NZ Super: We’re looking ‘to build scale rather than buy scale’

Neil Woods, portfolio manager for timber & agri at NZ Super – a significant investor in New Zealand’s agricultural sector – talks about the fund’s plans to diversify by investing outside New Zealand and beyond dairy.

The NZ$34.55 billion ($24.1 billion) NZ Super Fund has been investing in agri for six years and now has around 1% of its assets in the sector.

Neil Woods, portfolio manager for timber and agri, talks to Agri Investor about the fund’s approach to building scale and plans for entry into new sectors.

NZ Super Fund is one of the most active superannuation funds investing in New Zealand’s agricultural sector. What attracted you to the sector and how does it fit in within your overall investment strategy?

The NZ Super Fund is set up to prefund our future superannuation liabilities, so we have a specific cash flow-liquidity profile, which means we don’t have to pay any pensions out until around 2031-32. So, our profile is well suited towards long-term assets like agriculture and timber. That’s one of the reasons we’re attracted to it and why we began investing in it in 2011.

The other reasons we consider agriculture to be a sound investment are because of fundamental drivers such as rising populations and rising wealth – particularly in Asia, food scarcity and food safety. We also see agricultural land investments as being a diversifier for our fund, which hopefully is not subject to the volatility of public markets.

What is the size and value of your rural portfolio, currently?

At the moment, agriculture accounts for around 1 percent of our total fund, which as of April 30 stood at NZ$34.55 billion ($24.1 billion; €21.4 billion). The value of the portfolio, which comprises 22 New Zealand farms, is around NZ$300 million. However, we do want some more exposure offshore and our focus will likely be on non-dairy sectors initially.

Are there any sectors in particular that you’re considering?

Yes, beef and permanent crops are the areas we want to evaluate next.

In terms of geographies, where are you focusing in the near to medium term?

In the near term, probably Australia and North America. We have a small team so it’s difficult to spread too far too fast, especially since we’re trying to do direct investing.

Speaking of Australia, one of the weaknesses of that market – according to various sources – is the lack of large-scale investment opportunities. Is the situation similar in New Zealand?

Yes, that is one of the problems with agriculture, even offshore. But, we’re looking to set up platforms where we start small like we did in New Zealand: buy one farm and then build a platform around that particular management team and build scale that way rather than buying scale.

Do such opportunities exist in Australia?

Yes, we think they do. If we can find the right management team locally, one that might even invest alongside us, we may only have to spend NZ$20 million to start with, but then have the ability or the confidence to add a number of new farms at say a NZ$10 million or NZ$5 million price ticket even and build our portfolio that way.

Aside from agriculture, you’re also responsible for the fund’s timber portfolio. When did you begin investing in that sector?

We started around 12-13 years ago. To my mind, agriculture now is where timber was back in the ‘90s: there aren’t a lot of managers; there’s not much of a track record; people are interested in it but still aren’t sure how to do it. For us, timber is like agriculture in many respects. It’s a diversifier for the fund.

Are there any specific near-term goals regarding your timber strategy?

We’re pretty full on timber, which right now accounts for five percent of our entire portfolio. A large amount is in New Zealand; while the rest is in Australia and South America. The bulk of it is through direct investments but we do have some exposure through fund vehicles as well.

We’re happy with what we’ve got and there’s a lot of money chasing timber around, particularly in Australasia from US pension funds and managers. So, we don’t see a lot of buying opportunities at the moment.