Market turmoil seems to be having an interesting impact on clients. Demand for the middle ground of investment, as represented by core developed market equity funds, has generally disappeared. Clients seem to be at one of two extremes. Cash or very cautious total return funds are at one end and racy aggressive funds, especially Russia, China and commodities, at the other. Both these extremes have a strong investment case.
There are always areas of the stockmarket that will weather the storm better than most and may even go up. In my opinion, one of these opportunities could be agricultural commodities. When we talk about commodities, most people naturally imagine oil and metals. Crops and foodstuffs have been largely ignored so far.
Do not make the mistake, as some pundits have done, of thinking of commodities as a safe haven. They should be considered higher-risk investments and in the short term there could be some profit-taking. That said, I think this could be a major growth area over the next decade or more.
One investment house that feels the same way is Sarasin. Its Agrisar fund, due for launch on March 31, will invest in agricultural commodities. Sarasin may be an unfamiliar name to you but its parent company is Rabobank, a Dutch bank that focuses on agribusinesses, so it has some expertise in this area.
The story behind agricultural commodities is not dissimilar to that of hard commodities. There has been no significant investment in agriculture on a global scale for over 20 years. This is because there has been relatively low demand and huge pressure to keep prices low. However, demand has suddenly and dramatically changed. As I have often commented in this column, we are witnessing a huge urbanisation story. The world’s population has risen by over one billion over the last 12 years. These newly prosperous societies are beginning to want the volume and quality of food that we have enjoyed for many years. After decades of under-investment, the world’s agricultural industries are not set up to cope with this demand.
When you throw in the current mania for biofuels, which take land away from food production, you get a “perfect storm” for food prices. We have already seen the price of wheat, soya beans and rapeseed go through the roof, dairy products are following fast and meat is likely to be next. This is a global phenomenon and what I believe is a multi-decade investment opportunity.
What can the Sarasin Agrisar fund invest in? Effectively, the entire spectrum of agriculture, from the shares of firms benefiting from this trend to the agricultural land itself via real estate investment trusts.
Sarasin will also look at themes that are developing in tandem with the boom in agricultural commodities. These include the security of supply, which we are going to read a lot more about as governments around the world realise that they will not remain in power without securing their food supply. In addition, Sarasin will look at intellectual property and corporate restructuring.
Sarasin believes there are four major certainties. First, that the agriculture industry must grow wealthier to pay for the investment that needs to be made. Second, that technology is a long-term solution. Much agriculture is still manned and not machined. Third, the strategic necessity of securing supply and, fourth, that commodity prices will remain volatile in their scope to move sharply up and down.
The fund will have a portfolio of around 50 to 60 stocks across the whole supply chain within the agricultural theme. This includes fertiliser, pest control and seed inputs, irrigation mechanisation, storage, processing and distribution.
This area is not well researched by the investment community as a whole, so there is plenty of scope for stocks to be undervalued.
The fund can invest in the actual agricultural commodities themselves, but this exposure is expected to be no more than 15 per cent. This is because the real long-term growth story is in the supply chain leading up to production. This is very much a “picks and shovels” approach.
Sarasin, with its long experience in thematic funds and an extremely experienced team under Henry Boucher, who has 24 years experience of managing money, could be a good long-term bet.
Let me leave you with the thought that by 2024, India’s population is predicted to be bigger than China’s. The pressure for food and water, in particular, will become intense. This is a theme that transcends the economic cycle as no one can do without food and water.
Mark Dampier is head of research at Hargreaves Lansdown