Agriculture funds are in the spotlight after Hargreaves Lansdown booted hedge fund star Hugh Hendry’s Eclectica agriculture fund off its Wealth 150 buy list for avoiding defensive stocks such as supermarkets.
Popularity of the funds have surged in recent years as global food shortages and growing demand have propelled soft commodity price rises.
HL senior analyst Meera Patel said in a report to clients on October 6 that the firm had “high hopes” when Eclectica’s Hendry launched a fund in June 2007 but it has delivered “disappointing returns”. She said: “It does not invest in the end of the chain in supermarkets, which have proven more resilient.”
Hendry reacted angrily, telling Money Marketing: “I find it hard to accept criticism for an agriculture fund because it does not invest in food retailers such as Sainsbury’s and Tesco. We have seen strong success on the back of BHP Billiton’s battle to take over Potash.”
His Eclectica fund is focused on chemical companies selling fertiliser and pesticide and its largest stocks are in North America, according to data correct at August 31.
He has an 8.4 per cent exposure to takeover target Potash, the Canadian fertiliser giant. His next largest holdings are US fertiliser group Mosaic, Asian fertiliser and processing firm Wilmar, Canadian fertiliser stock Agrium and US group Monsanto.
Allianz RCM agricultural trends fund manager Bryan Agbabian agrees with HL that by ignoring consumer-facing stocks, funds can “become overly exposed to the most volatile segment of the universe”.
He says: “Segments of the downstream benefit most in periods of stable or falling grain prices and so can therefore support performance during temporary corrections in grain markets.”
Agbabian feels a global focus is crucial to target long-term agricultural trends, including “shifts in protein consumption, processed foods and the growing importance of supermarkets in emerging economies”.
Other fund managers told Money Marketing they use a “farm to fork” stock universe as the basis of their portfolios. This includes all ends of the spectrum from seed producers, chemical groups, farming machinery makers, logistics firms and processors to consumer-facing stocks such as supermarkets.
Baring global agriculture fund manager Jonathan Blake runs a farm to fork fund and has a position in Tesco. His fund is 30 per cent invested in emerging markets and uses risk monitoring to eliminate any excessive exposure to a single sector, country or theme.
He says: “We have more exposure to the upstream businesses – fertilisers, agricultural machinery, grain handlers and logistics companies.
But the attraction of a farm to fork investment universe is that we can identify attractive opportunities and position the fund within that universe, reflecting our views on where we are seasonally.”
Sarasin AgriSar, now the only agriculture fund left on the HL Wealth 150 list, is managed by Henry Boucher and is also a farm to fork product.
Boucher says: “Fertiliser has acted in the past as a warrant on the movement of commodity prices. It provides very exaggerated performance when a grain price rises. We do not see that as an investment but rather as speculation. Ours is a much smoother fund with more diversity.”
He adds the fund does not hold supermarkets but he ensures it is diversified into the consumer end of the industry by targeting retailers, for example Asian food manufacturers.
However, BlackRock BGF world agriculture fund manager Desmond Cheung echoes Hendry’s belief that agriculture funds should now own consumer stocks.
He says even owning consumer stocks such as confectionery giant Nestlé causes funds to be exposed to other dynamics than the central themes that investors want to target when they buy in.