Inside ETFs Keynote: JUST Capital

Summary

In January 2019, Paul Tudor Jones took the main stage at Inside ETFs in Hollywood, Florida — the world's largest ETF conference — to deliver a keynote titled "Looking for Returns? Ask the American Public." He opened with a confession: the only equity he has ever owned personally is an ETF, the JUST ETF. What followed was the case that "just" corporate behavior had become an investable factor, pitched not to philanthropists but to the asset-management industry's biggest distribution audience.

The speech builds the chain link by link: capitalism at a crossroads, with 150 million Americans unable to raise a thousand dollars for an emergency and 82 percent of new wealth going to the top one percent; the Friedman doctrine of 1970 as the turning point; profit margins at a record twelve percent and CEO pay up from 20-to-1 to 365-to-1; social norming — the Candid Camera elevator — as the mechanism of change; and then the JUST Capital machine: annual polling of roughly 100,000 Americans, seven drivers of corporate justness with worker treatment weighted at 25 percent, the Russell 1000 ranked from most to least just, the JUST index launched in late 2016, and the ETF launched in June 2018 in the largest ESG debut to that date. The kicker is the alpha claim — 340 basis points over the Russell 1000 since inception — and a Q&A in which he tells Goldman's moderator, on stage, exactly why Goldman slid from 65 to 166 in the rankings.

Full Text

Machine transcript (YouTube auto-captions), punctuation lightly normalized; wording as transcribed. Recognition errors possible — see sources.yaml for provenance.

without further Ado I would like to introduce legendary Trader investor and one of the founders of just Capital Paul Tudor Jones thank you Steve wow uh I had no idea ETF nation was so huge I shouldn't have I shouldn't be surprised though the only Equity that I have personally and that I've ever owned personally is actually an ETF and that's the just ETF and I'm proud to say that it really makes me happy to own that ETF and you'll understand why in a few minutes this is a story about capitalism how it's floundering in its current form and an ETF that might just save it uh but before I get to the ETF part I'd like to tell you a little bit about our history and our origin story capitalism I love capitalism I wouldn't be here today if I didn't have the opportunities that it affords I don't think any of us would be and for centuries if you think about it business has been the driver of American growth and prosperity in this country but today we're at a Crossroads wealth disparity income inequality and the lack of operative Mobility are causing huge social fissures when you think about it 150 million Americans according to Federal Reserve board Can't Raise a thousand dollars for a family emergency not a thousand dollars but we've got a couple of Americans who by themselves could solve the plight of those 150 I haven't seen this kind of um I think social divide since I was a kid in the late 60s and 70s the good news this this time around pots but it's it's a it's a scary time for someone who grew up and who prospered in the private sector according to a Harvard study 51 percent of Millennials today 19 to 29 either do not believe in capitalism oppose it or believe in socialism and that's really scary but it shouldn't come as a surprise right if you think about it 82 percent of all the wealth generated last year went to the top one percent the richest 26 people in the world have a net worth equal to the lowest 3.8 billion people so I don't think this is sustainable I don't think any of us think it's sustainable and younger Generations obviously notice all this so the historian Walter Shadow has written at this level of income inequality and wealth disparity usually ends in cataclysm whether it's War Revolution or pandemics and just so we're clear we had the highest level of income inequaline disparity in the history of this country uh and it's not it's not always been that way and it wasn't envisioned that way Adam Smith famously said if Justice is removed the great the immense fabric that is human society today must in a moment crumble in atoms so how do we get here how do we get to this level of income disparity is so different from certainly when I grew up let's go back to 1970 1970 that was the marginal tax rate had just come down from 90 percent to 70 percent wealth inequality was one-fifth one-fifth or 20 percent of what it is today and that's when my hero and I remember him so clearly because I was the economics major at the University of Virginia Milton Friedman famously said the social responsibility of a corporation is to increase its profits now those words were like catnip to the lions and tigers in the boardrooms across Corporate America in 1985 the bottom ninety percent of Americans owned 35 percent of the wealth last year the bottom 90 percent owned 23 percent of the wealth that 12 percent having gone from the poorest of the poor to the top one percent the most wealthy the Primacy of profits for investors and Executives has come in a great cost to all the other corporate stakeholders so when I think about stakeholders in a company you've got shareholders you have employees you have consumers you have communities and you have the planet or the environment those are the five stakeholders and kind of any corporate equation there is and governments nationally and globally act is is a referee the problem is that that kind of contract that they have among each other is what all basic trust is built on and it's certainly there have been plenty of studies showed that the greater the income disparity the more that Society distrusts other members of society so how do we change this trend that we've been on that creates all this I think creates all this social unrest and unhappiness in this country and the way that we do it might be as simple as turning the other direction in an elevator thank you the gentleman in the elevator now is a candid star these folks who are entering the man with a white shirt the lady with a trench coat and subsequently one other member of our will face the rear and you'll see how this man in the trench guard to maintain his individuality little by little he looks at his watch but he's really making an excuse for turning just a little bit more to the wall I would try it once again here's the candid subject here comes the Candid Camera staff three of them at and this man has apparently been in groups before that's that's the power of social norming that's how cultural change comes about is through peer pressure of our fellow humans it's the same thing that happens in society and for society after society and that's how we're going hopefully to change what I think has been this maniacal focus on prophets and we've got to remember prophets are a zero-sum game if we give them to shareholders and we then we're taking it away from either consumers employees communities or the planet and just so we can put things in perspective if we go back again to when I was a child corporate profit margins were around six and a half seven percent today they're an all-time record close to 12 percent that has come at the expense of the other stakeholders in society today and certainly is one of the key reasons why we have the income disparity that we have today so also remember at one but say four decades ago that kind of average CEO pay was 20 to 1 to the average land worker today it's 365. so and it's okay because we all believe in what Milton Friedman said that the purpose of a company is to maximize profits and we've hired the very best leaders in the world to do that who also along the way made themselves part of the privileged a few how do we go about doing that of course I think the way that we do that is that we use capitalism itself to affect the change and in 19 trillion dollars if we're going to have social change in this country the only way we're going to do it is through the private sector because again 19 trillion dollars is four times the size of the public sector it's 40 times the size of the philanthropic sector so if you're gonna have some type of lasting change we're going to have to do it where we spend all our time and we spend most of our waking time in the so and that's the reason that we founded just Capital five years ago was to kind of shift capitalism towards a more sustainable path I don't think the path we're on is sustainable at all and to my delight when we began this we found a very diverse group of activists and investors and business persons who all were ready to sign on board and enlightened CEOs who were against short-termism against focus on what's going to happen in the next 90 day earnings report report so how do we again just keep working with me because we're going to get to the ETF in a second so just Capital we're a independent not-for-profit research organization and we try to align the best business practices with what the American public tells us is their idea of corporate justness and we do that by polling every year and after this year will uphold over a hundred thousand Americans over the past four years of a perfectly demographically representative sample size according to race gender age income Etc and there are three founding beliefs in what we do the first is we believe the Democratic voice of the American people to get it right the second thing is is we believe in transparent independent data that drives accountability and positive action and then finally we think that if companies align themselves with what the American public believes the capitalism works for all again what we do is every year we start out by asking the American public a very blue sky question what is it that you think drives corporate Justice and just Behavior what do you think are the most important things and we go through and we compile all that data and then we collate and aggregate it and we've come up with seven key drivers of corporate Justice and those are and the most important one is Americans say that the most important principle of justice is how do you pay and treat your workers that's 25 percent of our of our index waiting the next one is customer treatment and privacy and that's That's essential to just business Behavior are there products that a company makes are they socially beneficial reasonable cost reasonable the next one is corporations should be environmentally conscious reduce waste and minimize pollution number five is companies need to support communities in the U.S and abroad number six is just companies should create jobs my guess is 10 years ago this wouldn't would not has been as big as it is today clearly Trump's focus on U.S job creation I think has impacted what Americans believe are and then finally in in most interesting is it's eight percent investor return ethical leadership are important priorities so here's the big disconnect right since 2008 92 percent of shareholder profits have gone excuse me 92 percent of corporate profits have gone to so that's what's happening in the c-suite today if you ask the American public they're not saying that only eight percent should go but they're saying that in terms of priorities shareholder interest and governance is eight percent so that's probably why we have much of the social Discord that we have today because the American public believe one thing and yet the way that our companies are being managed is a different way than what they believe so then what we do is we take those and we take the Russell 1000 and we apply those metrics to the one thousand largest companies United States and then we rank them from one to a thousand from the most just to the least just we rank those thousand and that shows us and shows the public how they align with what the public believes company corporate Justice should should be about uh and here's why that's so important in crucial what we found is is that companies that practice the same beliefs the American public have actually outperform on so many different metrics those that don't there's actually a situation where we can have a win-win for companies and for the American public where companies align themselves with those values and end up on virtually every front including return on equity and stock performance and outperforming those that don't so you know what we hear from CEOs and c-suite friends all the time is that investors are so focused on short-termism so focused on this quarter's profits that they can't manage their company a different way well I think again that's the purpose I think of this ETF and this dialogue is it's time to get in the elevator and look the other way so they look the other way I think we've got to send the c-suite a message that our companies can do something different than just focus on shareholder premises that course there are many already that are doing that Larry think it at BlackRock has been very vocal about it they've got six and a half trillion dollars of assets and he writes that with governments failing to prepare us for the future people are looking for companies to deliver not only financial performance but a greater level of social responsibility now he's far from alone over the past decade socially conscious investing I think has grown to did I read 12 trillion it's just a huge amount of and I think that's going to continue that way so we came out with our first set of rankings about three years ago and then in November of 2016 here's where it gets interesting we started an equity index comprised of the top 50 percent of the companies in the Russell 1000 and the 33 sectors that comprise the Russell 1000 so we took the top half of each of those sectors according to the the metrics the way that they were up there in the prior and we took that and we created the just index and that index is the basis for the just the julcd and every year we apply our rankings re-weight the index according to the top half of each one and that's the ETF that we see today now we launched in June of last year our first day launch was the largest ever in East ESG history and actually was one of the top 10 ETF launches of all time what separates the just index from other ESG indices is just doesn't have a single issue approach there's no negative screening what we do is we ask the American public said yeah the environment's really important but they're actually things more important than the environment yes climate change is important but you know what a living wage is actually even more important so I don't I would I do think the just ETF is part of the ESG universe but I think it's very differentiated from it I think it's something that's that's unique in that it's determined by the American people it's what they think companies should be doing so there's no negative screening we have every company in there and we rank every company um and yes the just ETF uh the jail UCD ETF probably has some companies on there that might not make it by some ESG standards but our job at just capital and hopefully as we drive Capital towards companies that are just is to engage these companies is try to change their behavior is try to move them to a place that is more synchronous with what the American public wants that'll give us a better Society in the long run and just so we understand the comprehensiveness of our rankings we have 76 unique metrics down from an initial cut of over 500 we connect collect a hundred and ten thousand unique data streams to do this and we're very rigorous and very thorough about our process and it's all on the web it's on our website we're completely transparent we have company portals and have ongoing engagement with hopefully every single company and ask them and we always ask for feedback because we're always trying to make sure that we're getting the exact thoughts the American people and translating that with data into exactly what they think and believe now because adjust index provides broad U.S security exposure has very low tracking accurate error it's it's a representative core Equity allocation for large caps for anyone the good news is is since our Inception the just indexes outperformed the Russell 1000 by 340 basis points and if you took the current constituents and went back 10 years and looked at how those current constituents did against their peers over the course of the past 10 years it actually has outperformed those peers by something close to 50 it sounds almost too good to be true right doing good making money sounds too good to be true and that's what we thought so we did a deep dive and we went through and we looked at our metrics and we found that 83 percent of the excess returns were so you can't just uh attributed to profitability investment value size growth momentum the other traditional factors no it was actually Alpha and of course as we all know Alpha's the Holy Grail it's like finding a hundred dollar bill on on the ground but if you think about it if you just think about what our top three drivers are it's uh employees if I go out and hire the very best people and I pay and I treat them well and then I ask them make me a great product at a reasonable cost and a reasonable price and it's socially and then you say Lynn let's treat the customers along the way like they're on a pesto pedestal with great privacy and great respect well that's pretty much the most basic formula for success in a business that you could possibly want and then if I just throw in one more which is I think our sixth factor which is job creation the United States so if I've got a company that's creating jobs it's probably doing something well so probably 70 percent of those factors I think intuitively we can all agree are the easiest way to build a great business and every year we're re-waiting again each one of those sectors to find the top half of those sectors that score the best on those metrics and I think that's one reason why over time it's very possible though don't know and wouldn't want to forecast very possible though that this ETF outpour outperforms conventional large cap equity weightings you know beyond that what is it and I think Steve had just touched on briefly the great thing about investing in this index is these companies pay their median worker on average seven percent more than the bottom half do they hire at a 27 greater rate than the bottom half too there are two times more likely to offer Flex hours they pay 60 percent less and a worker fines due to safety violations they recycle nine times more there are four more they're four times more likely to have a formal board schedule around ESG matters ESG matters and again the kicker is they earn on average three percent more Roe than the bottom have to so it's a really good story it's a story that makes me feel good when I own it because I actually think I'm doing something that's socially reinforcing what's so important for a society that right now is probably you know again we're trying to we're trying to rewrite the narrative right that's what this next election is going to be about too we're going to rewrite the social narrative in this country because where we are right now is not sustainable so rather than having our politicians do it rather than having them do it which I think is probably the least efficient way to have it done to have people who probably haven't run businesses may not have that much understanding their private sector to tell us how to do it I think we've got to organically change from within and we can do that through ETF by driving capital of those companies that do succeed we can also do it the great thing is is we take our our top 100 every year and we give those companies a seal of approval the just seal and we put them in the just 100 so we can do it by highlighting the consumers what products they should buy we can also do that by highlighting to kids whether working for a just company or not I've got four kids in their 20s and the Millennials today are totally switched on to whether companies they want to feel the significance of working for a company that's having some positive social change in the world um by listing the priors of the public we see a great opportunity again to do good feel good and hopefully make money while we're at it and our goal for just index and the conversation that I've had with you here today is that there's a business case for doing this where everyone wins that's what that's why this is such a a happy story so I invite you to join us on the to create a must a more just Marketplace that's of by and for the people thank you very much and I'll take some questions if there are any thank you Paul that was great it's so much of that story obviously resonates you know with us at Goldman in particular given the footprint and the size of the ESG business that we have but to your point as I said earlier it's it's more than that it's more than the SG it's it's investing with an impact uh so let's uh let's take a couple of questions from the audience uh I think a couple of these we uh we may have touched on uh the first one actually I think is is a great one it was actually one of the first questions that we asked all of you uh when we engaged how do you engage with the companies you rank what do you do with the information so we have a corporate portal on our website we reach out uh individually to every company we try to explain our story and listen I run a small company I can just imagine how many large corporations are overwhelmed by organizations like us but we try to reach out to everyone we show them our data that we collect on their company and we give them an opportunity to come back and tell us the data that you have is wrong we think the correct data is something different so we're in constant touch with them we try to be in constant touch and look we've only been existence five years the first year we're in existence or the first year we did the rankings we had about 30 or 40 companies uh in our corporate portal the second year we were 400. this year we're after our last rankings I think we're 550 and Counting um we're starting to have an impact I think this is like anything it's going to take time but I think over time hopefully our seal will be ubiquitous hopefully you'll see it on companies products and it will be something like the Good Housekeeping seal or JD Power or whatever it'll be a a a a a sign of affirmation that these companies are aligned with what Americans think are really important in the corporate world so that's a it's a good point and you touched on it earlier as well when you think about what the American public cares about most right jobs right Fair wages and jobs uh so one of the questions we got from the audience how do we incentivize companies to not only create jobs but create education programs to improve lower unskilled labor which is a core of the problem is it not uh there's no doubt about it well and I would say certainly with a lot of my peers just the whole idea you have to I kind of look at just capitalism we're in that those three phases of Truth you know the first truth you're widely ridiculed and mock the second truth you're rejected second phase and the third truth the third phase of truth is you're accepted I think we're kind of somewhere between one and two because I've got some friends of mine that are the greatest humanitarians I know and they just think this is insane you're melting you're you're you're messing with how we all got here Milton Friedman was right that's the way that we should be so I think of it differently I think there's there's nothing I think more important than intellectual Capital so if we can change the mindset of companies if we can take these brilliant entrepreneurs and have them not just deal with okay how to make a great product how to market sell Etc how do I make profits but how do I deal with some of the social issues oh my Lord uh so I think part of this is changing the way I think it's part of this is changing the very mission of what a company is supposed to do I don't think the mission should be to maximize profits I think the mission should be to the mission probably should be that's great if I'm writing an admission statement for companies for Corporate America it would probably be and in real time in front of it in real time I think it would be something along the lines to promote social harmony protect and sustain our environment for our children and their children while the same time maximizing economic utilization and resources to be split fairly among all the stakeholders with most importantly recognizing some combination of employees and shareholders since they're the ones taking doing the work and taking the risk it would be something along those lines right and it would be a longer definition than the way we're currently maximizing which is it's a free pass right it's a free pass just to go and do whatever you want without really any kind of uh social there being any social consequences and I could there's one right here in Florida if we think about red tide green algae bloom the toxic Waters that have literally threatened this very state where did it come from it came from a variety of for-profit interests in the center of this state who don't have a who don't have any regard for what's happening to millions of neighbors threatening the environment and now the water supply and now if you think about Florida it's based on is based on tourism and it's based on property tax from snowbirds that come down here and live who wants to come to a place where the water is not clean so again we've gotta we've got to change the way companies approach what their mission is and is insanity not the basic ingredient in every good idea out there right now I think we have time for a couple more this one's good and we get this all the time uh from the clients that we're out talking to about the ETF and obviously the story is obviously clearly resonated well with all of you and with the particularly in the financial professional Community but how much of the just etf's performance is driven by significant sector bets versus investors rewarding companies doing good and we've done a lot of work on this topic we've done we've got a great paper it's on our website that talks about the alpha of these metrics and again it is I I want to believe the paper and I want to believe that it's not sector bets at all I want to believe the alpha is from what I pretty much describe very simplistically and I kind of think of Peter Lynch in the old days which is how he'd go in and see a story and see what people liked hit by the product and that's how he did his stock picking I think here again if we think about a third of this index the metrics are around are you creating jobs are you paying your workers well and you're treating them well if you're doing those three things my God you're probably a hell of a growth industry and if every year we're taking the top half by definition I think in this ETF you're always going to be in the game here's a question you're not asking is Goldman in the index yeah who's going to avoid that okay I knew you were so Goldman's in the index and let me just say I'm going to be real honest Ivan Goldman Sachs is uh if I had to pick uh the best run firm on Wall Street I'm picking Goldman having said that last year you were ranked 65 and you dropped to 166 this year you're our partner we love your guts we're going to call it the way we see it going went from 65 to 166 because in the great financial crisis a variety of banks paid your bank also had the same fines but your payment day was later than theirs and so you're Dr we have a three year look back when it comes to whether it's economic funds Financial fines or environmental fines and so you're in that window and that cost you uh you slip from 65 to 166 out of the Thousand the great thing about you is it hadn't Goldman hadn't even blanked no problem we get it it's all about integrity and honesty and that's what it is so uh kudos to you yeah no I uh I would agree Kudos kudos to us it's uh but it also I mean it also shows the the robustness of the methodology you know as well and the fact that you know one of the things that you touched on earlier as well uh hopefully I didn't steal too much of your thunder uh is that again this is inclusive not exclusionary and I actually think that you know both that question relative to how we've dropped and also uh you know essentially where's the alpha coming from the fact that this really is idiosyncratic risk this is Alpha in the portfolio I think that goes to both of those so I think we're getting the hook in this in the fact that the screens went black so again join me in thanking Paul for taking time today uh and telling us about Josh thank you so much

Key Themes

This is stakeholder capitalism operationalized: the argument of the 2015 TED talk converted into an index, an ETF, and a corporate-engagement loop — with the claim that justice is alpha, not merely ethics. The polling-driven weights, the JUST 100 seal, and the consumer and employee signaling make it the public-market twin of venture philanthropy: metrics and incentives instead of grants. His insistence that "there's no negative screening" — every company ranked, capital driven toward the just rather than away from the unjust — is what distinguishes the JUST approach from the rest of the ESG universe, and the mission-statement passage ("I don't think the mission should be to maximize profits") is the keynote's philosophical core. The print sequel is the FT op-ed on mending capitalism.

Context & Significance

The keynote sits at the midpoint of PTJ's capitalism campaign: five years after founding JUST Capital, seven months after the JUST ETF's record launch, and a year before the FT op-ed. The audience choice is the significance. A philanthropy gala would have applauded the mission; Inside ETFs had to be sold the factor. His pitch — hold the just half of the Russell 1000 as core equity and beat the benchmark doing it — is the moment stakeholder metrics were packaged for mainstream portfolio plumbing, and the Goldman exchange in Q&A (a three-year lookback on fines, "it's all about integrity and honesty," answered to Goldman's own moderator) is the speech's most striking proof that the rankings have teeth. Within this archive it anchors the non-trading half of the legacy: the same mind that prices macro regimes here prices corporate behavior — and bets that the market can be made to care.