As agriculture increasingly creeps into the mainstream and institutional investors start taking on more than just one agri-related asset in their portfolios, the issue of portfolio construction has become front and centre in investment conversations. I’ve been speaking with a number of market contacts as to the questions agri investors should be asking as they fit agri within a broader investment portfolio.
“Real assets, including agriculture, present very different investment opportunities on the risk spectrum making portfolio construction all the more critical,” said Kathryn Wilmes, partner and global head of infrastructure and real assets at Pantheon, which has recently launched a separate accounts business for real assets including agri.
When approaching portfolio construction, investors can look at it against key elements such as whether an investment is a growth asset, has an inflation or deflation protection element, or helps to diversify the portfolio. And there are parts of the agri value chain that can be matched to these elements, according to Peter Roney, ex-managing director at Cambridge Associates.
“Agricultural land, for example, depending on the structure of the investment, can fit in all the key elements above, whereas investing in biofuels or biotech is generally more likely to be a growth investment,” he said. “The agricultural value chain is so diverse itself that agriculture can fulfil multiple roles in an institutional portfolio.”
There are other ways to look at portfolio construction too including liquidity, investment vehicles, products, costs, volatility, geography and political risk, he added.
So here are five key questions sources say potential investors should address to determine the type of assets, risk/reward profile or global diversification that’s appropriate for an institution’s particular portfolio:
1. How important is cash yield to the programme? This will influence the weighting to different real assets or sub-sectors within agri. Buy-and-lease farmland investments are likely to provide cash yields from day one whereas operational assets that are undertaking some improvements are more likely to have a J-curve. The same applies for established businesses versus developmental projects.
“Cash yield is also a risk management metric,” said Karen Dolenec of Towers Watson. “Given that agricultural assets should generate regular income, the commitment to pay a cash yield makes sure that the manager is focused on productivity.”
2. How much exposure do you want to commodities? Some managers suggest implementing a cap for each different commodity. In agri this will include permanent crops versus row crops, dairy versus beef meat and so on.
“In commodity-exposed sub-sectors, we look to identify very high quality assets that we believe have strong competitive cost positions to mitigate price volatility,” said Wilmes. “We also want to be in low cost basins where the producer has the best economics and we look for those that have a low use of leverage so they can better withstand cycles.”
3. What returns expectations do you have and where on the risk return spectrum are you comfortable? There are plenty of different ways to get exposure to agri even within the same commodity such as buy-and-lease versus own-and-operate, processing assets or even different leasing structures.
4. What is your emerging market interest and general comfort level with different geographies? The risk parameters and considerations differ completely from country-to-country from political and regulatory risk to climate risk to local acceptance of your operations to commodities and production systems.
“These need to be balanced against the costs of operating in these geographies though,” added Dolenec. “And ESG issues will need to be navigated as emerging markets become increasingly important in the institutional agri investment landscape.”
5. What is your tax profile? This isn’t obvious but it’s critical if you are contemplating investing in the US, for example, where foreign investors are subject to certain taxes including FERPTA.
These are among the topics broached in our debut Almanac, a special printed annual magazine that highlights key trends and strategies via a mix of in-house features and expert commentaries from industry thought leaders. Subscribers should expect their copy soon.
What’s your experience of portfolio construction for agri and other real assets? Get in touch at firstname.lastname@example.org