InvestmentsJan 31 2014

Commodities – a long-term option?

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Most commodities underperformed in 2013 and agriculture was no exception, meaning that even the best-performing funds still ended the year below traditional indices such as the MSCI World.

The number of open-ended IMA-listed funds specialising in agriculture or agribusiness are limited, with data from FE Analytics identifying just six vehicles.

In 2013, all six funds produced a positive return, although the best performing of these was the Luxembourg-domiciled BlackRock BGF World Agriculture fund run by Richard Davies and Desmond Cheung. It produced a return of 8.53 per cent during the year, compared with 24.32 per cent from the MSCI World.

Mr Cheung notes: “We try to play the long-term stories, such as food demand growth globally will, in the very long term, outstrip supply growth that the global agriculture sector will deliver. There are lots of concerns about the availability of land and feed and whether technology in the farming sector is advanced enough to deliver consistent yield growth year-in year-out to match demand growth. We see a disconnect there, where it is likely to lag without more investment.

“What we’re trying to capture within equity investment is very different to expressing a near-term view on commodity prices.”

In 2013, the specific agriculture indices also saw below par performance compared with traditional equity markets, as the MSCI ACWI Agriculture and Food Chain index returned 11.67 per cent, while the DJ UBS-Agriculture sub-sector index posted a negative return of 15.87 per cent. Koen Straetmans, senior strategist, real estate and commodities at ING Investment Management, notes even in the wider DJ UBS Commodity index, the agricultural segments underperformed last year.

He adds: “In the sub segments, the biggest underperformer was corn, which saw 40 per cent negative performance in December 2013 compared to December 2012. Wheat also sharply underperformed with a 22 per cent correction, then you have also soy beans down 8.6 per cent and sugar down 14.5 per cent. One of the biggest underperformers was coffee with a 21 per cent correction, although on the positive side there was cotton up 9.3 per cent and cocoa up approximately 16 per cent.”

“Broadly speaking, I would say the grains are sharply on the downside, the reason being a surprising US crop season and also the expectation is for the Brazilian and Argentinian harvests to be on the ample side. It doesn’t look like in the short term there will be a lot of support for agricultural prices.”

The longer-term picture for agriculture funds is mixed. For the five years to January 22 2014, the three funds with a five-year track record, Baring Global Agriculture, Sarasin Agrisar and the CF Eclectica Agriculture returned 49.86 per cent, 47.7 per cent and 34.18 per cent respectively. However, compared with the MSCI World return of 86.09 per cent in the same period, the overall performance as a sub-sector has been underwhelming.

Relatively speaking, the best comparison of performance for these funds is a more specific benchmark such as the DJ UBS-Agriculture sub-sector, which posted a negative return of 1.02 per cent for the five years.

As with any niche asset class, investors need to be aware of what they’re investing in. As Mr Straetmans explains: “If you look at it from a fundamental basis it still doesn’t look really good, but you can have pockets that might become interesting.”

Nyree Stewart is acting features editor at Investment Adviser

Funds to watch

Ben Willis, investment manager and head of research at Whitechurch Securities, says: “At present, we do not actively invest in the agricultural theme, though we have met with a couple of managers who run agriculturally focused funds. If we decided to allocate to this area then it would be these types of funds that would be considered.”

Eclectica Agriculture

Managed by George Lee and launched in 2007 the fund does not invest in futures, options, ETFs, agricultural indices or go short. It is a long-only equity fund. The fund can only invest in stocks that derive more than 50 per cent of their business in agriculture and this leaves the manager with an investment universe of approximately 400 global stocks to select from. The fund will invest into roughly 80-90 of these stocks at any one time.

Sarasin Agrisar

This fund is managed by Henry Boucher and was launched in March 2008. It follows Sarasin’s Global Thematic Approach and incorporates current themes such as Corporate Restructuring, Strong Get Stronger, Pricing Power and invests across the ‘field to fork spectrum’ which means from crop cultivation / fertilisers through to food production and food consumption.