Gavin Launder is standing by fast-fashion retailer Boohoo in his L&G Growth Trust, even after accusations likened conditions in one of its suppliers to a “sweat shop”.
An undercover reporter for The Sunday Times claimed he was paid just £3.50 an hour in a Leicester factory run by Jaswal Fashions, which it was alleged supplied clothes to Boohoo. It was also claimed there were few hygiene or social distancing measures in place, even though the investigation took place during the local coronavirus lockdown.
Next, Asos and Amazon pledged to stop selling Boohoo’s clothes on their websites, while funds run by asset management groups such as Standard Life Aberdeen and JP Morgan pulled their investments in the retailer.
Yet even though Launder (pictured) described himself and LGIM as “very mindful of ESG concerns”, he is sticking with Boohoo for now, saying he was unconvinced by some aspects of the Sunday Times story.
“I was looking back at various meetings from even before we actually invested three years ago,” he began, “and we’ve had conversations about the supply chain at every meeting, not just in the UK but everywhere else, knowing that complex supply chains are vulnerable to various abuses at some point.
“We’ve been pushing Boohoo on it all the time. It would be well aware that this is its potential Achilles heel.
“So when the story broke a few weeks ago, I was a little sceptical it would be so obviously abusing labour and it turns out there were some inaccuracies in the article.”
Among the inaccuracies cited by Boohoo were that Jaswal Fashions has never been one of its suppliers, and this company ceased trading as a garment manufacturer a number of years ago.
In addition, it said that the clothes destined for Boohoo were not manufactured in the factory in question, but in Morocco, and were just repackaged there. However, it accepted there was evidence of non-compliance with its code of conduct and so terminated its relationship with the supplier and manufacturer.
While Launder is standing by Boohoo for the moment, he is monitoring the situation closely and said he will sell out if evidence emerges the company was aware of staff mistreatment in its supply chain.
“For the last year, we have been pushing it to get an independent audit of its supply chain so that someone could back up what it has been telling us,” he continued.
“It hired a head of sustainability, but he only arrived at September last year. He got his feet under the desk, then started looking for a third-party auditor called Verisio which was due to start in March. Then the lockdown happened so it wasn’t able to get access to factories.
“That began to improve in May just before the story broke. Now Verisio will throw more resources at it, and it put Bureau Veritas on to the ticket as well to try to accelerate the process.
“It has also got Alison Levitt QC to carry out an independent review of the supply chain practices.
“Although we’re very mindful of ESG concerns and push Boohoo hard on it, we’re also more evidence-based, so we want to see the facts rather than just a Sunday Times story before we take great action.”
For Launder, the controversy around Boohoo sums up why you can’t just take a tick-box approach to ESG issues. He said that LGIM has always been strong on governance, for example, and is not afraid to vote against the management structure in the companies it invests in.
In addition, he talks to senior managers at all of his portfolio holdings three or four times a year, including onsite visits, and if they have a sustainability team, which is becoming more common, he will meet with that as well.
Armed with this knowledge, he said allegations that Boohoo knew about issues in its supply chain didn’t quite stack up.
“We’ve been pushing it in our discussions since the story broke and it accepts labour costs in the UK are higher than they are overseas,” he added. “But it saves on not paying import duties, overseas agents fees and air freight costs, so that offsets the higher wages.
“It has a ‘test and repeat model’, meaning it will order short runs of clothing, and if it works it will order more, so it is worth paying a premium to be close to the market.
“Clearly it is being charged higher wages, so what the suppliers are doing with that premium is something it needs to sort out.
“It’s kind of a strange situation given it knew this was a potential issue. It can afford to pay higher wages, so why would it have cut corners?”
He added: “Over the last month, that was the main negative in the fund. It is developing this factory it will at least co-own if not own, and that will demonstrate that it can work properly in the UK.
Performance of stock in 2020
Source: FE Analytics
“Assuming we can get comfortable with the sourcing policies, this is a fantastic long-term growth story. This whole online penetration is still at a very early stage.”
L&G Growth Trust has 25 holdings, which are equally weighted at 4 per cent of the fund. Launder takes a ‘growth at a reasonable price approach’ (GARP) to investing, but with a degree of flexibility, especially when it comes to tech stocks.
He said that by modelling a company’s growth trajectory for a period of five years or longer, it is possible to outperform. This is because the analyst forecasts that fuel the market are made for the next two to three years and tend to assume that growth will fade in the third year.
The statistics back this up so far – L&G Growth Trust has made 57.72 per cent since Launder joined in September 2014, compared with 15.7 per cent from the IA UK All Companies sector and 14.24 per cent from the FTSE All Share.
Performance of fund vs sector and index under manager
Source: FE Analytics
It has beaten both these measures this year as well. Yet while some investors may be tempted to recycle money from top-performing growth names such as Launder’s fund into battered areas in the hope of benefiting from a value comeback, the manager believes this would be unwise.
“For deep-value stocks to be attractive on a longer-term basis, you need a return to higher GDP growth globally, higher interest rates and higher inflation, and I just don’t see any evidence of that,” he said.
“And then the other source of conflict is the growth companies are quite scarce. If you look at all the companies that have a top-line growth of 8 per cent or more, at the end of the 1990s, they were about a third of the market. Since then, they have shrunk to less than 10 per cent. And the amount of quality-growth companies is even smaller. So I think it justifies a premium.
“The gap between value and growth does get a bit excessive at times. But that’s why we have got to be selective with which stocks we are exposed to,” the manager finished.
The £218m L&G Growth Trust has an ongoing charges figure (OCF) of 0.78 per cent