Why Compromise? Blending Returns and Investor Values with Bill Davis, Founder and Portfolio Manager at Stance Capital
This transcript has been edited for clarity.
Dan Carreno: Thank you for tuning in to Rewilding Wall Street, where we provide insights and analysis into the ever-evolving world of sustainable investing. I'm Dan Carreno.
Brittany Damico: And I'm Brittany Damico. And today we have a special guest with us, Mr. Bill Davis, who is the founder and portfolio manager at Stance Capital. Thank you for joining us today, Bill. How are you doing?
Bill Davis, Stance Capital: I'm doing great. Thanks for having me.
Dan Carreno: Excellent. I appreciate you being here, Bill. At O-Six, we are really honored to be working with Stance Capital. I've been impressed by the work that the firm is doing, and today, we wanted just to take a minute and talk about Stance Capital, where the firm came from, and your outlook on the markets. Does that sound like a fair agenda to you, Bill?
Bill Davis, Stance Capital: Yeah, let's do it.
Dan Carreno: All right. So, to kick things off, just by way of background, if somebody's not familiar with Stance and not familiar with you, would you mind giving us a little bit of the story in terms of how you got into the asset management industry and, how you found yourself focusing on sustainable investing?
Bill Davis, Stance Capital: Sure. So, I sort of came into the finance industry through the back door. I was working in sustainability, more in the private capital market space. I conceived a renewable energy technology, which became venture and private equity backed. I ran the company for about seven years, up until 2010 or so. Ironically, we developed a successful technology that we could not commercialize because of fracking in the US. At the time that I created the company, natural gas was trading for $12 an MMBTU. And when we were ready to commercialize, it was down to $2.34, which I remember. It essentially knocked the economics out of the business. Along the way, I had been thinking about this thing called socially responsible investing, which has been around for quite some time. And it was my opinion back then, and this is around 2008/2009, that somewhere in there was a good idea. But I didn't think that the way it was being practiced was particularly scalable. Like this idea that you offer clients concessionary returns in exchange for values alignment just struck me as completely upside down. And in 2010, when it was clear that we couldn't commercialize the company I had been working on, I decided to focus on that. And it took a couple of years, partly because there wasn't a whole lot of data. Companies weren't reporting off balance sheet behaviors. And it took probably three or four years before we were able to create a product out of it and ultimately a company.
Dan Carreno: When you founded Stance Capital, was there anything that you put into place early on in the investment process or culturally, that you saw as a big differentiating factor versus the other large fund complexes out there?
Bill Davis, Stance Capital: This is what we said about to do. If you build portfolios a certain way, values alignment is essentially a free option. And furthermore, I think part of the point that we were trying to make is that we didn't want values alignment to have anything to do with the actual financial performance of the portfolio. Because once it does, then if you start looking at slightly different values, you're looking at very different performance potentially. And what we were really trying to do was come up with an approach to portfolio construction that had multiple jobs for multiple components of construction, but for values alignment, it had no alpha responsibility. Its only responsibility was to deliver a set of names that an investor was comfortable owning. So that was one point of differentiation. The other more obvious thing is that we are systematic and quantitative and unemotional in the decisions that we make. We've been using machine learning AI for over ten years in construction of portfolios. And every quarter, when we rebalance the portfolios, we are looking at 50 or 60 fundamental financial factors and attempting to identify those factors which are statistically most likely to generate outperformance over the upcoming quarter. And then combining that with the ESG data I mentioned earlier. So, to invest in a company, we have to hold two views simultaneously. One is that they are relative to their industry group peers doing a better job environmentally while supporting their own communities with their own governance. And secondly, we think they're poised to do well financially. What we were trying to do was both be unemotional and levelheaded about how we think about scoring companies.
Dan Carreno: If I'm hearing you correctly, you're not sourcing any data ESG data from an outsourced provider. Is this something that you had to build entirely from scratch? What does that that process look like to build your own dataset?
Bill Davis, Stance Capital: Think of it this way. We work with a firm up in Toronto called Corporate Knights, and the CEO and founder of the firm is a shareholder in Stance. It’s a very strategic relationship. And at the time we began working with them, they weren't supporting any investment managers anywhere. In fact, they weren't even working with financial services firms. They're mostly known for publishing an annual ranking of the hundred most sustainable companies in the world, which is announced at Davos every year, and they've been doing it for 25 years. Essentially, that approach became the foundation of what we do. It was based on objective criteria, which was all quantitative. We were able to see how they derived their scores. And in working with them, we have contributed to their body of knowledge around off balance sheet behavior. For example, after the first quarter of Covid, we got together as a portfolio team with our partners at Corporate Knights, and we asked what have we learned? And the thing that we learned is that paid sick leave is a risk to financial performance in certain sub-sectors of the economy. Take a meat packing plant, for example, that doesn't offer paid sick leave. You've got low paid workers working in close proximity to one another. If somebody gets sick, the first thing they're going do is go right back to work because they need the paycheck, right? Then everybody else in the plant's gets sick, the plant shuts down, and the company's misses its numbers. It occurred to us that we should go out and gather data and add that as a material risk factor that would apply only to certain sub-sectors. And so that's exactly what we did, and our partners at Corporate Knights basically did that work for us. So that's the level of partnership we have. I would also say that frequently we are looking outside them to augment with new data sets. After the 2020 presidential election, which we all recall as having many unfortunate moments, not the least of which was what happened on January 6th. We then asked how it is that corporations are using shareholder dollars to prop up politicians that refuse to certify the results of a free and fair election? How is that a good thing for democracy? How is that a stabilizing force in the investment world? And our view is it's not. So, we found that there's a nonprofit called Open Secrets. We started licensing data from Open Secrets, and we are now using that data to provide red flag score deductions when we score a company. I should caveat that and say that all large, public companies seem to give some money. But there's a difference between spreading $5,000 checks around and going out of your way to support a politician that refuses to certify the results of a free and fair election. And I would also point out that the correlation between the politicians that did that and the politicians that are anti women's reproductive rights, anti sensible gun legislation, it's the same group of people. In many ways, that one effort is identifying a lot of bad behavior that we can hopefully screen out.
Brittany Damico: I think it's a strong differentiator that you have this feedback loop with Corporate Knights. I think that's something unique and powerful and interesting about Stance. So deeply appreciate that you're doing that work. Moving forward, I'm curious what your market outlook is for 2024.
Bill Davis, Stance Capital: We're at a very interesting place, and I would describe it as a bit of a plateau. And if you think about the market in 2023, it was dominated by seven stocks, which are now referred to as the magnificent seven. They account for 28% of the S&P 500. So, one could argue that just by passively investing in the S&P 500, you're buying a whole lot of concentration risk. Point number two though is it generally isn't this way. Go back 20 years, the equal weight S&P 500 index, outperformed the market cap weight S&P by almost a hundred basis points a year, which is a very large amount compounded over time. As an active manager, we tend to be underweight mega cap. We happen to cap our weights at 3.5% every quarter when we rebalance. And so I think what you're going to see is a reversion to a more normalized market with greater breadth, greater participation by sectors such as healthcare and industrials, and financials. Although I think that there's some headwinds specifically as it relates to real estate exposure, especially among regional banks, but also financial services includes things like insurance firms and insurance brokerage firms, and lots of other areas that we think are very attractive. So, I think you're going to see more participation in the market by down cap members of the S&P 500 spread across many more sectors than just big tech and big comm services companies. I think the third thing that we're seeing, is that when people think about fossil fuels in a portfolio and then they think about a fossil free portfolio, they assume it’s a values alignment thing. Well, it is, and it isn't. The reality is that fossil fuels have dramatically underperformed every other sector of the economy for half of the last 10 years. If you look at 2012 to 2021, so 10-year period, fossil fuels underperformed in eight of those years, and in five of those years, they were actually dead last among all sectors of the economy. It’s a structural change that is taking place. The world is moving away from fossil fuels. It's moving more towards renewables. It's moving towards electrification. And yes, while there is still massive demand throughout the world for fossil fuels, it is changing. From a fiduciary standpoint, I'm not going to say it's irresponsible to be building fossil fuel exposure into a portfolio, but I would say there is a strong fiduciary argument for why investors are best served by not having exposure to traditional energy. I would also add that energy used to be about 30% of the US economy in 1980. Today, it's between 3.5% and 4.5% depending on what's going on in world wars and things like that.
Brittany Damico: Perfect. Well, thank you Bill. We appreciate your insights. We've got one final question for you before we wrap things up. If listeners would like to learn more about Stance Capital, where should they go?
Bill Davis, Stance Capital: They should go to our website www.stancecap.com. They'll find lots of information on the website and ways to contact myself to learn more.
Dan Carreno: Outstanding. Well, I appreciate the time and all the insights, Bill. We will start wrapping it up there, but we're going to take a few minutes to chat around the campfire. This is our usual segment where we go around the horn and briefly share something that we've come across recently in our lives that's been interesting, inspiring, or otherwise thought provoking. So, Brittany, why don't you start us off. When you finally get out there and light up that first campfire for the season, what are you going to be chatting about?
Brittany Damico: This dovetails on another around the campfire that I spoke about somewhat recently. And today I am going to chat about biophilic interior design or just biophilic design. This is the idea of bringing the outdoors in. There are interesting components behind it like getting rid of 90-degree angles and looking more at soft edges and the different elements of nature, creating water sounds, looking at different textures. It has an impact not only on your mood, your behavior, blood pressure. So, I've started refurnishing and revamping my space to have more of a reflection of biophilic design to it.
Dan Carreno: Cool. Bill, how about you?
Bill Davis, Stance Capital: So, I live in Massachusetts, and I suspect this is true in a lot of states, but there's all these great incentives to be smarter around energy here. I think it's called Homeworks. They'll come out and do an assessment, test various things, and look for ways in which cold air is seeping in and hot air is sneaking out. That process now has me kind of going a little bit overboard. I've put solar panels on my house. I had them also come in and blow insulation in parts my basement. I'm putting in five heat pumps. It's really sort of fascinating because a lot of it is incredibly inexpensive, pays for itself, and comes with 0% financing. I happened to ask the people from Homeworks what percentage of people in Massachusetts take advantage of it, and they said 6%. It should be a whole lot higher than that. Hopefully if some of your listeners are from Mass, they will pick up the phone and jump on the bandwagon here.
Dan Carreno: This is going to make me sound old. This past weekend I had the opportunity to try the Apple Vision Pro device. Full disclosure, I have never put on a VR headset before. So, this was a new experience to me. The technology was just mind melting. It really was like nothing I had ever seen before or experienced before. And, I’m of two minds on it. On one hand, it is just so impressive what Apple has accomplished with this technology. On the other hand, I have real concerns about what this type of thing is going to do to society. We're already sucked into our phones and our screens so much and with this type of technology, I could just see it drawing people into these virtual worlds and away from their friends and families in the natural world, more so than we already are. We'll wrap it up there. Thank you, Bill, for coming on and sharing your story and sharing your views with us. For anybody that is interested in learning more about Stance Capital. Bill mentioned his website, www.stancecap.com. If you're interested in learning more about O-Six Impact Partners, you can go to our website, which is www.osixpartners.com. Please feel free to contact us through the website if there's anything that we can do to help support your sustainable investing ambitions. Thank you for tuning in, and we will be back soon with another episode of Rewilding Wall Street.
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