Asset owners often discuss their desire to grow their returns. Some are taking the concept literally as well as figuratively, and investing into agriculture.
Their interest is part of a broader desire to diversify investment portfolios away from traditional assets, which are either volatile (in the case of equities) or low yielding (in many bond markets). The asset owners’ desire for diversification initially focused on private equity and real estate, but it has spread further.
Unlisted agriculture and farmland assets have been a particular beneficiary. It’s easy to see why: a combination of a growing global population and the expansion of Asia’s middle classes looks set to keep bolstering demand for quality crops and livestock.
Those fundamentals have steadily encouraged more asset owners to seek investment opportunities.
“We are seeing an increased level of interest from institutional investors globally in investing in agriculture now compared to 10 years ago,” said Dania Zinurova, head of manager research for Australia, Willis Towers Watson.
She said that there were about 50 unlisted farmland or agriculture funds in 2017, possessing approximately $13 billion of dry powder. That was a sizeable step-up of both number of funds and allocated assets compared to five years beforehand.
“These numbers may not sound impressive if compared to some other asset classes, however keep in mind that agriculture is still an evolving asset class for institutional investors. The opportunity set itself is attractive in terms of its size and potentially value depending on the markets and strategies,” said Zinurova.
New Zealand Superannuation Fund is one of the pioneers venturing into agricultural investments. The sovereign wealth fund is looking to get its hands on permanent crops and gain beef exposure in Australia, portfolio manager Neil Woods told AsianInvestor.
“We are being reasonably patient and picky about what we are getting exposure to so I think the next two or three years we will be getting closer to full allocation,” he added.
With NZ$40 billion ($27.4 billion) in assets under management, Woods said the investor currently holds a variety of agricultural assets, such as a beef operation, vineyard and dairy farm in New Zealand and Australia.
“Our target is 3% [for agricultural assets] but we are about half of there at the moment,” said Woods.
The New Zealand sovereign wealth fund has been in the sector since 2010.
Yet while there are definite strengths to the asset class, there are rising uncertainties too – principally the role climate change will play on these assets. Budding investors into agricultural land need to weigh these rising risks as they seek to expand the spectrum of their investments.
One key goal lies at the heart of the interest of most asset owner interest in agricultural assets: diversification.
Investors are typically seeking to expand the variety of assets that can offer a return, particularly away from public market investments. This desire helps explain the interest in agricultural assets.
“Investors typically invest in agricultural assets because they are looking for diversification. Some investors are attracted to the good macro story supporting agriculture, which includes rising food demand coupled with shrinking arable land,” said an industry adviser at Mercer, the New York-headquartered consultant.
The observation chimes with Woods’s view on the sector. “What [NZ Super] is looking for in these [agricultural] investments is really that they are a diversifier for our fund.”
Agricultural assets appeal in this context because they tend to perform independently of the assets that form the bulk of asset owners’ portfolio.
“Neither farmland prices nor farm gate returns are strongly correlated with the [performance of the] stock market,” said Alistair Nicholson, director of Valic, an avocado grower in New Zealand, and a representative of several family offices globally through the Singapore-based Vulpes Investment Management.
One appealing factor of agricultural assets is their relatively stable returns. According to the National Council of Real Estate Investment Fiduciaries (NCREIF), an index performance data provider for commercial properties in the US, agricultural asset returns have been stable and positive for many years.
The rolling four-quarter return of total farmland stood at 6.74% at the end of 2018, although the index’s annual total return for 2018 was 4.47%. That marks a slow but steady decline from about 5% in 2005. Meanwhile, Preqin estimated that agriculture and farmland assets by primary strategy with vintage years from 2004 to 2018 had a 4.4% of median net internal rate of return.
That said, total farmland returns never slipped into negative territory over the 20 years until 2018. Such consistent performance varies greatly with the S&P 500 index, which reported a 4.83% annual loss for 2018. Such a lack of correlation is appealing, even if outright investment returns of farmland is not that high.
And, as opposed to other asset classes such as equities, agricultural investments have a long lifespan by nature. They can easily last more than 10 years.
“We don’t really have a number in our mind, 15 to 20 years is the range…it’s certainly more than 10,” said Woods. “It’s really indefinite until we decide that the asset class isn’t performing to our expectation and then we might shift focus.”
The lengthy investment horizon can be appealing for investors with long term liabilities too, as it can help them manage their asset and liability gap.
“From a portfolio point of view, agricultural assets make a great duration match as it’s hard to get assets that have a similar productive life as agricultural assets,” Nicholson told AsianInvestor.
This story has been adapted from a feature in the Spring 2019 edition of AsianInvestor magazine.