As a relatively new and untapped asset class, farmland remains mysterious to some institutional investors. Greg Bright spoke to Charmion McBride, chief operating officer of Insight Investment, an affiliate manager of BNY Mellon Asset Management, about the benefits of the asset class which include uncorrelated returns and SRI considerations.
There are lots of ironies in pension funds management, with its fondness for categorisation. One is that what is arguably the oldest form of investment – farmland – which followed shortly after the development of the family cave, is considered an alternative asset.
Yet the world still needs farmland, probably more than ever, and now with all the financial packaging that pension funds and other institutional investors demand, there is a growing array of products to capitalise on this very old type of investment.
The beauty of investing in farmland, apart from the obvious connection with the world’s demand for food, is that it represents “real” assets, rather than financial ones, and its correlations with other parts of a portfolio are low.
Charmion McBride, chief operating officer, global farmland at Insight Investment, the big UK-based affiliate manager of BNY Mellon Asset Management says there are three main components to the investment return from farmland: commodity prices; land value appreciation; and active alpha, which includes productivity enhancements.
Putting aside the fundamentals, such as about 60 million extra mouths to feed per year in the world at current growth rates, farmland has several attractive characteristics for pension funds.
Clearly, it is a long-term investment, with a 10-year horizon not uncommon. It is a hedge against inflation. And, to the extent that the investment can be benchmarked, it is lowly correlated with equities and bond markets.
London-based McBride says that pension funds she has spoken to who are looking to fit farmland into their portfolio may consider it as either a real estate play, private equity or income-producing investment.
The West Midlands Pension Fund of the UK, tends to see the Insight investment in terms of its sustainability risk budget. The fund has a strong SRI focus.
With Insight’s offering, which is made available via private placement, McBride says that SRI considerations are incorporated both at time of purchase of the asset – farm property or agriculture-related investment – and in ongoing farm management. The manager follows the process developed by the European Initiative for Sustainable Development in Agriculture which recommends a holistic approach to try to balance potentially conflicting issues of food production, profitability, safety, energy efficiency, animal welfare, social responsibility and environmental care.
An interesting aspect of the return dynamics for farmland is that land values tend to hold up, and go up, despite the fluctuations in commodity prices.
From Insight’s perspective, it is not unreasonable for investors to expect a total net return target of 15 per cent a year, unlevered, with income distributions of up to six times a year after about three years.
Diversification comes from geographical spread and commodity range. The manager looks to identify countries with a comparative advantage and farming “partners” which also show an outperformance track record.
The big underlying driver of farmland returns is, of course, the rising demand for food. The production of biofuels will also kick in over the next few years, but the expected growth in the world’s population, coupled with rising living standards in emerging countries, will place steadily increasing pressure on demand.
While continued productivity improvements will take some of the pressure off supply, as they say about land: they are not making any more of it.