these fundamental solutions earlier than you make a bunch of selections which can be going to value you cash that you simply’re going to wish to go change.

The best way to launch an ETF is to have a complete bunch of cash and be keen to spend it, I feel is the easiest way. Launching a car, whether or not you might be BlackRock or a startup, is a little bit of a coin toss.

I used to be speaking to my buddy who works at a pretty big asset supervisor, and he was like, “Yeah, any new fund we’ve got, 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 come back as quick as you need it to come back, and that’s why you should have cash. Nevertheless it actually is, you take a look at the checklist of … any checklist of ETFs and also you go to the underside ones. And it’s not identical to 30 little startup firms you’ve by no means heard of. It’s actually 90% big asset managers who’ve acquired autos from 2 to $10 million.

I like telling of us, Cathie Wooden launched an ESG ETF in, I don’t know, 2000 after which closed it 18 months later ’trigger she couldn’t increase cash in ESG ETFs. So actually you 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 simply’re wrapping and the necessity, after which you should not screw up the efficiency and all that form of stuff.

Meb:

Relating to, you’ve acquired plenty of totally different takes on this area, however one of many questions we’ve been asking many of the visitors is, should you sit right down to espresso or lunch with a bunch of advisors which can be type of in your world, what’s a perception you maintain that say 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, lots. I may go two instructions right here, so …

Meb:

Title them each. Do each of them. We acquired time.

Liz:

So I don’t consider you possibly can predict the market. As any individual who was raised in a really evidence-based quantum psychological store the place we did no predicting of the market, it’s fascinating to see this entire ecosystem of parents yelling about shares all day, every single day and guessing the place macro goes to go and all these items. I don’t suppose it’s 75% of parents don’t consider in market. And to be tremendous good it’s predicting the timing of the market too.

I feel there’s threat in timing. I feel all of the research recommend that the timing threat of energetic safety choice is likely one of the largest issues. That’s why we’re macro agnostic. We’re the whole lot apart from responsibly rising agnostics regardless of the fixed barrage on Twitter or CNBC or wherever. This concept that 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 common take.

My ESG take, and I hear this lots, is ESG knowledge is just not standardized and might’t be standardized. And if you take a look at the businesses that we maintain within the portfolio, greater than half the portfolio has externally assured environmental knowledge. And so not solely is it standardized, not solely are they reporting by way of the identical framework. They’re getting exterior auditors to evaluation their emissions knowledge and a bunch of their environmental knowledge. And the Division of Labor is reviewing their variety knowledge.

Whereas 5 years in the past for certain, it positively seemed like stuff was not standardized by way of ESG knowledge, all the businesses we’re have moved in direction of this. It’s referred to as the GRI template. There’s like a billion totally different frameworks in ESG, however should you go into any giant cap sustainability report, apart from a Tesla or all the oldsters who refuse to report fundamental ESG stuff, which is a really small group now, the overwhelming majority, in all probability like 400 of the S&P 500 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 take a look at three yr knowledge for many of those metrics for many of our firms.

Meb:

As you look again in your profession, what’s been probably the most memorable funding? Good, unhealthy, in between?

Liz:

In all probability beginning the agency, however I’m going to say this ETF largely as a result of it’s public. I imply, if you’re working in separate accounts, we may share stuff with what we’re doing, however now it’s like, hey, we’re on the market. Efficiency has been fairly good since we began, which is a coin toss to be tremendous clear. We identical to the product. We just like the branding. We like Wes. We just like the US market. It’s nice. There’s so many alternatives. I imply, Canada’s nice too, to be tremendous clear, however we love what number of of you there are, 10 occasions as many people. There’s random 4 billion RIAs in the 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 acquired to say, our ETF BEEZ is my favourite funding. We don’t love our firms one after the other. We consider them as a group. We’re fielding a group of gamers. I imply, we don’t play favorites. We simply wish to choose a superb group. So it’s, I’ll by no means reply a single safety as being a superb funding or my favourite ’trigger once more, that’s simply not how we method 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 we’ve got an ETF web site, which is honeytreeinvestetfs, which is all that formal one. After which we’ve got 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 wish to name it present shit present, I’m nonetheless on there. I’ll be on there till it goes down for a wide range of totally different causes. ‘Trigger I like the neighborhood and there’s a number of nice of us there, and it’s how we met Wes and all these items. So Liz Simmie on Twitter, if you’d like obnoxious, occasional ESG takes. I largely simply rant about how BlackRock is just not woke and other people 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 in all probability even simpler to entry than an advisor, however after all, we’re primarily centered on advisors on this. So should you’re an advisor focused on ESG and is aware of nothing about it otherwise you’re a deep ESG practitioner, please be at liberty 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 right now.

Liz:

Thanks for having me.

Meb:

Podcast listeners we’ll publish 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 evaluations. Please evaluation us on iTunes and subscribe the present wherever good podcasts are discovered. Thanks for listening, mates, and good investing.