Frontier Investment Consulting has given a cautious nod of approval to possible investments in some agribusiness funds, following a review of this new sector.

The asset consultant is not recommending clients make a strategic allocation to agriculture or a direct investment either, however, the report says: “For those clients that do wish to gain exposure to the broader agricultural theme at this point in time, a global listed equity manager specialising in the sector would represent a reasonable approach.” The report, ‘Agriculture: Is There an Investment Case?’, was written by Frontier’s Stewart Hardie, Tom Lambert and Jonathan Stagg and sent to clients late last month. It details the macro case for agribusiness investing, which is compelling due to the increasing supply and demand imbalance for food, but also several risks. These include: climate change damaging the value of certain lands; emerging economies increasing productivity; biofuels subsidies being reduced; and, regulation of food trade (for instance in Russia). “It may be difficult to predict which enterprises benefit from the macro themes at the present time,” the report says. The market structure of the agricultural industry complicates the investment case. In Australia, the industry is dominated by small family-owned properties or large privately held ones. Accurate returns data are difficult to source, with the ABARE survey providing the best available figures. ABARE suggests a reasonable return over the long term, similar to the return from direct property. But aggregation and averaging of the figures hides large variations between regions and properties. In terms of available investment funds, the report says, there are a number of managers, some of whom have produced, albeit over limited time horizons, initial positive returns. “A listed approach has the additional benefit of providing global exposure and liquidity, in terms of exit, but also the ability of the manager to more readily redirect investments to particular sub-sectors or geographical regions and different parts of the agricultural value chain. “However, being a listed investment, it would be expected to demonstrate much higher volatility and correlation with other listed investments, partially negating any portfolio rationale for investment in the agricultural sector in the first place.” Jonathan Stagg said that agribusiness was an industry and not an asset class and this was a rare time that the consulting firm researched a particular industry – normally the realm of managers. “We don’t look at any other industry in isolation,” he said. “It’s a logical investment but not a ‘must have’ right now.” Stewart Hardie, a Frontier analyst, said a number of clients had started to show interest in agribusiness so the firm wanted to formulate a view as to whether there was an investment case. He started work on the 44-page report last September.

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