State-backed institutions go about investing in farmland in contrasting manners. Some, like China Investment Corporation and the Fundo Soberano de Angola, are not too afraid of being public about their appetite for land. Others, like the Saudi Agricultural and Livestock Investment Company, have a greater penchant for discretion. The vast majority, however, are simply not involved at all.
Raul Martinez-Oviedo and Francesca Medda, two University College London scholars, find this surprising. Greater volatility in bonds and equities has made mainstream asset classes a riskier bet; low energy prices are pressuring sovereign funds, many of whom derive their wealth from the stuff, to more actively manage their treasure chests. They have an idea of what may hold SWFs back: in the absence of track record, how are they to know how such assets can impact their portfolios over the long term?
The pair has thus worked hard on finding an answer to this question. They built a test portfolio inspired by the investment policies followed by Norway’s $1 trillion Government Pension Fund Global – the world’s largest sovereign fund – and studied how it would have performed over 2007-16 had it swapped some of its equity bucket against a 15 percent allocation to ag and timber.
Their findings are encouraging. Such a move, they assess, would have boosted the fund’s market value by 27 percent over the nine-year period. In addition, they reckon ag and timber can help generate higher returns, prop up resilience against financial downturns and provide “an excellent option for commodity-risk diversification.” That comes on top of the usual inflation-hedging attributes of natural assets, which other scholars have previously established.
Yet the demonstration has limits. For one, given its size, governance, attitude to illiquid assets and transparency policies, the GPFG is a unique beast. Martinez-Oviedo told us he expects ag and timber to have similar merits for other funds, but admitted he could not prove that. Further research is needed to demonstrate the asset class’s benefits, he noted. But using the pair’s method more widely will likely prove tricky: GPFG’s willingness to share data is uncommon among SWFs.
Another problem lies with the practical difficulties of buying farmland when you are a sovereign entity. It is an issue we’ve explored before, and it has become even more prevalent since we last covered it, as exemplified by Australia’s latest regulations on agricultural purchases (these make it hard for state-backed transactions to go unnoticed). Martinez-Oviedo admits that political opposition can be a dampener in some countries.
Finally, there are questions about SWFs’ potentially competing priorities when targeting agriculture. Are they primarily looking to maximize returns? Or, as critics contend, advance their homeland’s food security and other non-financial goals? On this Martinez-Oviedo is more clear-cut: sovereign funds can pursue strategic motives, but investment performance remains crucial: “If they choose something, they’ll choose something very attractive for them.”
Whether SWFs find Martinez-Oviedo’s paper sufficient to believe in ag and timber – whatever the hierarchy of their goals – is up to them. Yet “spreading the word,” as he says, can only help.
Write to the editor at matthieu.f@peimedia.com
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