June 2008

PERFORMANCE: Farming for profits

Considering Eclectica’s background as an opportunistic hedge fund manager, the agriculture business is a nice fit ... Niklas Tell comments niklas_tell.jpgIn recent months food prices have been headline news. “World agriculture has entered a new, unsustainable and politically risky period,” said Joachim von Braun, the head of the International Food Policy Research Institute in Washington DC, in a recent article in The Economist. The same article (“The new face of hunger”, April 17 2008) says that the rising prices mainly reflect changes in demand rather than problems of supply and states: “The changes include the gentle upward pressure from people in China and India eating more grain and meat as they grow rich and the sudden, voracious appetites of western biofuels programmes, which convert cereals into fuel. This year the share of the maize (corn) crop going into ethanol in America has risen and the European Union is implementing its own biofuels targets”.

There has, however, not been much media coverage of funds investing in the area. Maybe as a consequence of people being more focused on climate change funds in the last couple of years. It is therefore time to use this column to take a closer look at funds focusing on agriculture. These typically come in two forms, either funds investing in soft commodity futures or funds investing in the equity of firms focusing on areas such as fertilisers and equipment manufacturers. One well-known example in the first category is the Schroders AS Agriculture fund. Funds in the second category are a more recent phenomenon and one of the first was launched by Deutsche Bank in 2006 (the Global Agribusiness fund). Another was launched about a year ago, the CF Eclectica Agriculture Fund, and is run by London boutique Eclectica Asset Management. At the time of writing this column (middle of May) the fund is up some 20% year to date. A more recent launch in this space is the Petercam Equities Agrivalue fund, which was launched in December last year.

But, back to the Eclectica fund nd Eclectica Asset Management. the firm is probably best known for its outspoken founder, Hugh Hendry, self-proclaimed outsider. The boutique manager is, however, quickly making a name for itself in everything agricultural. Considering the firm’s background as an opportunistic (global macro) hedge fund manager, the agriculture business is a nice fit. The firm has a history of following global trends and, visiting the offices at Salem Road, you quickly realise the people here, and not least Hendry himself, have a truly global outlook on investments. Rather than art, the walls in the office are filled with large maps of the world and looking at the disposition  of the portfolio the maps are not just for display. At the end of April, the US was the biggest geographical exposure with some 52% of the portfolio, but holdings are also found in Europe, Asia and Australia/New Zealand.

The argument for investing in agriculture, as outlined in a recent presentation by Eclectica, is easy enough to understand:
- Food prices have declined, in real terms, for 35 years
- The world’s population has been growing at 1.5% annually
- Growth in emerging economies drives demand for land intensive protein and dairy products
- Agricultural land is being lost due to water shortages and urbanisation
- The spread between grain and energy prices encourages the use of food for fuel
- For eight of the last nine years, the world has consumed more food than it has produced
- To incentivise new supply, agricultural prices must rise

At the end of March the portfolio had 92 holdings and some of the bigger ones were water management firm Lindsay Corp (3.4%), fertiliser producer Potash Corp of Saskatchewan (3.3%), agricultural processor Archer-Daniels-Midland Co (3.1%), agricultural equipment manufacturer Agco Corp (3%), crop protection firm Syngenta (3%), fertiliser producers Agrium Inc (3%) and Yara International (2.9%).

So far, the team at Eclectica has showed it can find interesting opportunities in this space and investors seems to have noticed as well. The fund had some £ 140 million in assets under management at the end of March. That had grown to some £ 202 million on May 16.

• Niklas Tell is a partner at Tell Media Group AB ©  2008 funds europe

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