An Introduction to Agricultural Investment Funds
In this article; we offer a broad introduction to the different types of agriculture funds. For a more comprehensive investment analysis of agricultural investments in general, download our Agriculture Investment Report available as a free download.
Which Type of Agriculture Fund is for me?
As investors wise up to the developing trends in population growth (60 million more mouths to feed every year), resource scarcity (millions of hectares of productive land lost annually), and rising household incomes in the developing world driving a change in dietary habits, many are looking to capitalise on the growth potential in the agriculture sector. Consequently we have recently seen the birth of a number of investment funds that hope to capture the growth and income potential of the sector.
There are funds that invest in agricultural commodities; others that invest in the sector through traditional equity markets, and a whole host of other investment strategies to consider. So which of these funds is right for your portfolio?
Here we offer a basic introduction to the various types of agricultural fund available to the private Investor.
Mutual Funds that Invest in Agriculture
By far the most common type of agriculture fund; a traditional equity fund; will invest shareholder capital in publicly traded equities of companies operating within agricultural supply chain. A Fund Manager and his or her team will be responsible for selecting which companies the fund invests in; and the fund will often use one of the key agricultural indices as its performance benchmark.
Some funds will have a specific regional focus; investing only in developed or emerging market companies. Others will have a focus on a particular part of the supply chain such as food processors, farming companies, agricultural input manufacturers or machinery manufacturers. More often than not; the Fund Manager will select shares across the entire agricultural supply chain in an attempt to capture sector-wide growth, so this type of fund might hold shares in fertiliser companies, tractor manufacturers, farming companies, logistics businesses and/or food processors and even retailers.
This type of fund might suit an Investor that wants to try and capture the financial growth and yield of companies operating in a growing market or sector, but one should remember that any type of publicly traded financial asset will share a very high correlation with the overall performance of financial markets and is likely to have a higher volatility than other asset classes such as property.
Investors should also be aware that the performance of these types of funds is reliant to a large extent of the ability of the Fund Manager to pick good stocks, and only very few agriculture funds have consistently outperformed their benchmark.
Agriculture Funds that Invest in Private Equity
For Investors with a greater appetite for risk, investing in smaller private companies with high growth potential might be more appropriate than traditional listed equity funds. These types of investments are inherently more risky and illiquid than publicly traded equities or the funds that invest in them, and are often only suitable for experienced investor capable of bearing the long term economic risk of the investments.
As with any type of private equity investment, the aim of the Fund manager will be to invest shareholder capital in relatively new companies with the potential for fast growth and excellent returns.
At present there are no publicly listed private equity firms investing purely in agricultural businesses, so qualifying Investors are better turning to specialists such as DGC Asset Management Limited in order to invest directly in agricultural investment projects including smaller high growth companies operating in the agriculture sector, and agricultural production projects based on the acquisition, development and operation of productive agricultural land assets.
Whether you want to try and capture the general demand-fuelled growth in food production business, or you want a more direct exposure to agricultural production, picking the right entry point is key to the success of your investment.
If the need for instant liquidity is a defining factor in your investment selection process, then mutual funds investing in agricultural businesses are the way to go. If you are more seeking exposure to rising commodity and land prices in the long-term; then direct investment in agricultural assets or private equity projects might be more up your street.
Either way, agriculture is gaining traction as an attractive sector amongst Investors and their Advisors, and including some form of exposure to the future growth in food production and rising commodity and land prices is likely to position Investors well to profit from developing trends in population growth, rising incomes and resource scarcity.
Agricultural Land Funds
For those Investors aiming to add the true performance dynamics of productive agricultural assets to their portfolios; an agricultural land fund may offer the most suitable kind of exposure to the agriculture sector. There are relatively few farmland funds to choose from when compared to equity funds that invest in the agriculture sector, and the very nature of the asset class make it difficult to consolidate multiple land holdings in various regions into an evenly balanced fund.
There are however a small number of private funds and other investment vehicles that afford Investors access to farmland within a portfolio, and whilst it is true that there are significantly more funds aimed at the institutional investors, there are some that can be accessed with relatively small amounts of capital.
As noted here; the traditional fund environment does not lend itself to the management of agricultural land assets, and research has shown that the most value for smaller investors is seen in small-scale agricultural producers. By investing in smaller private companies that own and operate farmland assets; the investor gains exposure to the capital preservation, inflation hedging, income and non-correlated return characteristics that make farmland such an appealing asset class during periods of volatility or uncertainty in traditional financial markets, whilst at the same time the investor benefits from an experienced management team undertaking a commercial farming operation, and so also gain exposure to an income stream that is far superior to that of the let land model.
DGC Asset Management Limited invests in small-scale agricultural businesses where capital value can be added to the underlying asset base (agricultural land assets) through development and installation of commercial farming infrastructure and row or permanent cropping operations, thus reducing capital risk exposure whilst. This unique investment strategy delivers the best of both worlds in terms of direct farmland exposure and commercial farming operations, and so delivers a superior risk adjusted and inflation adjusted return for investors.
For more information about current opportunities to invest in the agriculture sector and agricultural land assets, contact DGC for more information.
Agriculture Funds Homepage
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