James Govan, manager of the £216m Baring Global Agriculture fund, says his investment universe is driven by the so-called 3Fs – food, feed and fuel.
He explains: “Diets in emerging markets are changing, where the consumption of meat, fish and dairy foods is increasing. This is driving higher demand for feed.” In regards to fuel, he notes that last year the biofuel ethanol consumed more than a third of the US corn crop.
Looking to the supply side within the sector, he says that global trend yields are rising but this is growing at a slower rate, and harvested land per capita is declining due to the large increases in population. Mr Govan says: “Over the long term, this should lead to higher soft commodity prices to encourage production and hence strong demand for agricultural products and services. The aim of the fund is to invest in agricultural equities and benefit from this long-term trend.”
Mr Govan describes his strategy as investing throughout the “agricultural value chain, including the upstream, midstream and downstream sectors”. He says upstream companies tend to benefit from strong soft commodity prices, such as fertiliser, seed, crop protection, agricultural machinery and plantations. The midstream companies include processing and distribution and meat, fish and dairy, which represent the biggest sector weighting in the fund to benefit from big harvests and low soft commodity prices.
He says the downstream sector is relatively defensive in a stockmarket context, like the food retailers and food manufacturers such as Nestlé. He adds that while he typically has a balanced portfolio between the three categories, he will shift the asset allocation of the fund aggressively depending on the soft commodity/macroeconomic backdrop.
Since the fund’s launch in January 2009, it has gone through a number of changes where, for example, the benchmark was altered to the DAXglobal Agribusiness in December 2011 from the MSCI AC World index, as Mr Govan felt this was a more relevant comparison. He also changed the structure of the fund from an equally weighted approach to a more tiered strategy.
Mr Govan says: “The outlook is very positive, with strong meat prices due to limited supply and cheap grain prices leading to supernormal profits. We have cut our positions in agricultural machinery stocks Deere and Agco as we believe farmers are likely to save money by reducing spend on agricultural machinery.”
Since the start of 2009 to September 22, the fund, which has ongoing charges of 1.73 per cent, has achieved a total return of 67 per cent and over the past 12 months has delivered 5 per cent, according to FE Analytics. It is placed at the riskier end of a risk-reward profile, sitting at level six out of a possible seven.
In regards to the fund’s gains, Mr Govan highlights that earlier in the year he upped his position in US chicken producers Pilgrim’s Pride and Sanderson Farms, as well as meat producer Tyson Foods, as he says it became apparent “how serious the PED [porcine epidemic diarrhoea] virus was in the US in hogs and the impact it was going to have on higher pork prices”.
He adds: “We considered that this was likely to lead to increased chicken demand and prices and this proved to be correct.”
On the flip side Mr Govan highlights paper firm Domtar, which performed poorly as the earnings momentum was weaker than both he and the market had anticipated. He says: “Around 10 per cent of North American paper capacity was cut last year and this resulted in very high industry utilisation and enabled the paper companies in North America to push through a price increase, which was successful.” But an attempt to drive a second price hike proved less successful, as customers increased imports.
In terms of what lies ahead, the manager is positive on his outlook, particularly where a number of the subsectors are making supernormal profits in the lower crop price environment. Even at these prices, the farmer is incentivised to maximise production and as such Mr Govan does not expect much change in fertiliser or seed demand.
EXPERT VIEW
Ben Willis, head of research, Whitechurch Securities
The Baring fund only invests in companies whose majority earnings are from soft commodities. Therefore, it may be considered a ‘purer’ play on the theme compared with some of its peers. The manager adopts a multi-cap approach, employing a value bias and hoping to harvest the rewards from stocks being overlooked by the broader market. One for investors to consider if they are looking for a specific focus on this investment theme.
