The Ohio Police and Fire Pension Plan has been advised to gradually add row-crop exposure to its nascent real assets program, according to a report prepared by its real assets consultants, the Townsend Group.
Last March, the $15.7 billion pension approved a recommendation Townsend made in January 2017 that up to 40 percent of its 5 percent real assets allocation be devoted to agriculture. The report also recommended that OP&F add infrastructure investments.
A year ago, OP&F committed $50 million to Agriculture Capital’s ACM Fund II, which surpassed an initial target of $400 million to close on $548 million in October. In November, Agriculture Capital vice-president Atish Babu told Agri Investor that efforts to raise the vehicle – focused on permanent crops including citrus, blueberries and tree nuts – deliberately aimed to increase the participation of public sector pensions like OP&F.
At the time, OP&F communications manager David Graham told Agri Investor that in addition to a desire for diversification and better risk-adjusted returns, the allocations to ag and infrastructure were designed to overcome challenges it faced in meeting a 5 percent allocation to timber the pension had adopted in 2014.
“We could not find enough suitable investments in timber to realize that five percent,” he explained.
In the report delivered to OP&F in April, seen by Agri Investor, Townsend reported that the pension’s real assets portfolio had a 2.8 percent net return in the fourth quarter of 2017. The document showed that OP&F’s overall real assets portfolio, currently valued at $340 million, constitutes 2.2 percent of the total portfolio, with plans calling to increase its share to 8 percent over the long term.
The report noted that the real assets portfolio is currently heavily weighted towards timber, which is to make up between 20 and 50 percent of the OP&F’s real asset investments, according to the investment policy targets. With infrastructure planned to make up the largest portion of the portfolio, at between 40 and 70 percent, the report noted that agriculture is expected to be the smallest portion of OP&F’s real assets investments.
According to the report, Townsend’s plans call for a “well-diversified” real assets program with an emphasis on developed markets. Less than 40 percent would be devoted to investments in the US, and less than 85 percent concentrated in developed markets.
The permanent crop-focused ACM II commitment – which the report said is in the early stages of its development, and so impacted by start-up costs and a j-curve effect that resulted in negative initial returns – is currently OP&F’s only agriculture investment. In its report, Townsend recommended a “pause” in permanent-crop investments in the US.
Townsend also recommended that OP&F add row-crop exposure to its real assets portfolio “gradually over the longer term.”
Townsend declined to comment. OP&F declined to state whether the pause in permanent-crop investments would leave the pension open to such investments outside the US, or to define more precisely its time frame for adding row-crop exposure.