Townsend advises OP&F against row crops for ‘foreseeable future’

A market source says the consultants’ expectations of no new ag commitments in the coming year reflects, in part, the influence of recent volatility in permanent crops.

The Townsend Group has advised the Ohio Police and Fire Pension Fund it should not expect to add row crop exposure for the foreseeable future.

In a report to the $15.9 billion pension’s investment committee dated January 22, consultancy group Townsend said OP&F’s focus within agriculture should remain on permanent crops, where its single existing commitment “will provide exposure.”

Townsend’s 2019 agricultural investment plan for OP&F included a “pause” on permanent crop investments in the US and a recommendation to add “row crop exposure” over the long term. The 2020 investment objectives for agriculture state only that “exposure” should increase gradually, over the longer-term, with no amount or timing specified.

On timberland, the real assets consultant wrote OP&F “does not need additional timberland exposure.”

“Core infrastructure, farmland and timberland are expensive by historical metrics,” Townsend wrote. “Unpredictability of markets, combined with unpredictability of fund behavior, will require pacing to be reassessed and adjusted over time.”

Townsend and OP&F declined to comment.

Townsend recommended OP&F broaden its real assets exposure to include agriculture in March 2017, following an unsuccessful attempt to fill a 5 percent allocation with timber investments alone. OP&F committed up to $50 million to a permanent crops-focused vehicle managed by Agriculture Capital in May 2018.

In April 2018, Townsend recommended that OP&F look to add row crop exposure as part of the effort to build an agricultural portfolio constituting of up to 40 percent of the pension’s real assets portfolio, which also includes timber and infrastructure.

Plans call for OP&F’s real asset investments, which currently account for 3 percent of its overall portfolio, to build towards an 8 percent allocation over the long-term.

A source familiar with Townsend’s recommendations told Agri Investor they reflect both uncertainty driven by macro factors like China trade tensions and US dollar strength, as well as some degree of judgement about the ability of managers to meet such challenges.

“I think Townsend – if I am reading them correctly – is just looking for a little bit more aging and maturing of the fund managers before they really push more ag products to their clients,” the source explained.

Another factor, the source said, is that OP&F’s single agricultural investment to date has been in permanent crops, which has exposed the pension to volatility not generally in-line with the strategic objectives of a real assets portfolio.

“They were looking for the exact opposite; they were looking for more stability and a tight band in terms of how outcomes would flow and there is more volatility in those outcomes than they expected,” the source explained.

The source added that OP&F is indicative of a group of similarly sized institutions that are in the process of deciding where, and if, agriculture fits within their portfolios.

“The broader LP sentiment on ag right now is that overall – primarily in row crops – the space is under-performing, so you have to do something that isn’t ‘buy and lease’ row crops which can compete with a broader market of products that are not just ag,” the source said. “No one is sitting and saying they have to deploy X percent or X dollars in ag, unlike a bond allocation or even an ESG allocation.”