The Benefits of Our "Values-Aligned" Strategy

Beau Barnett:
Hi everyone. My name is Beau Barnett and I'm the Sales Director for Hennessy Funds. I am excited to introduce a new investment option to the Hennessy Funds lineup, the Hennessy Stance ESG Large Cap ETF. For Hennessy Funds, this is our first foray into the ETF marketplace and we have a great partner in Stance Capital who are leaders in the ESG as well as ETF investing.

And today they're going to give us a brief overview of their process and of the Fund. The Fund is an actively managed ETF that focuses on companies that rank high in ESG metrics while also seeking capital appreciation all while being mindful of overall portfolio risk. So at this point, I want to introduce Bill Davis and Kyle Balkissoon, who are both managing partners and portfolio managers of the Fund and the founders of Stance Capital.

As always, we appreciate your time and thanks for joining us.

Bill Davis:
Hi, and thanks for having me on today. My name is Bill Davis, and together with Kyle Balkissoon, we are Co-Portfolio Managers on the Hennessy Stance ESG Large Cap ETF. Before getting into portfolio construction, it's important to note a few things. 
The first is that climate risk is actually portfolio risk. And so as ESG managers, we spend a lot of time thinking about how to mitigate that risk. As businesses and economies decarbonize their models into the future, there are going to be winners and losers across every sector of the economy. And so put simply, our job is to try and identify those winners and put them in front of, or I should say, in our client portfolios.

The second point I want to make is Kyle and I have a track record going back to 2014, so that's now over nine years and we are extremely proud of the track record that we have built and the leadership in the ESG space.

We're also excited about our partnership with Hennessy Funds. We actually launched an ETF version nearly two years ago. And then recently we partnered with Hennessy to help us scale the ETF. And before talking more about that, I think I'd like Kyle to turn it over to you to ask you to walk us through portfolio construction. 

Kyle Balkissoon:
Thank you, Bill. Hi everyone, I'm Kyle Balkissoon, co-portfolio manager at Stance Capital, along with Bill Davis. Here I am to explain the investment process on the STNC ETF. Our thesis kind of comprises two key views. One is a values alignment view, meaning companies that we think have values more aligned with that of our clients. And the second one is an outperformance view, meaning we expect those companies to outperform. 

To formulate our values alignment view, we look at metrics that companies disclose themselves, also known as ESG, key performance indicators, that is KPIs, and we rank them against their industry group peers. So we compare oil companies, oil companies, banks to banks and industrials to industrials. We are comparing tech firms against utilities, nor are we comparing industries that don't align. What we do when we look at these metrics is we try to find companies who are not only leading their peers but doing quite strongly.

We also take a secondhand view from what we call interest groups who actually compile and compute bad lists of companies who are doing what I'd say is things that might not align with our clients’ values from an issue specific standpoint, such as financing, misleading media, having massive regulatory fines and sanctions, illegal activity and convictions, palm oil and deforestation and many more issues.

So we take these scores subtracting on the bad lists, and we simply retain the top half in every sector. We do exclude weapons, tobacco, and fossil fuels. So that is none of those will go in, but we use that process I just mentioned to formulate our values. 
The next process we look at to formulate an outperformance view is we build a quantitative models using both long-term factor analysis, short-term factor analysis, and what we call state based.

That is, we look at what we think are drivers of outperformance in those three frameworks of the world, and we combine them to formulate a forecast of which names we think will perform. We simply intersect the names that we think will outperform with those that are values aligned and optimize that portfolio to have the least amount of tail risk and the most amount of diversification.

Those three parts of the process—having an investment view, having a values alignment and running companies that have those two properties with the least amount of risk—is how we invest.

Bill Davis:
There are several reasons why we actually created this vehicle. The first was really to democratize access to ESG product in a separate account that has higher minimums. It's often difficult for investors to clear those minimums. The advantage of the ETF is any investor, regardless of their amount of investing, can basically access the ETF. 

The second reason, and I think this is equally important is that ETFs offer significant tax advantages to investors over separate accounts in other vehicles. And so we wanted to lower taxable investors to provide a product that allowed them to essentially grow assets in the account without being subjected to a lot of capital gains along the way.