Home Financial Advisor Episode #514: Liz Simmie, Honeytree – A Quantamental Method to ESG – Meb Faber Analysis

Episode #514: Liz Simmie, Honeytree – A Quantamental Method to ESG – Meb Faber Analysis

Episode #514: Liz Simmie, Honeytree – A Quantamental Method to ESG – Meb Faber Analysis


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 at the moment’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising corporations which are stakeholder ruled, objective pushed, and make a web 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 concerning the means of launching an ETF with our pals at Alpha Architect and shares recommendation for anybody eager about launching one themselves.

Feedback or options? 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 – Lively administration and index hugging
  • 15:14 – Principal elements 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
  • Study extra about Liz: Honey Tree Make investments; X



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 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.


Med Faber is the co-founder and Chief Funding Officer at Cambria Funding Administration. Resulting from trade laws, he is not going to 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.


Hey, hey everyone. A enjoyable present once more at the moment. Our visitor is Liz Simmie, co-founder of Honeytree Funding Administration, which just lately launched an actively managed ESG-focused ETF ticker BEEZ. In at the moment’s episode, Liz dives into the technique of BEEZ, which focuses on responsibly rising corporations which are stakeholder-governed, purpose-driven and make a web optimistic impression on the world. And she or he shares some sizzling takes on the state of each ESG and energetic administration. As we wind down, Liz talks concerning the means of launching an ETF with our pals at Alpha Architect, and shares recommendation for anybody eager about launching one themselves.

Please get pleasure from this episode with Liz Simmie.

Liz, welcome to the present.


Thanks for having me.


The place do we discover you at the moment?


Toronto, the good white north up right here.


I heard an A in your diction earlier. Are you initially a Canadian?


Yep, born and raised in Toronto my complete life. I’ve by no means gone wherever else. Really I went to Montreal for varsity after which got here again and can by no means depart this nice metropolis and nation.


Superior. I find it irresistible up there. We’re going to speak about loads at the moment. 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. Daily individuals need to begin an ETF, they received an concept for an ETF. We’re going to speak about somebody who’s accomplished it very just lately, placing out their first fund in November with our loopy good friend, Wes Grey and crew. So we’ll undoubtedly get into a little bit little bit of that later. However I need to speak a little bit bit about you, your concepts, your course of. Give us a little bit background.


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, they usually 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 particular person to return in. I begrudgingly mentioned, “Positive, it appears like an attention-grabbing concept,” having actually no idea of the funding trade past a little bit little bit of publicity right here and there.

And I used to be fortunate. I joined a bootstrapped dividend progress fairness supervisor at about 10 million AUM and was there till about 1.5 billion AUM after which left to 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 standard path to be a portfolio supervisor at an even bigger store or a pension or no matter, it’d be a really totally different expertise that wouldn’t essentially set you as much as going to bootstrap your personal rising supervisor.

The agency’s referred to as Bristol Gate for people who need to google issues. We launched ETFs in 2018, and I had met my co-founder on the identical time, and we thought all these of us are attempting to launch ESG methods they usually’re all lacking what we expect the tip 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 12 months we launched the ETFs up right here. 2018, we got down to discovered Honeytree. We had been registered in 2019. It takes loads longer up right here to get accepted by the regulators. We began our observe data in 2019 for our international fairness technique. We did that in order that we didn’t must launch a car off the bat as a result of automobiles value some huge cash they usually take numerous effort to distribute. They take numerous consciousness and all these items.

Anyhow, we had all the time supposed 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 wanted 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 range initiatives up right here institutionally or from advisors, whereas everyone is aware of within the US, numerous states have various supervisor initiatives at their pensions and issues like that.

So we thought, if we’re going to do that car, let’s do it within the US, let’s do it as an ETF and let’s do it with Wes. And growth, November seventh, we launched our first ETF and the ticker is BEEZ, B-E-E-Z, ’trigger branding issues and it’s a US massive cap and it’s centered on accountable progress.

So it’s the identical funding thesis we’ve been engaged on our complete agency historical past, which is responsibly rising corporations, stakeholder-governed, purpose-driven corporations who deal with their stakeholders outperform in the long term.

What’s actually attention-grabbing is we didn’t like all of the prevailing ESG frameworks. We thought, and I may speak about for 10 years concerning the issues with present ESG and funding frameworks, however we threw out numerous the rankings 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 complete course of.

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


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 totally different individuals. So let’s hear a little bit bit about y’all’s course of. You may 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 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.


So quantum psychological means we’re not purely basic and we’re not purely quant. We use each processes. And for people on the market who will not be deeply steeped in fairness, basic fairness land, basic is taken into account deep dive qualitative analysis and quantitative analysis into an organization versus quant processes are usually extra quantitative, much less deep dive into an organization kind measures. And there’s many various managers who do each. We do each.

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

And what that qualification standards appears to be like 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 sort like the unique spiritual investor exclusion as a result of ESG has its roots in spiritual investing. So no weapons, no weapons, no playing. We don’t exclude pot, however no pot corporations make our display. We exclude fossil gas manufacturing.


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 similar to, “Liz, what are you speaking about?”


Properly, it makes it very attention-grabbing up right here as a result of now we have 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 corporations are actually good at DEI and reporting far more so than tech corporations and asset managers, however that’s a distinct story. However we exclude fossil gas.

There’s a few causes we exclude fossil gas. We by no means held an power firm at Bristol Gate as a result of power corporations are a little bit too cyclical to have excessive constant dividend progress. So from becoming in into qualifying and moving into the portfolio, they’re more likely to fail anyway. So it’s 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 corporations in our portfolio.


Properly additionally, I imply whenever you transfer from a universe of 1000’s all the way down to 50, you’re invariably going to kick out all kinds of issues and areas and sectors and industries, whether or not it’s from the broad standards, whether or not it’s from the secondary type of standards as nicely. In order that’s the entire level of energetic administration. You need a concentrated portfolio as a result of when you’re charging greater than zero, you need it to have a look at bizarre and totally different.


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 considered one of my massive points with energetic administration index hugging.


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 downside as a result of numerous the big asset managers, as soon as they get to scale, upon getting 10, 50, 100 billion, 500 billion, you don’t need to look that totally different as a result of there’s solely draw back danger. The cash is already captive. And we all know that cash as soon as it’s sitting someplace, doesn’t prefer to go wherever except it will get abused or does very poorly. If you happen to have 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.


They usually’re all chasing FANG shares and it’s like, what are you doing? However the index hugging factor, individuals like to select on ESG for index hugging. Lively is index hugging all the way in which. 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 complete sectors. Once we run our international, we exclude dictatorships in our international fairness technique. So we’re okay not having exposures to a bunch of issues, whether or not they be sectors or international locations or kind of corporations.

In our non-traditional ESG qualification standards, we have a look at board range past gender. So we embody racial range of board members, 33% or extra. So we gained’t have a look at an organization who has not discovered methods to put a pair token range hires on their board but, largely as a result of when you haven’t discovered how to try this from a governance perspective, you’re not very competent.


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


No, persons are a lot … Within the US, particularly the US boards are fairly various. Canada’s fairly unhealthy, 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 numerous of us. It’s humorous ’trigger actually it finally ends up kicking out cool tech renewable power boards that you simply … not typical stuff that we maintain in our portfolio like boring industrials and boring retailers and semiconductors as a result of they’ve all been engaged on these items for some time. So it doesn’t kick any of these out.

Funding grade credit standing may kick out extra corporations. If you happen to have a look at the final cohort of our qualification course of, there’s in all probability extra boards that fail or extra corporations that fail on funding grade credit standing or fraud points and issues like that, lawsuits, than on the board range. Why? ‘Trigger everyone’s slowly figuring it out. And to be tremendous clear, we’ve elevated that 33% from 30, so ultimately it’ll be 35 and now we have to cope with the universe as it’s. ‘Trigger our aim is to get from the universe all the way down to a manageable consideration set that we are able to cowl from a basic deep dive perspective in essentially the most environment friendly means attainable.

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

And one factor you’ll discover, when you have a look at our portfolio, there’s numerous manufacturing concerned corporations. And that’s the place the semis form of pop in. It’s ’trigger these corporations who’ve needed to handle labor, handle manufacturing services, handle worker security, you possibly can think about there could also be a little bit few steps forward of a West Coast tech firm by way of eager about their workers and reporting ESG stuff and employee security and issues. So it’s attention-grabbing the way it nets out.


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 dwell viewers and it was like 95% male. However the enterprise capital has to me, essentially 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 a little bit off-topic.

All proper, so we’re beginning with quite a lot of these elements. You bought numerous them. What do you suppose are the principle drivers of those that type of filter out essentially the most issues? Are there any of the 25 or so which are significantly extra distinguished?


Checked out it year-over-year they usually are usually, I imply clearly participation exclusions. You already know what I’d say? There’s an entire 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 ranking, it’s form of simply an equal. You’ll suppose it was greater in a few of the areas. Apart from dropping complete 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 everyone beneath funding grade credit standing, and based mostly on subsequent 12 months’s predicted dividend, we selected the highest 50 and did the elemental deep dive on these. And what we’re getting with the identical however a distinct course of ’trigger bear in mind, what we’re slicing out is just not, we are able to’t simply have the best dividend growers as a result of if we simply seemed on the highest dividend growers to get the ESG growers too, or the accountable growers too, we’d need to form of go a little bit bit additional than the highest 50 excessive dividend growers.

And that’s why we altered or optimized this course of that my dad constructed as a result of we needed the identical issue publicity. So these excessive constant dividend growers who’re well-managed and well-governed and centered on the long-term, we needed them, however with barely increased stage of ESG. And to be tremendous clear, when you have a look at the Bristol Gate ETF, it has the next ESG ranking than most ESG managers and methods on the market as a result of boring, excessive, constant sustainable dividend growers usually have excessive ESG rankings ’trigger they typically don’t do an entire bunch of silly stuff that will get you pushed down within the rating with controversies or behind on the occasions by way of board range, all these items that make up ESG rankings.

And also you’ll discover I didn’t point out we use ESG rankings as a result of we don’t use ESG rankings at any half in our course of. And ESG rankings, simply ’trigger I do know individuals hate ESG and rankings, ESG rankings are the identical as purchase/promote rankings, proper? So it’s simply exterior sourced analysis {that a} portfolio supervisor should buy or not.

And so we run that qualification as soon as yearly. That will get us to about 50-ish corporations. After which we do our 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 herald ESG knowledge and put it equally beside that monetary basic knowledge. And we purposely manage 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 think about basic to the corporate. And I’ll provide you with 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 individuals. Water use, if it can save you the associated fee that you simply spend on water, it’s a monetary factor. It’s undoubtedly an ESG factor, but it surely’s tied to the operations and the prices of an organization. It’s not a separate consideration. Waste is a good instance. It prices numerous cash to eliminate waste.

And you then get into the stuff that’s a little bit extra complicated to know the way it’s tied to the underside line, like gender and management year-over-year, racial range and management year-over-year. So at first look, oh, that’s only a really feel good measure. Properly, corporations that we’re in search of and that we personal perceive that the extra ladies you’ve in management roles, the larger your pool of candidates you need to recruit from. So it truly will increase the various optimistic advantages to the corporate of doing this fundamental stuff that some would say is silly DEI stuff. However the corporations that we’re holding are doing it for operational and enterprise causes, not as a result of it makes them look good on a questionnaire.

We have a look at science-based targets, that are net-zero associated. We have a look at parental depart. We have a look at what knowledge we are able to discover that’s comparatively systematizable throughout the consideration set of corporations.

So if you concentrate on it, we’re in all probability, of the 50 corporations 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 corporations like racial range and management year-over-year, three-year change in that, three-year change in water depth, three-year change in water use. As a result of you possibly can’t get it for the entire S&P 500 for instance as a result of an entire bunch of these corporations aren’t reporting that stage of information but. However as a result of we’re this type of extra superior ESG-esque pool of corporations, we’re getting all these knowledge factors that we’d not be capable to purchase from an index supplier who’s promoting ESG knowledge throughout their index.

In the end, we’re constructing a excessive energetic share, 25 positions, tremendous concentrated ETF of essentially the most boring, sustainably rising, responsibly rising corporations. And in a nutshell, these corporations that we’re holding perceive that the optimistic impacts that they make on all of their stakeholders, so their workers, their prospects, the area 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 prospects is core to their mission and core to their objective.

And these corporations are based on that and it doesn’t matter what their political views are. Properly-managed, long-term centered corporations which are 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.


Positive, let’s hear it.


So stakeholder governance. So anyone steeped in investing has been usually educated that shareholder primacy and shareholder governance is the function 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 workers and prospects and an entire bunch of different elements affect an organization’s capability to generate profits.

So stakeholder governance, which isn’t one thing I invented, I’d argue unique governance was stakeholder governance, however that’s a extra complicated matter. Stakeholder governance is only a firm that claims, “You already know what? Our workers and our prospects and all these items should be thought-about in our governance and our administration processes. Why? As a result of they impression they usually’re impacted by our choices. And we’ll do higher if we’re participating all of our stakeholders and serving to and supporting and never screwing over basically all of our stakeholders.”

So there’s tons of corporations on the market that imagine in a stakeholder governance framework. So as an alternative of being our solely aim is to return returns to shareholders. That turns into simply one of many roles of the board. And so we’re in search of these corporations the place there’s proof of their metrics, no matter these metrics is likely to be, that they’re contemplating their stakeholders. ‘Trigger you possibly can’t simply say you or your stakeholders are ruled and also you care about all these items similar to you possibly can’t say you care about range. Saying you care about range or the atmosphere is nice, however what you truly do in your corporation and the modifications that you simply make and the outputs you can see within the enterprise let you know whether or not one thing’s caring about any of these things.

So stakeholder governance is, I feel it’s one thing companies do extra naturally. I feel it’s within the funding trade I feel numerous 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 individuals making an attempt to suit all this local weather and variety into these fashions they usually don’t match as a result of the standard fashions assume shareholder primacy and shareholder governance. The one means ESG works in a company is when its core to their operations and core to their objective, not as a separate exercise on the aspect.

Our corporations will not be doing ESG stuff to really feel good or to look good. They’re doing it as a result of it’s a part of their objective and their core, and it’s how they had been all the time based and the way they’ve all the time operated. And purpose-driven is basically complicated as a result of it’s one thing I discovered loads about in governance coaching and in advertising, which is it’s actually tough to speak persistently to individuals.

And so these corporations that we’re in search of know that it’s actually laborious and know that sharing, having a shared objective, getting an entire 1000’s of workers to work collectively in the direction of the identical aim persistently and speaking that aim is a tough exercise that they as a board and a administration staff must work on. And that shared objective is just not solely having a transparent objective for the group, however serving to all of your workers, all your stakeholders, all your prospects perceive why you’re there and what you’re doing makes for a extra environment friendly ship if one may need to say. When you’ve disparate targets and disparate concepts in a company about the place one ought to go, it’s much less environment friendly, and people get confused and don’t perceive as clearly what they’re speculated to be doing.

That is all management and governance science that’s simply within the early phases of academia by way of quantifying and analyzing all these items. However I feel everyone can agree that if everyone’s working round with their head lower off and no person is aware of what they’re doing at an organization, it’s reducing productiveness. And the extra everyone could be on the identical web page by way of long-term targets, the extra effectivity you can obtain.


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

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


There’s like 100 matters 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 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 must always inform individuals and hearth them, in all probability we must always try this.” They usually all simply sat there and twiddled their thumbs.

And that is all extremely certified group of people who find themselves CEOs and on an entire bunch of boards they usually’re professionals at this, but one of many largest corporations on this planet sat there and twiddled their thumbs. After which ultimately they gave the fellows 50 million every and paid them off and triggered 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 hearth the CEO. And when the CEO’s not hiring and firing the dude sexually harassing of us, that’s a governance problem.

The primary time we constructed the portfolio, our international fairness technique, two of the boards had just lately fired their CEOs for sleeping with their secretaries and varied different issues. And that exhibits practical governance.

The reply to your query is what’s practical governance? Is it an entire bunch of unbiased board members? Properly, that’s what the ESG rankings would let you know is sweet governance. The issue is 10 unbiased extremely certified of us don’t create good governance. Good governance is created by a governance tradition, by a shared objective, by individuals truly working collectively on governance points.

So you possibly can have good governance with bizarre compensation and all this type of stuff on the identical time, completely. However I’d argue numerous that massive 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 robust perception that non-independent administrators will not be ESG. We don’t essentially share that perception. Whereas we’d favor … Clearly we search for audit committee independence for instance. That’s considered one of our necessities. We gained’t put money into an organization. However that ship’s sailed. All people is aware of 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, individuals hear loads about CEO compensation, and there definitely are numerous extremely paid CEOs. The issue is we don’t have any good measures proper now to really assess CEO pay. And what I imply is what we’re usually utilizing proper now’s common employee pay to CEO pay. So it actually is dependent 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 when you’ve received a person and a lady in senior management roles and the lady simply because she’s had decrease incomes all through her profession is getting paid much less, and that is stuff that corporations can repair.

What issues is Walmart’s base pay versus one other retailers base pay, not essentially the ratio of what their executives make versus what that pay is. As a result of an organization paying a low quantity to executives doesn’t naturally imply it’s doing higher for the world. And executives value numerous cash. So it’s a extremely attention-grabbing, messy matter, 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 girl in management’s comp, males in management’s comp even damaged down by racial range as a result of the way forward for ESG reporting is the Division of Labor range knowledge being put in monetary statements as required disclosure, and that features gender and race by stage, and that’s going to finish up together with turnover. It’s going to finish up together with pay and pay fairness, together with bonuses. It’s very attention-grabbing as a result of wage versus bonuses will get very messy by way of pay fairness. It’s going to be a shock to everyone and everyone’s going to hate it apart from the businesses which have been reporting this already.


How do you guys cope with shifting sands over time? Not on issues which are as apparent possibly as range on boards, however issues like, hey, we’re going to exclude, you talked about hashish, alcohol, like opioids. I don’t know, a decade in the past individuals had been like, “These are the very best factor ever.” And now they’re like, “Oh my god, these are accountable for lots of misuse and issues like …” I imply we wrote an investing paper some time again on the investing pyramid, however the instance we gave was the meals pyramid from my youth, which is such as you actually ought to simply be consuming pasta and frosted flakes and muffins. Your base of meals ought to be carbs and the very last thing you need is fat or protein, no matter it was, and at the moment it’s inverted.

In order information change and shifts, how do you guys cope with that? I do know you mentioned it’s an annual course of, however do you type of replace these standards and concepts as they change into extra accepted? How do you concentrate on a few of these matters?


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

However right here’s what occurs in ESG and impression, and I say ESG and impression as a result of impression rankings occur in public markets too. Typically individuals after they speak about impression investing, it’s simply personal markets, however for essentially the most half now we have impression rankings on these corporations. The issue with impression rankings is they typically are based mostly on the SDGs, so the sustainable growth targets that are developed for international locations by the UN.

So an organization to be impactful in keeping 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 handle an SDG. And so what occurs is all of the pharmaceutical corporations get 100% impression ranking as a result of they make a drug that’s serving to individuals. They don’t get any destructive ranking for worth fixing.

And so we’d 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 complete 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 corporations simply to be tremendous clear. There’s an entire bunch of analysis that company pursuits … That is considered one of my passionate areas. Tariq Fancy was the previous CIO of BlackRock, ESG at BlackRock, and he give up and he went on an enormous, massive talking tour of the world to say, “Corporations don’t make an impression. Solely governments and nonprofits could make an impression.”

However the Sackler household in a company via an entire bunch of promoting choices and a necessity to make more cash began and created a large destructive impression far past their product, proper? With all of the lies and the paying off medical doctors and continued points, they created a destructive impression that no authorities or nonprofit may cease.

And so the reply is corporations make big, big impacts, optimistic and destructive. What we’re making an attempt to purpose for on this portfolio is corporations making a web optimistic impression. So corporations who’re decreasing their destructive externalities as a result of they value cash, they damage individuals, they give the impression of being unhealthy from a PR perspective, an entire bunch of the reason why you would scale back your destructive impression on the world whereas rising your optimistic impression. 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 destructive and optimistic impacts.


So so far as portfolio building, you get down to those small group of names, 25 whatnot. Do you’ve 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 last portfolio?


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, but it surely’s sector agnostic. We used to personal McDonald’s and KFC in my dad’s technique. And other people would say, “Aren’t they the identical firm?” And whenever you have a look at the geographic income of them, they had been fully reverse. And identical factor, there’s numerous corporations that look very comparable and appear very comparable on this massive cap house that aren’t essentially.

So whenever you have 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 choice 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 % of the index. We have now not one of the pretend shares. You’ll be able to’t have excessive energetic share when you’re holding a bunch of these corporations. And everyone else, I imply everyone’s going to have these of their portfolio in any case. However it’s actually, we’re in search of the 25 most responsibly rising corporations out of that 50-ish set of corporations that now we have. It turns into our bench too. So the following set of ranked corporations in there are who will use when we have to hearth an organization, whether or not it’s for quarterly earnings or doing one thing silly on the ESG aspect or the non-ESG aspect.

However once more, numerous our stuff is annual knowledge. Whereas annual reporting and experiences come out midyear and issues like that, numerous our board range modifications after they change someone on a board, and now we have 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, when you’ve received 76% board range, after all you possibly can put an entire bunch of white dudes in your board, however when you received 31 and each investor that exhibits up is participating with you in your board range or one thing, you’re going to be cognizant of it.

And that’s what’s so humorous about ESG. The entire world tries responsible BlackRock and the funding trade on ESG. They’re the laggards on this. The pensions for essentially the most half do numerous the engagement round and many managers to be tremendous clear, ESG managers do numerous pushing on range and environmental stuff and governance and all these sorts of issues, but it surely’s the businesses themselves who understand that it’s a advertising profit, it’s a recruiting profit. It’s their massive 4 accountants saying that they will audit this knowledge and serving to them manage it. It’s the firms driving ESG. It’s not BlackRock driving ESG. It’s not … undoubtedly not Vanguard driving ESG stuff. Actually Vanguard is simply being referred to as into congress for pushing local weather change narrative, which is the funniest factor in your complete world for a passive store.

The oil sands corporations up right here in Canada are working, doing much more work than most asset managers on range and decreasing their emissions. Why? As a result of they’ve an entire bunch of buyers who care they usually may very well be foundations, pensions, people who care about progress on these items and workers who care about progress on these items.


Give us a behind-the-scenes have a look at what it’s like to start out an ETF. We get this query loads. Lots of people see the pot of gold on the finish of the rainbow. There’s clearly numerous work that goes into it and also you guys are comparatively new launch, so congratulations. However inform us a little bit bit concerning the expertise, the way it’s been, have you ever made it all the way down to Puerto Rico but? What’s the general agony and ecstasy of being not solely a founder however a cash supervisor and now a ETF issuer as nicely?


And a wholesaler and a marketer and all that form of stuff. I feel it’s fascinating that folks 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 isn’t going to alter.

I feel there’s all the time going to be public markets buyers and personal markets buyers 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 an entire attention-grabbing aspect of the enterprise, you need to know who’s going to purchase it regardless of how cool the concept is, and you need to know the way it’s going to get distributed.

The great factor with an ETF car is individuals should buy it, common individuals should buy it, and advisors should buy it in a bunch of locations, however there’s an entire bunch of restrictions and issues. They make issues extra sophisticated than simply launching an ETF. Just like the crypto ones, for instance, you in all probability are pals with all Eric Balchunas and all of the crypto-obsessed ETF of us, they usually’re going to regardless of the spot Bitcoin ETF goes to launch. Properly, many of the warehouse cabinets are locked within the US.

Curiously up in Canada, not one of the warehouses locked their cabinets to Canadian or US listed ETFs. So any advisor in Canada should buy any ETFs besides the crypto ones. The large banks up right here has put a particular ruling on crypto ETFs, they usually mainly mentioned to advisors, you can not purchase them. You’ll be able to solely purchase them in case your consumer indicators an enormous waiver and it will get a excessive danger ranking of their portfolio.

So though these are presumably the good, most talked about ETFs in your complete, complete world, an entire bunch of Merrill Lynch and UBS and Citi of us will not be going to have the ability to purchase them of their accounts anytime quickly as a result of they’re going to need to get accepted, they’ll in all probability create inside ones in order that they will, ’trigger there’s a pay to play facet there too, that folk want to know. You will get your ETF on Schwab or no matter for free-ish. Getting your ETF on US platforms requires time and cash 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 large asset managers, they usually’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 though it looks as if an ETF is a magic bullet by way of wrapper for these merchandise, there’s an entire bunch of different concerns.

In order that’s simply my rant to inform everyone that your product concept is nice. Who’s going to purchase your product and the way they entry it’s in all probability greater than 50% of the consideration that it is best to make earlier than spending an entire bunch of cash to launch an ETF.

For retail platforms, after I say retail platforms, I imply advisors utilizing platforms to handle their fashions, an ETF is turning into an more and more higher choice 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 together with Wes ’trigger we love Wes. We went with Wes as a result of we undoubtedly weren’t going to do a mutual fund, and he has a terrific white label ETF platform and has demonstrated. I imply, I met Perth first and that’s how we met Wes. Perth is my hero.


I do know. Properly, I seen your dictator’s remark earlier, and so I mentioned that appears like someone we all know.


And I simply suppose it’s so fascinating. Perth’s in all probability considered 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 an entire 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 corporations 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 in search of 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 very best on this planet. You’ll be able to’t change the buyer conduct.

So Perth actually constructed a product to unravel the tip person’s wants. And I imply, she received a tremendous timing with the Russian invasion, however she was already doing the work of discovering the market match and getting groups to construct her into the mannequin lengthy earlier than that occurred. And so everyone ought to simply go 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.


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.


Perth is superb. She’s simply the right instance of that you must discover who’s going to purchase your nice concept earlier than going and determining methods to make your nice concept. And possibly you had been an advisor, possibly you labored as a wholesaler, possibly you labored someplace within the distribution of the trade, however particularly when you’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 fundamental solutions earlier than you make a bunch of choices which are going to value you cash that you simply’re going to wish to go change.

The way in which to launch an ETF is to have an entire bunch of cash and be keen to spend it, I feel is one of the simplest ways. 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 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 that you must have cash. But it surely actually is, you have a look at the record of … any record of ETFs and also you go to the underside ones. And it’s not similar to 30 little startup corporations you’ve by no means heard of. It’s actually 90% big asset managers who’ve received automobiles from 2 to $10 million.

I like telling of us, Cathie Wooden launched an ESG ETF in, I don’t know, 2000 after which closed it 18 months later ’trigger she couldn’t elevate cash in ESG ETFs. So actually you can be essentially the most well-known human being on earth. You continue to want to search out the distribution connection between the product that you simply’re wrapping and the necessity, after which that you must not screw up the efficiency and all that form of stuff.


In the case of, you’ve received numerous totally different takes on this house, however one of many questions we’ve been asking many of the company is, when you sit all the way down to espresso or lunch with a bunch of advisors which are type of in your world, what’s a perception you maintain that say when 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?


Yeah, loads. I may go two instructions right here, so …


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


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

I feel there’s danger in timing. I feel all of the research counsel that the timing danger of energetic safety choice is likely one of the greatest issues. That’s why we’re macro agnostic. We’re the whole lot aside from responsibly rising agnostics regardless of the fixed barrage on Twitter or CNBC or wherever. This concept that folks simply sit on TV yelling about future numbers and what they’re going to foretell pushes cool, certified math expertise individuals away from the trade. In order that’s my normal take.

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

Whereas 5 years in the past for certain, it undoubtedly seemed like stuff was not standardized by way of ESG knowledge, all the businesses we’re have moved in the direction of this. It’s referred to as the GRI template. There’s like a billion totally different frameworks in ESG, however when you go into any massive cap sustainability report, apart from a Tesla or all the parents who refuse to report fundamental ESG stuff, which is a really small group now, the overwhelming majority, in all probability like 400 of the S&P 500 corporations are reporting this framework. Are they reporting year-over-year? No. You’ll be able to return to their earlier report and a few are laggards and a few are forward, however we’re in a position to have a look at three 12 months knowledge for many of those metrics for many of our corporations.


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


In all probability beginning the agency, however I’m going to say this ETF largely 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 similar to the product. We just like the branding. We like Wes. We just like the US market. It’s nice. There’s so many alternatives. I imply, Canada’s nice too, to be tremendous clear, however we love what number of of you there are, 10 occasions as many people. There’s random 4 billion RIAs in the course of states that no person’s ever heard of, which might be the twelfth largest RIA or asset wealth store in Canada.

And so I received to say, our ETF BEEZ is my favourite funding. We don’t love our corporations one after the other. We consider them as a staff. We’re fielding a staff of gamers. I imply, we don’t play favorites. We simply need to decide an excellent staff. So it’s, I’ll by no means reply a single safety as being an excellent funding or my favourite ’trigger once more, that’s simply not how we strategy portfolio building.


Proper on. The place do individuals discover out extra data? The place do they go? Comply with you, comply with the agency, the fund, all that.


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 numerous articles and podcasts and issues like that.

I, regardless of Twitter or no matter of us need to name it present shit present, I’m nonetheless on there. I’ll be on there till it goes down for quite a lot of totally different causes. ‘Trigger I like the group and there’s numerous nice of us there, and it’s how we met Wes and all these items. So Liz Simmie on Twitter, if you would like obnoxious, occasional ESG takes. I largely simply rant about how BlackRock is just not woke and folks shouldn’t be satisfied that any asset supervisor is woke. That’s us in a nutshell.

And naturally you possibly can go by B-E-E-Z on choose custody platforms within the US. If you happen to’re a retail investor, it’s in all probability even simpler to entry than an advisor, however after all, we’re primarily centered on advisors on this. So when you’re an advisor taken with ESG and is aware of nothing about it otherwise you’re a deep ESG practitioner, please be at liberty to succeed in out to us on our web site ’trigger that’s who we’re seeking to join with.


Liz, thanks a lot for becoming a member of us at the moment.


Thanks for having me.


Podcast listeners we’ll submit present notes to at the moment’s dialog at mebfaber.com/podcast. If you happen to love the present, when you hate it, shoot us suggestions at suggestions@themebfabershow.com. We like to learn the critiques. Please assessment us on iTunes and subscribe the present wherever good podcasts are discovered. Thanks for listening, pals, and good investing.



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