Did Sports Direct fall victim to socially responsible investing?

Jul 31st, 2016 | By | Category: Equities

The downfall of Sports Direct has shown that it is not just earnings growth and revenue but also executives’ decisions and the quality of work for employees that can affect a company’s share price and ultimately its future. As socially responsible investing becomes increasingly thematic these companies are inevitably falling under the spotlight.

Sports Direct's share price has dropped pushing it out of the FTSE 100. The UK's equity SRI ETF also excludes it

Sports Direct’s share price has dropped pushing it out of the FTSE 100. The UK’s equity SRI ETF also excludes it

In a recent government report from the business, innovation and skills select committee found that Sports Direct International’s factory in Derbyshire was like a “Victorian workhouse”, with around 3,000 employees on a “six-strikes-and-you’re-out” basis, being paid below the minimum wage and were too “frightened” to take time off. Most of the workers were employed through an agency or on a zero-hours contract.

It is unsurprising then that the only socially responsible UK equity exchange-traded fund on offer – the UBS MSCI United Kingdom IMI Socially Responsible UCITS ETF (UKSR) – excludes Sports Direct.  JD Sports and Halfords, the nearest equivalents, do feature in the fund with weightings of 0.08% and 0.1%, respectively. The ETF has returned 6.44% in the last three months, according to Bloomberg, and has a total expense ratio of 0.28%.

Added to this is Sports Direct’s share price, which  has fallen some 51% YTD. It was dropped from the FTSE 100 on 21 March this year after it fell 26% from 1st January and it subsequently shuffled down into the FTSE 250.

However, while FTSE 100 investors will have been pleased to have seen the back of it, by moving into the FTSE 250 the fall in share price will have been mitigated by the diversification across 250 stocks. The index as a whole is currently down -1% YTD.

Despite the diversification on offer in the FTSE 250, the index hasn’t had a good year so far. There are seven ETFs that track the FTSE 250 index, from iShares, Source, db X-trackers, Vanguard, HSBC, Amundi and Lyxor, and all have delivered negative returns over 12 months.

iShares’ ETF (MID) is by far the largest fund at £946m assets, but costs 0.40% in fees.

The clear winner, however, in terms of low fee and performance is the £174 million Vanguard FTSE 250 UCITS ETF (VMID), which only costs 0.10% and is down just -1% over 12 months in GBP terms, compared to a hit of as much as -1.8% from HSBC’s ETF over the same period.

But a good example of how a diversified index can work is the MSCI UK Index, which has 118 holdings. Sports Direct makes up 0.07%. There are three ETFs tracking this index by UBS, Amundi and iShares. These funds have performed much better than the FTSE 250 at positive returns of over 2.5% in the last year.

In the US, the company features in a handful of growth-focused UK equity funds, according to alletf.com. (Sports Direct was considered as a growth stock as it soared 254% from August 2011 to April 2014, but has fallen 71.6% since then.)

Whether Sports Direct’s share price will continue to fall is unclear, but the company’s billionaire chief executive, Mike Ashley has announced a pay-rise for staff –which would cost the company £10 million – and that he would carry out an internal review of working practices.

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