The Luxembourg-domiciled fund, co-managed by Desmond Cheung and Richard Davis, targets agriculture sector growth but specifically focuses on capturing what farmers are doing at any one point in the cycle. Mr Cheung explains: “Some of our competitors would expand quite a bit further away into the food sector, but while we have a little bit of food sector exposure in this fund, it is mainly due to the fact they have direct relationships or dealings with the farmers. So we don’t generally buy into companies such as Wal-Mart even though obviously it is in the food supply chain.”
Process
The fund’s investment process is primarily bottom-up, with Mr Cheung noting the key underlying driver is stock selection based on valuation, with a three- to five-year view on the company.
But he adds: “Obviously, this is quite a cyclical sector, so we have to include a top-down overlay to determine which part of the cycle we are in. We try to incorporate the two and come to a conclusion on the recommendations on each of the names and the size of the position within the fund.”
The fund is also not constrained by the market cap of companies available within the agriculture sector, and currently has roughly 10 per cent of the fund allocated to small caps, with a further 30 per cent weighting in medium-sized businesses.
Performance
Since launch in March 2010, the sterling-hedged share class of the fund has returned 15.81 per cent to June 10 2013, compared with a 24.92 per cent return from the benchmark FSE DAXglobal Agribusiness TR USD, according to Morningstar.
However, on a discrete-year basis, the fund’s sterling share class significantly outperformed the index in 2012, with a return of 11.49 per cent compared with the benchmark return of 8.32 per cent.
The manager points out the fund has not excluded any parts of the agriculture sector, so while some may have the perception the universe consists solely of seed or fertiliser or equipment companies – areas that are fairly consolidated – this is not the case.
“The way we classify or define the agriculture sector is little bit wider. On one side you have arable farmers, which are those growing crops such as corn, wheat and soya beans and so those would be captured more under the seed, chemicals, equipment or fertiliser companies. But then other parts of the farming world that have been neglected in the past three years are the livestock sectors. When corn or soya bean prices rallied in the past couple of years, those are effectively the input costs that go into the production of meat, so they’ve been suffering from the high rises in crop prices.”
He points out this shows there is some level of counter cyclicality in the sector that offers opportunities whether crop prices are rising or falling, an important point as the manager suggests crop prices may now be retreating to more affordable levels. Mr Cheung also highlights the role of aggregator companies, those that sit somewhere between the upstream arable farms and the downstream livestock farms and provide the storage, transportation and processing services from crop farmers to the market.
He notes the reallocation to downstream sectors such as livestock has helped boost performance, particularly as one of its top-10 holdings, Smithfield Foods, has been the subject of a takeover bid from a Chinese company.
However, the manager acknowledges not all sectors have performed as well, with the agricultural equipment sector dragging on performance amid signs previous growth among large-scale farm equipment companies in the US and Europe will decline as crop supply becomes more balanced.
While the fund has only recently passed its three-year track record, after a tricky start the recent performance has picked up, highlighting the strengths of a fund with the flexibility to move between different parts of the agriculture sector.
For investors looking for specific exposure to agriculture, this fund has the potential to become a core player in its field.
Expert view
Darius McDermott, managing director, Chelsea Financial Services: “BlackRock has a very strong natural resources team within which the managers of this fund sit. The fund is pretty concentrated with roughly 50 per cent of the fund invested in the top-10 names. It has a high weighting to the US but these companies tend to have a global focus. It’s a multi-cap fund with a healthy weighting in mid caps, at roughly 30 per cent and 10 per cent in small caps. The agriculture sector can be pretty volatile as, while the growing demand for food stuffs worldwide is a very long-term trend, there are many very short cycles to contend with which last a matter of months, not years. Therefore, having the flexibility to invest throughout the agribusiness value chain as this fund does, is important. The three-year numbers are good.”
