Investing with good intent

Monday, 21st December 2015 14:52 - by David Harbage

The equity worth of the UK's largest retailer of sports goods, Sports Direct International, came under pressure when the company announced its half year report on 10 December that showed a marked slowdown in its pace of growth.

Beyond an assessment of the group's business model, scrutiny of its employment practices - which have frequently caught the media's attention, by reference to 'zero hour' contracts in particular - increased and prompted a public statement last Friday. Should existing or prospective investors be concerned? What might be viewed as running a lean business, via diligent cost containment, by an owner could be viewed as sharp or unfair practice by an employee.

Investors are mindful of the damage that can be caused when a company loses its good reputation, with the prospect of customers shunning the product, service or, in Sports Direct's case, its shops and website. There are many instances of companies or industries capturing headlines for the wrong reasons: ranging from inappropriate to criminal behaviour (investment banks), the use of child labour (clothing factories), disruption to nature (mining, oil explorers). Fraudulent behaviour on the part of senior executives can bring a company down or, perhaps more commonly, disingenuous management communication, opaque accounting and poor corporate governance can be the catalyst to a deterioration in sentiment which cannot easily be reversed.

Institutions with particular ethical beliefs will deliberately choose to avoid areas of controversy. For example, certain churches or other charities will not wish to invest in businesses whose prime activity surrounds armaments, alcohol, tobacco, abortion or pornography. Such instructions will be given to their fund managers, who either have the skill set to carry out the necessary research or will delegate it to agencies - such as London-based EIRIS. The area of investing with an ethical or social perspective is worthy of further investigation, covering both positive behaviours (seeking to own the good) as well as exclude the disapproved areas. Of course, 'one man's meat may be another's poison'. Many companies will, of course, feature both the 'good' and the 'bad' such as big retailers for whom selling a certain item (for example a cosmetic product which might have been tested on animals) might represent a very small part of their business.

Does investing with a conscience pay, in the sense of delivering better returns? There are many studies which suggest that it might and many big public bodies, notably pension funds in the US and here in the UK (including the Universities Superannuation Fund) commit a portion of their monies to screening environmental, social or other ethical issues. Private investors will no doubt carry out their own research, to a greater or lesser extent, based on preferences and invest accordingly.

As for Sports Direct, the reader can decide (the writer doesn't make recommendations) but after falling from 737p at the beginning of December to 567p at the time of writing, the stock is valued on an earnings multiple of 13.2 times forecast earnings in the current year to April 2016 and 11.5 times the following year but without any dividend support. As a general principle, invariably a company that maintains high (beyond legal) standards in its operating practice and clarity in its financial disclosure is likely to outperform one that falls short. 

Written by David Harbage for lse.co.uk on the 21st December 2015

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.