Active vs passive: the pros and cons

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Investing in agriculture – July 2013

The appeal of the agriculture sector for investors is easy to understand – long-term drivers of growth and short-term opportunities make it a compelling option.

Indeed, with the United Nations anticipating the global population could reach 10bn by 2100, the demand for food coupled with pressure on the amount of farmland look set to drive up the price of agricultural commodities and necessitate more investment in technology to improve efficiency.

While the fundamentals are convincing, the best way for an investor to access agriculture is not as clear-cut. From opting to take a direct bet on an individual stock through to investing in a passive or active fund, the choice can be bewildering.

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Neil Jamieson, head of UK sales at ETF Securities, says the best way to navigate the options is to examine the motivation for the investment. “Investors need to consider whether they are investing for diversification and optimisation of returns in their broader portfolio or... to tilt their equity exposure towards a particular theme,” he says. “While equities are geared to the business cycle and driven up and down by underlying sentiment, agricultural commodities do not, on the whole, behave like that.”

The key benefits of going for an exchange traded product are fundamentally the same as those that underpin passive investments in general: they are available at a much lower cost, they tend to perform in line with the average actively managed fund over the longer term and there is a wide choice.

“For broad exposure, a basket of, say, 30 commodities will generally rise a little faster than the MSCI World index, but also fall a little faster, too,” Mr Jamieson adds. “Equally, agricultural commodities also afford some tactical options.”

In the actively managed fund space, there are a number of options for investors who are willing to take on the risk and reward associated with the equity market. “Within [equities], agriculture looks attractive,” says Mike Horseman, managing director at investment specialist Cockburn Lucas. “We tend to use active managers, utilising the good managers there are in that space, then perhaps blending in some passive building blocks.”

Mr Horseman cites the Sarasin AgriSar and Baring Global Agriculture funds as the leaders in the sector, offering good performance and diversification. The former has secured an annualised return of 5.1 per cent since it launched in 2008, while the latter has returned 7.8 per cent on an annualised basis in the past three years. Other strong offerings include the Allianz RCM Global Agriculture Trends, First State Global Agribusiness, Eclectica Agriculture and JPMorgan Natural Resources funds.

Henry Boucher, manager of the Sarasin AgriSar fund, suggests seeking to understand the definition of agriculture each manager is working to.

“For a lot of funds, the focus is large-cap North American agriculture stocks,” he says. “Instead, we look not only at the production of food in the developed world, but also the consumption of food in the emerging markets. It provides a wider spectrum of choice, and goes further than simply looking at how different stocks are going to perform in line with different commodity prices.”