Where does agri fit within a standard institutional investment portfolio?
There is no straight – or ‘right’ – answer. In fact, for investors without a specific agriculture allocation, it throws up another question that Tim Hornibrook, head of Macquarie Agricultural Farms Management, referenced in this week’s Q&A: what type of exposure does the institution want?
Does it want to invest directly or back fund managers who invest in land and lease it, much like a standard real estate investment? Or might it instead back a strategy to improve and operate that land, which may include or blend elements associated with private equity, commodities or natural resource investing?
This also gets at the heart of whether or not conventional portfolio theory – whereby investments are classified by security/asset class or geography types – is the right way for institutional investors to think about portfolio construction? Some, such as the California State Teachers’ Retirement System, have changed tack in recent years to classify their investments according to six core risk factors including inflation risk, interest rate risk and global economic growth risk.
Nick Greenwood, pension fund manager at the UK Borough of Windsor & Maidenhead, argues that investments, whether agri or not, should be classified by their function and the risk they present, over their form or asset class definition. An own-and-operate fund would therefore be a mix of real estate and commodities. But this is a matter of contention within his investment team, some of whom would prefer to label it private equity.
But there is a middle ground here, which is particularly important for institutions approaching the agri asset class for the first time: the creation of a real assets bucket.
A real assets allocation can fit within the existing alternatives programmes most investors have established and could encompass a range of different assets from infrastructure to water to energy, depending on the organisation’s definition. This means that an investor does not have to decide which type of exposure it wants so it can fit into an existing bucket, but instead now has the flexibility to invest across the various options, classing it as real assets.
This also removes the complication of making room for an investment within an existing bucket and gives investment committees more flexibility in terms of specific allocation amounts agriculture. The California Public Employees’ Retirement System (CalPERS), for example, has gone this route, establishing a real assets programme that includes real estate, forestland and infrastructure.
With this model in mind, it may also be easier for some smaller or newer investors to gain exposure to agri via segregated account mandates with one of the number of growing real assets management firms that can make cross-sector investments opportunistically.
Institutions have invested into agriculture in the past without a real assets bucket or even a specific allocation to agri, of course, but these are the forward-thinkers of the institutional investing world, according to Hornibrook.
The vast majority of pension funds globally still construct portfolios based on traditional target asset class allocations – historically it has been (understandably) the easiest way for investment committees to get their head around a pension’s various types of investments and diversification needs/goals.
But for many that’s prohibiting their ability to invest in agri and keeping them on the sidelines. Developing a real assets bucket could be an easy way to get exposure to agri’s compelling investment opportunity, and make many of the complications go away — at least in the short term.