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SG Securities believes the recent agricultural boom is far from over. The firm is launching the Lyxor Agriculture Fund in Hong Kong with the aim of raising $500 million. The fundÆs initial offer period will last until April 17. SG plans to launch in Singapore as well.
The Lyxor Agriculture Fund is 80% invested in the Dow Jones-AIG Agriculture Total Return Sub-Index, with another 20% exposed to the SGI Global Agriculture Index. Derek Ng, vice president for equity derivatives and structured products at SG Securities, explains the fund is intended to expand investor choice in agriculture-related mutual funds that have exposure to both commodities and stock momentums.
As at the end of February, the Dow Jones-Agriculture Total Return Sub-Index had a breakdown of 25.7% in soybeans, 18.5% in corn, 15.5% wheat, 11.2% sugar, 10.5% coffee, 10.5% soybean oil and 8.1% cotton. Sector allocation of stocks under the SGI Global Agriculture Index include 57% in fertilizers and chemicals, 23% in agricultural commodities, 11% in equipments, 7% in livestock and the remaining 2% in diversified holdings.
The fundÆs index holdings will be balanced every quarter.
Ng says growth in agricultural-related inflation is a long term but inevitable trend. Between the 1970s and 1990s, agricultural prices grew by 1.2% annually. Since the turn of the century, prices have risen steadily by 2% every year.
A current low inventory for wheat, for example, at 13.8% reflects the underlying shortage for commodities as the worldÆs arable land continues to be stripped away by urbanisation and industrialisation in emerging economies û traditionally agricultural societies and exporters to the rest of the world.
Although the populations of developed economies are aging, the global popular is still growing, so the shortage of food is likely to be a long-term trend. Ng says competition for food from ethanol production and cattle raising is only going to aggravate the problem, but in turn, can provide investors with a good hedge against inflation in agricultural investments.
He rejects the idea that an asset bubble is forming in the agricultural sector. So long as arable farmland continues to decrease, prices in the sector will continue to rise, he reasons. In particular, he points out the fund will give investors a chance to participate in sectors, such as agricultural engineering, equipment and seed producers, which stand to benefit from long-term farming efficiency improvements.
The fund is currently only open to Hong Kong retail investors. Minimum subscription starts at $3,000. The management fee is 1% per annum, while initial sales charges can go up to 5%.
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