First State Super ‘not yet in a position’ to scale up agri portfolio

First State Super is still not in a position to deploy large sums of capital into agriculture, its associate portfolio manager for real assets told Agri Investor, although it has tweaked its strategy to explore investments with more exposure to operational risk.

First State Super, which recently completed a merger with VicSuper and will rebrand to Aware Super this month, now has approximately A$125 billion ($91 billion; €77 billion) in assets under management. The addition of VicSuper’s ag and water holdings has taken its portfolio in the asset class to more than A$1.5 billion.

Despite this, associate portfolio manager for infrastructure and real assets Brent Snow said investment at a much larger scale was required, but this remains out of the fund’s reach for now.

“We came to the view that if you’re going to get the sort of portfolio characteristics that you want from the asset class – things like capital preservation, inflation protection, uncorrelated returns – you really need to be very, very well diversified,” he said.

“In order to do that you need to deploy a lot of capital into the space and our view is that we’re not yet in a position to do that. It may be something we’ll consider down the track, but right now, because agriculture is a subset of our infrastructure and real assets portfolio, we don’t really have the capacity to go out and build a massively diversified agri portfolio.

“Even within that A$1.5 billion we only really have exposure to a handful of commodities – we’ve got a water portfolio, we’ve got our poultry infrastructure business, we have some exposure to tomatoes, plums, grains and some timber now through the VicSuper holdings. But there’s a whole lot of commodities that are still missing in that,” he said.

When asked whether First State Super would reach the point soon where it could deploy capital into the asset class at greater scale, Snow replied: “Not for the foreseeable future.”

Snow said First State Super’s strategy will remain largely the same for now, focusing on sale-and-leaseback transactions, although a recent internal review gave the team more scope to consider taking on more operating risk in its ag portfolio.

“We now have a bit of flexibility to consider an operating asset if we think it’s a particularly good opportunity. We’ll consider it if there is a particularly unique angle for us. We’ve got a large portfolio of water, so if we can use that to unlock good investment opportunities then we want to consider that.

“[But] the strategy right now is to focus on sale-and-leasebacks – never say never, but for the next couple of years, we’ll continue to look at it that way.”

As revealed by Agri Investor last week, the superfund internalized the management of its almond orchards late last year, which are fully leased to ASX-listed Select Harvests. The mandate was previously managed by Argyle Capital Partners.

“It’s a pretty passive investment for us in the sense that it’s a sale-and-leaseback to a high-quality operator – we just collect a quarterly lease payment, effectively. There was a period of active development on the orchard, as the original acquisition was about 50 percent brownfield orchards and 50 percent greenfield conversion. That conversion is now complete so there’s not much further capex deployment required. It just makes sense for us to manage that internally and we’ve got the capabilities to do that.”

On whether further investments could be managed internally in future, as First State Super has done for much of its infrastructure and real estate portfolios, Snow said assets would be assessed on a case-by-case basis.

“Sale-and-leasebacks I think we will do on a direct basis, but even then it will be case-by-case because there could be examples similar to how the almonds transaction was structured, where it makes sense to have a manager involved for a period where there is capital investment required,” he said.

Snow said the fund’s portfolio has performed well during the coronavirus crisis, with its almond leases providing certainty and returns on water over the financial year proving strong, despite a softening in prices after the breaking of the drought in early 2020.

Demand for poultry had also remained strong, with the ProTen investment’s contracted revenues also providing reliable income.

“Ag has been a nice diversifier for our portfolio. Our infrastructure portfolio likewise held up quite well through covid-19, but we do have some assets with GDP exposure to them there, like our land registries and our port investment in the UK,” Snow said.

“Overall, the portfolio held up quite well and I would say that our ag portfolio did particularly well over that period.”