17-June-2020: Steve Johnson: How I Loathe the Gambling Industry and Buy Gambling Stocks
That's an interesting blog post by Steve Johnson, founder and CIO of Forager Funds on how "ethical investing" is a waste of time in his opinion, and how he divorces his personal views and preferences from his roles as a fund manager and investment analyst.
Can't say I agree with him on that. My own view is more along the lines of some of the comments below his post, such as - if presented with a range of great opportunties, why not give preference to those that pose no ethical dilemmas?
Steve's view is that if a casino is underpriced, somebody is going to make money by investing in it, so why leave those profits for someone else?
I would say that shifts in investment sentiment can take time, but it is not wise to ignore them. I would further point out that sometimes it just takes one very large player to refuse to invest in a sector, to cause that sector to decline in a meaningful way.
Forager is not that very large player, but they would be wise not to be caught on the wrong side of a meaningful sentiment shift away from a sector they are heavily invested in.
The large player I'm thinking of is actually BlackRock, who are the largest asset manager in the world; As of March 31, 2020, the firm managed approximately $6.47 trillion in assets on behalf of investors worldwide. That's trillion - with a "t". That's $6,470 billion (with a "b"). Larry Fink, has now removed companies who derive 25% or more of their revenue from thermal coal from his portfolios, and from discretionary portfolios that they manage for clients. While such companies still remain in some of BlackRock's ETF's - because those ETFs must shadow the underlying indices that they track - BlackRock are also introducing a range of new "sustainable" or "ethical" ETFs to provide investors with options. Larry has signalled that this new focus extends to all fossil fuel companies and that oil companies are included in that. Larry believes that the world is now moving to "sustainable investing" and he wants to be at the forefront of that shift, which is having the effect of accelerating the shift - due to BlackRock being so huge and such a dominant force in the market. Other fund managers are already following BlackRock's lead. There were other much smaller fund managers doing this before of course, but they didn't really get the press that BlackRock is generating. Why is this important now? BlackRock is so big that when they introduce a policy change and decide to stay out of a sector, that moves share prices. It's a HUGE development.
Now, it's a long bow to draw to link thermal coal and oil companies to gambling companies, however my point is that ESG (Environmental, Social, and Governance) concerns can no longer be sensibly divorced from share price impacts. There WILL be share price impacts as more and more industry participants decide that there are too many downside risks associated with companies where there are legitimate ESG concerns - and they decide to avoid such companies purely due to the perceived financial downside of investing in them. In other words, you don't have to hate a sector to want to avoid it. You could also avoid a sector simply because you think it has too many headwinds. While I understand Steve's point, I also note that the biggest losses in the Forager Australian Shares Fund (ASX: FOR) over recent years have been in companies that I personally have avoided due to ESG concerns - such as TGA (Thorn Group, lower tier lenders who target people who can't generally afford what they're buying and tend to have a high level of defaults) and FIG (Freedom Insurance, high-pressure telemarketing funeral insurance sales, with products that were very expensive and very poor options for everybody except the people selling them). I see it as inevitable that companies with business models that are so rubbish - in terms of quality, fairness to customers, and value for customers - are going to fail. If they don't fail all by themselves, they will fail as a result of government intervention or legislation changes. Therefore, with so many superior options out there, why bother with them at all?
The clue is probably in the name - Forager. They tend to forage amongst the rubbish, the stocks that everybody else is discarding - or has discarded - as rubbish. Occasionally, they will uncover a hidden gem, such as Macmahon (MAH). But sometimes what they have ended up buying, particularly in recent years, has just been rubbish.
I hold FOR shares, and I think Steve Johnson is an exceptional fund manager who is different and very honest. However, I don't agree with him on everything.