The objective of James Govan’s £107.4m fund is to achieve long-term growth by investing globally in the agriculture sector, and his vehicle has produced some solid returns for investors since launch in January 2009.
Mr Govan categorises the agriculture value chain into three broad segments: upstream, midstream and downstream. He explains: “The upstream [companies] are what we would think about as agricultural investment – fertilisers, machinery and seeds – and these sorts of firms tend to do well in a strong soft commodity price environment. The midstream [companies] are the processing assets, such as ethanol plants in the US, ports, large infrastructure and basic processing. These tend to benefit from bumper harvests and relatively cheap grains and edible oils.”
The downstream firms are typically food manufacturers, such as Kraft Foods and Tyson Foods, and can provide a defensive element to the portfolio, he adds.
“We try to assess what sort of environment we’re in when thinking about our top-down [view],” he says. “We’ve had strong harvests and low crop prices in the past two years, which suggests the midstream sector has been the best place to be. We’ve been overweight that sector, but prior to that we were overweight the upstream sector when grain prices were strong.”
Mr Govan points to the recent rally in crop prices – which were up 20 per cent in a recent three-week period – as an indication that the agriculture sector is becoming more balanced. “At the end of June, we were still underweight the upstream companies against the benchmark [the Dax Global Agribusiness Total index],” he reveals. “We had nearly 60 per cent in upstream against the benchmark’s weight of almost 70 per cent. And then we were still overweight the midstream [sector] by around 37 per cent compared with the benchmark’s 29 per cent.”
He suggests that companies in the sector are also spotting opportunities, which is encouraging some merger and acquisition activity. The manager points in particular to Canada Potash Corporation’s bid for a German fertiliser company, and the potential merger of agrochemical firm Monsanto and Swiss agrochemicals and seeds producer Syngenta.
This specialist fund has been placed at the riskier end on a risk-reward spectrum, at level six out of a possible seven, and has ongoing charges of 1.02 per cent for the I-accumulation share class.
Mr Govan notes the past year has been a “reasonable environment” for the agriculture asset class. He observes: “Last year was a strong global production year with almost perfect growing conditions, which led to falling crop prices – and lent itself to investing in midstream companies.” Data from FE Analytics shows the fund delivered 8.51 per cent in the 12 months to July 14 2015, against the 0.52 per cent average loss generated by the IA Specialist sector. Across five years to the same date, the portfolio returned 31.34 per cent versus the sector’s paltry 12.01 per cent.
The manager notes that Tyson Foods is one of the largest positions in the fund and remains a high-conviction holding, having added to recent performance after it purchased US food company Hillshire Brands. He explains: “Tyson paid a high price for that [firm], but this has given it some enormous opportunities in terms of synergies. We think that as Tyson grows the business in the long run, there’s a very good opportunity for Tyson’s share price to rerate.
“We believe the market might be underestimating the cashflow generation of the business. [Tyson] took on a lot of debt buying Hillshire, but it’s paying that debt down quickly.”
Mr Govan’s cautious stance on the machinery sector has not paid off, however. “The sales of tractors and combine harvesters have fallen a lot, because farmers have pulled back their expenditure in those areas,” he points out.
“The market has looked through the short-term difficulties more than we expected. In fact, John Deere is not far off all-time highs in terms of its share price.
“Looking forward, the key months for the US are July and August, so we’re still at a crucial period for the development of the [corn] crop. We have better foresight on Europe’s wheat crop as we’re nearer to the harvest, but there could still be a lot of volatility due to the weather.”
EXPERT VIEW
Ben Willis, head of research and investment manager, Whitechurch Securities
This fund is not investing directly in soft commodities, rather it invests in companies that derive their earnings from soft commodities, such as fertilisers, infrastructure or machinery. This means that the agricultural theme is loose and broad. Given this and the fund’s global remit, if investors were to compare it to the MSCI World index, they’d realise just how poor the ‘agriculture theme’ had been in comparison to investing in a broad based, core global equity fund. This fund has been better than most within the agriculture fund space. But while the theme itself makes a good story, it is not a good investment in my view.
