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Funds investing in agriculture and agriculture-related opportunities are a relatively new addition to the fund landscape. Most are open-ended and fall within the Investment Management Association (IMA)'s specialist sector, or are domiciled offshore.
Few agriculture funds - with the notable exception of the CF Eclectica Agriculture Fund, Sarasin AgriSar Fund and Amundi Global Agriculture Fund - have a track record of more than three years, so financial advisers are relatively cautious about recommending them.
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Sarasin AgriSar - our top fund tip of 2010 - is a firm favourite. Meera Patel, senior analyst at Hargreaves Lansdown, says that, while short-term spikes in the food price usually ease back, longer-term factors are likely to exert upward pressure on prices and Sarasin AgriSar is a good way to profit from this.
"Sarasin's strategic alliance with Rabobank, a Dutch bank that focuses on agribusinesses, gives it access to significant resources in the agricultural sector, in addition to its own investment expertise. The fund also looks at themes that are developing in tandem with the boom in agricultural commodities. For example, corporate restructuring is a prevalent theme in the portfolio, particularly in light of BHP Billiton's attempts to acquire fertiliser giant Potash Corp," Ms Patel adds.
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Justine Fearns of AWD Chase de Vere favours the Baring Global Agriculture Fund: "It is UK-domiciled and a good size at over £200m; fund size is important as a small fund can increase the risk further," she says.
Most funds focused on agriculture have posted strong performances over the past year, as the table below shows. However, when it comes to choosing a fund, it is worth looking at the total expense ratio (TER) as these funds can be pricey and many charge a performance fee. Exchange-traded funds (ETFs) and exchange-traded commodities (ETCs) can be a much cheaper alternative, with funds such as the ETFS Agriculture DJ-UBSCI ETC posting a performance of close to 50 per cent in the past year - far ahead of its nearest actively managed counterpart.
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However, Renzo Casarotto of the First State Agribusiness Global Fund argues that one advantage to buying an equity fund as opposed to commodity-price-linked ETF is that equity investments tend to outperform the commodity over the long term thanks to their exposure to production volume growth. Furthermore, as agriculture is a high-fixed-cost business, yield improvements and higher capacity utilisation lead to decreasing unit costs and better profitability. Active fund managers can identify companies that can grow volumes at low cost and thus provide investors with long-term opportunities.
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Source: Investors Chronicle