Forum: NZ Super, First State Super discuss fees, direct investing and family agribusiness

Superannuation funds NZ Super and First State Super on the gap between small family businesses and institutional capital, and why it's important not to hide behind ignorance.

Superannuation funds speaking on the investor panel at Agri Investor’s Australia Forum expressed varying views on topics such as direct investing, manager-operator alignment and fees. Neil Woods, portfolio manager, direct investment, at the NZ$30 billion NZ Superannuation Fund, and Damien Webb, head of fixed income and real assets at the A$51 billion First State Super joined CBRE Global Investment Partner’s Alexandra Crossing at the event and offered their views on investing in agriculture.

On direct investing versus funds:

Woods: We have a strong preference to not go through investment managers as we like to be close to the assets as we think that’s important in the agri sector.

Webb: We are flexible in our approach as we can invest in listed securities, privately, across the capital structure and either directly or indirectly. At present, we are at the beginning of the journey of investing in Australian agriculture. As such it makes sense for us to work closely with a trusted and experienced fund manager. This is primarily to enhance our sourcing abilities and be our eyes and ears on the land.

We have specifically made that mandate as broad as possible to be open to the broadest opportunity set, albeit we will have investment preferences and priorities from time to time as conditions change. The mandate will remain primarily with discretion to us as we improve our internal knowledge and networks over time, we can then consider being open to also considering direct investments.

On fees:

Woods: We like a manager to make a good living but not get super wealthy out of the base fee. We like to reward on performance related to capital and cash and relative to the performance of the market. We want them to sit in the top quartile.

In New Zealand part of the manager remuneration for our dairy investment is based on the capital growth of our farms (valued annually) relative to the growth of dairy farms in the market. We don’t want to award managers too much if the market just goes up and down, but if they can outperform, we have that weighting and we are looking for a similar approach here [in Australia].

Webb: As a large fund, we always see fees as a bespoke negotiation pertinent to each opportunity.

On diversification within agri:

Woods: We are not that worried about diversification within our agriculture portfolio, we think about diversification at the fund level. We are targeting to have 3 percent of the fund in agri (within farm gate and land-rich assets) and are not too concerned if that’s in crops or beef or dairy. We are looking on a very asset-specific basis.

On NZ Super’s involvement in the management of the underlying assets:

Woods: We typically sit on the boards of all the agri companies we have invested in and we also don’t think we can hide behind a manager when things go wrong so that if there are any headline articles, we want to have sufficient knowledge to know how to respond. We also delve into ESG policy settings or reviewing the policies an asset manager already has in place and we get independent reviews on occupational health and safety and expect reporting on a monthly basis. You can’t hide behind ignorance.

On investing alongside a family farming business and the lack of available funding for these businesses:

Woods: A joint venture or partnership with a family farming business is the type of relationship we are looking to develop. Some of the Canadians have a similar view and we have done some co-investing with them. But alignment can be tough: ensuring that the operator and investor agree on the use of leverage, reporting requirements, hurdles for reinvesting and liquidity events is not easy.

Webb: We agree that there is a disconnect between small-scale high quality farming operations who need capital and large institutional pools of capital seeking to invest. Joining the two is the challenge for all parties involved. There’s approximately A$2 trillion of superannuation capital in Australia and yet only a few billion of that is invested in Australian agriculture. There is still a lot of work to be done to make it happen and we are here to do it, but it takes time.