When assessing fund managers and their investment processes and holdings, investors need to take into consideration a range of factors.
One of these, which is becoming more widely recognised among the investor community, is environment, social and governance, known as ESG.
There are a number of stocks that are currently much exposed in this area and which we sometimes see in the holdings of portfolio managers.
The UK stock that we seem to most discuss with managers is Carnival Cruises. Its recent history is a litany of one ESG shortcoming after another. While its Costa Concordia disaster is clearly the most high-profile incident, other examples include a child drowning in one of its ship’s swimming pools and occasional complaints of food poisoning on board.
Manager knowledge and, to be frank, interest in the issues, varies massively but we endeavour to highlight these considerations to them as the impact on reputation, profits and ultimately share price can be very negative. In spite of a strongly rising stockmarket in the past five years, its share price is still below the level of mid-2009.
A recent example that we have been debating with portfolio managers is Yum! Brands, which owns the likes of Pizza Hut, KFC and Taco Bell.
It ran into controversy earlier this year that revolved around allegations that a company supplying some of its restaurants in China had been using meat past its expiry date and this is not the first time supply-chain issues in China have come to light. As the largest restaurant chain in that country and one with massive plans for continued growth, this is a concern.
It could drive customers away and attract penalties from the authorities or, worse still, be harmful to consumers’ wellbeing. In spite of clear efforts here and a website dedicated to corporate social responsibility, in the past month the share price has fallen more than 15 per cent.
Another example is Vedanta Resources. It has been criticised in a number of ways but most notably with regards to mining deaths, human rights and pollution near its mines.
Specifically, the company’s operations in India were said to threaten the traditional lives of the people that live in the region, and protestations were raised at its annual general meeting as well as through Indian courts.
Ultimately, the building of a new bauxite mine was prevented, while the legal proceedings and upheaval to the firm’s plans have had massive cost implications: the firm’s share price still languishes more than 50 per cent below the levels it typically traded at for the several years preceding 2011.
We are firmly of the belief that investors need to be cognisant of such issues as the evidence suggests they can have a seriously deleterious effect on share price performance, and, if not addressed appropriately by management, investment returns.
On the behalf of their investors, portfolio managers should engage with companies on these topics and agitate for change where necessary. If none is forthcoming, then an exit should be planned prior to these shortcomings affecting performance.
Ian Aylward is head of multi-manager research at Aviva Investors
