InvestmentsJul 18 2016

Fund Review: Allianz Global Agricultural Trends

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Manager Bryan Agbabian explains: “Our objective for the strategy and fund is [to] invest in companies across the agricultural value chain. This value chain addresses the global food deficit we believe is a secular theme over time and also the changing consumption patterns of food in both the developed and developing economies.”

He confirms the fund invests in equities only and does not invest in commodity futures.

Mr Agbabian selects holdings from an investment universe of approximately 250 companies. The “dynamic investment process” means looking at agricultural markets and taking a view on whether there is going to be a good harvest, which determines the direction of commodity prices. He says: “We have this dynamic process where we could have more of an emphasis on companies that benefit from rising or falling commodity prices, or from more plentiful crops.”

On the basis this year will be a better harvest for corn and soyabeans in the US, he notes: “A company that produces chicken is going to benefit because feed costs are going to be falling and that’s a lower cost for these types of companies – it’s a profit tailwind.”

He adds: “As far as the bottom-up analysis [goes], I want to see good management, and I meet with companies regularly so I know the management. Then I look at improvement in the financials. I like to see improvement in profit margins on a year-over-year basis, and strong balance sheets where the net debt relative to [earnings before interest, tax, depreciation and amortisation] is actually a reasonable level. So there’s a top-down element as far as where the agricultural market is going, and bottom up as far as what companies are going to benefit.”

According to the key investor information document for the clean P sterling share class, the fund sits at the riskier end of the risk-reward scale, at level six out of seven. Ongoing charges of 1.13 per cent apply.

Within the past year there have been no major changes in the portfolio. Mr Agbabian reasons: “I have a holding period of at least a year, although there are exceptions – if something happens at a company I will exit or reduce the position. But turnover is relatively low given that I look forward a year or more.”

Data from FE Analytics shows the fund has failed to outperform its benchmark, the MSCI ACWI/Food, Beverages and Tobacco index over one and three years, although it has delivered solid returns. In the three years to July 6 2016 the fund generated a return of 37.3 per cent, while the index was up 56.9 per cent. Over the past 12 months to July 6, the fund returned 14.7 per cent against the index’s 40.3 per cent gain.

EXPERT VIEW - Darius McDermott, managing director at FundCalibre

The manager has been in place since the fund’s launch in 2008 and, while it also invests in companies across most of the farm value chain, the fund is more volatile in nature: it can do spectacularly well or lose a lot more than its competitors. In sterling terms, 2014 was a bad year and this has had an impact on three- and five-year cumulative numbers. The manager seems to have bounced back over the past 12 months, however, and it is on slightly better footing now. It has a high weighting to the US (60 per cent), with a decent amount in Irish, Japanese and Mexican companies.

Mr Agbabian says he has had a bias to processing and distribution companies in the portfolio, or what he refers to as a “downstream approach”.

“My emphasis has been more on the companies that have been benefiting from the current environment,” he remarks. “Within that downstream bias there have been some changes. Companies like Tyson Foods have done well. This has had a positive impact on the portfolio – it’s up 55 per cent over the past year.”

Holding Constellation Brands is up 41 per cent in the past year. He suggests: “Market share gains for Constellation’s Modelo beer brands along with pricing power has provided the foundation for greater integrated capacity for higher margins in future years. Its wine business has also shown improving results.”

Another holding that has added to performance is Calavo Growers, which has done well on the back of the growth in avocado consumption in the US of 20-25 per cent a year.

But Mr Agbabian acknowledges several holdings have detracted from the fund’s performance, including corn-based ethanol producer Green Plains, nitrogen fertiliser company CF Industries and Cal-Maine Foods. Of the last holding, he says: “Over the past year it’s been down 11 per cent. But I’m continuing to own it because more than 60 per cent of its cost of goods sold is based on feed and if corn and soyabean prices are falling, Cal-Maine will benefit.”