Interview: Desire for diversification drives LGIAsuper in agriculture

“The urge to merge is overwhelming,” says Troy Rieck, chief investment officer at LGIAsuper. “We’re all trying to be big enough to matter, but small enough to care.”

Rieck is discussing the rapidly growing trend among Australian superannuation funds to explore opportunities to merge, as underperforming funds come under the spotlight from regulators.

Agri Investor is speaking to Rieck just six weeks after he started his new role at Queensland superfund LGIAsuper, which has its roots as a fund for local government employees in the state. The fund, with A$12.79 billion ($8.75 billion; €7.95 billion) in funds under management at June 30 2019, still draws the majority of its membership from this pool.

Rieck joined LGIAsuper from Melbourne-based Equip Super, where he had an equivalent role as executive officer, investments. Equip recently completed a merger with Catholic Super to create a A$26 billion fund. Other big mergers in the pipeline include a combination between Queensland giants QSuper and Sunsuper to create a A$185 billion fund, as well as First State Super and VicSuper to create a A$125 billion fund.

“I think for the most part it’s very well intentioned,” Rieck says. “Like any industry, you tend to find that these things build momentum and they become a trend, and then everyone’s doing them – and sometimes they look back and say: ‘I don’t really know why.’

“But there will be a much smaller number of funds going forward in Australia.”

Rieck, a native Queenslander, says he was attracted to the role at LGIAsuper for two reasons: it represented a chance to get back to his home state and to live again in Brisbane (he describes the city as “like a miniature version of Singapore” because of the humidity); and it is a fund that’s willing to “have a go and do things differently”.

He refuses to call it unique, arguing that word is “dramatically overused”, but he emphasizes that the fund is “a little bit different” in its approach to alternative assets, including agriculture.

And the fund has done well out of its investments in these asset classes in recent years.

Agriculture is ‘harder’

According to its 2018-19 annual report, at June 30 2019, LGIAsuper had A$1.68 billion allocated to alternatives, under which it brackets agriculture alongside credit strategies and hedge funds. This represented 13.1 percent of its total funds under management.

Alternatives overall returned 4.69 percent for the fund in 2018-19. This made it one of LGIAsuper’s lower-returning asset classes last year, but its diversification attributes played a “pivotal role” in the portfolio, the fund said in its annual report.

“My concern is that the increasing political scrutiny on water rights makes it a tougher investment strategy going forward”

Troy Rieck

“We’re big believers in diversification, so we’re trying to find rewarded risks and we’re trying to spread those risks out around the world,” Rieck says. “We’re big believers in the illiquidity premium. We like the stable returns that private assets can generate because they help to smooth out the [fund’s overall] return streams over time, and it helps to mitigate some of the large sustained drawdowns you can see in public markets.”

Agriculture, Rieck says, is a “little bit harder” than some other asset classes like infrastructure, though.

“One of the classic discussions in superannuation in Australia has always been about the lack of investment by superfunds in agriculture. There’s endless discussions about [a collective industry fund vehicle for ag investment] but no one ever seems to bring a product to market – and some of the ones that have come to market haven’t always been as successful as people would like. So we chose to go a slightly different way,” he says.

In agriculture, LGIAsuper has made commitments of various sizes to three different managers totalling several hundred million dollars.

Rieck cites the superfund’s investment with US-based Equilibrium Capital’s Controlled Environment Foods Fund as a good example of what he says is its differentiated approach. This looks, at first glance, like an agriculture investment, but it also has a lot of characteristics that investors traditionally associate with infrastructure.

“Equilibrium has quite a different strategy to most that you’ll see here in Australia, where they’re essentially taking infrastructure skills and applying that to food production to build greenhouses,” he says.

“The plan here is to either construct or purchase greenhouses and then sign take-or-pay contracts with the large retailers in the US. That’s about delivering certainty of high-quality supply and doing it in a way that’s acceptable to institutional investors.”

‘Tough’ outlook for water

LGIAsuper’s largest single chunk of capital in agriculture as at June 30, though, sat with Blue Sky Alternative Investments (since rebranded as Argyle Capital Partners), with whom the superfund had allocated A$87 million into its Strategic Australian Agriculture Fund and its Water Fund.

While the investment performed remarkably well last year, returning 23.18 percent, Rieck acknowledges that Blue Sky has been in the news for the wrong reasons for the last 18 months and, perhaps more significantly, says that the issue of private investors owning water entitlements has become an “increasingly tough” subject.

“Certainly, we’ve generated good returns out of that portfolio – but as you know, there’s a severe drought in many parts of Australia,” he says.

“The concern for us here is twofold: that the manager has gone through a number of operational problems and lost key staff, but [there is also] the question around social licence to operate. If I was to express a personal view, my concern here is that the increasing political scrutiny on water rights makes it a tougher investment strategy going forward.

“The key risk here of course is regulatory change. You can imagine [former agriculture minister] Barnaby Joyce or Scott Morrison standing up in Parliament and declaring changes to the Murray-Darling Basin Plan, based upon the drought conditions – and I wouldn’t like to be the guy standing between farmers and water supply.”

Water has become a polarising issue in Australian society this year because of the drought, with the perception growing among the general public that private investors are profiting unfairly from water investments – and despite whether that is true or not, perception can be everything. Rieck and LGIAsuper have clearly been grappling the merits of holding these assets and whether the headline and ESG risks are still outweighing the financial rewards.

“There’s always this [tension] about generating acceptable returns but at the same time having to live within the society that we operate in. We want to be long-term investors, we don’t want to be short-term investors on these issues,” he says.

Part two of our interview with Troy Rieck will be available Thursday.