In respect of Ethical, Social and Governance (ESG) considerations, Forager’s process specifically addresses ESG risks and opportunities as a component of business valuation and value realisation. While these considerations can result in a lower or higher valuation, Forager’s investment products do not exclude any investments on the basis of ESG considerations alone.
Investors should be aware that the Funds can and do invest in a range of non-ESG sectors, including gambling and oil and gas. Forager’s valuation process requires higher rates of return from riskier investments. In addition to traditional financial and operational risks, we consider ESG risks an important and growing component of the overall risk assessment.
Forager has a detailed research and due diligence process comprising quantitative and qualitative analysis, which includes a review of ESG risks and opportunities. We incorporate the impacts of ESG risks and opportunities into our valuations when choosing new investments or managing the weightings of existing investments in our portfolios.
Norwegian conglomerate Bonheur owned a collection of wind farms, cruise ships and oil rigs. Its oil rig ownership made the stock uninvestable for ESG investors, despite the fact that the oil rigs were worthless and the wind farms worth hundreds of millions of dollars. After Bonheur gave its oil rigs away for nothing, the Forager International Shares Fund’s investment doubled in value over a fairly short period of time as ESG investors bought the shares aggressively.
Poor governance hinders a company’s reputation, growth and return potential. That’s why Forager takes an active ownership role in the management of its investments. Where we feel a board or management team has provided poor governance we can get active in protecting our, and other shareholders’, rights.
An exceptionally large Special Dividend was declared by Thorn Group that, taken in conjunction with their Dividend Reinvestment Plan (DRP), would have resulted in a major shareholder gaining further control of the company without paying an appropriate control premium and circumventing takeover law. We had concerns about the board being aligned with the major shareholder and made an application to the Takeovers Panel to halt the DRP. The application was successful and the DRP was overturned. The major shareholder subsequently bid for shares at a 47% premium to DRP price.
Part of Forager’s active ownership approach involves encouraging board and management actions that we believe are in the best interests of shareholders by maintaining open lines of communication, via informal meetings, formal communication and annual general meeting voting.
Australian company MSL Solutions was performing poorly after its 2017 listing on the ASX. Plagued by operational losses, running out of cash and with a board of directors not doing enough to fix its problems, Forager used its significant shareholding to remove the chairman from the board and replace him with a director who was experienced with improving underperforming businesses. With an entirely new management team, significant acquisitions and some astute acquisitions, MSL became profitable and was trading at significantly higher prices.
Forager anticipates that ESG considerations will play an increasingly important role in the business landscape and will grow to play a larger role in the investment decision-making processes of fund managers. Our approach allows us to adjust our portfolios for the risks and opportunities stemming from increased investor attention on ESG factors.
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