SINGAPORE (Sept 16): By year-end, a new strategy focused on the entire food value chain may be made available to investors in Singapore. Amundi-owned subsidiary CPR Asset Management, which has assets under management of more than €47.5 billion ($72 billion), plans to launch its CPR Invest — Food for Generations strategy in the city state.
This comes at a time when global investors are paying more attention to food security and alternative proteins amid pressing concerns over climate change. Many of these investors and asset managers are hoping the sector under the spotlight will yield attractive returns.
While there are thematic funds that look into food, water or energy companies, CPR’s strategy is one of the very few that consider the entire food value chain, categorised as agriculture, water, food products, beverages, food retail and restaurants.
Stephane Soussan, CPR’s thematic equity portfolio manager, says: “As the food challenge is global, we think the investment universe should span the entire food value chain. Moreover, some sectors like food products, beverages and food retail are defensive [as they are] linked to stable consumption while agriculture, water and restaurants are more cyclical. Therefore, our investment universe helps us build a portfolio that can be more or less defensive or cyclical.
“We invest in agriculture and water, as these sectors should benefit from massive investments to tackle the scarcity of arable land and water resources. Companies with exposure to emerging markets, health and wellness, and convenience food should provide superior growth. With regard to food security, companies in laboratory safety and purity analysis are good examples of promising equity vehicles.”
The strategy was launched in 2017 and aims to outperform the MSCI World Index over a period of at least five years. The fund has returned 19.5% from the beginning of the year to June 28. Over the same period, MSCI World Index returned 17.4%.
The managers will select stocks from a universe of more than 500 companies. Soussan, who has been managing agriculture investments since 2013, says the managers take into consideration environmental, social and governance (ESG) factors. It measures three environmental metrics: carbon intensity, water intensity and waste recycling.
Feeding new demand
The world’s food supply faces many challenges. For starters, agriculture and land use accounted for 25% to 30% of carbon emissions between 2007 and 2016, according to the International Panel on Climate Change report. In Asia, smallholder farmers, who produce between 30% and 80% of global food supply, still rely on traditional farming methods. They are also vulnerable to climate change. These challenges are what food funds have identified as investment opportunities.
Already, companies that make alternative proteins are seeing tremendous interest from investors. Impossible Foods shares have bolstered the company’s market valuation to as high as US$5 billion in the secondary market ahead of a potential public launch. Shares in Beyond Meat have risen more than 800% since its IPO on May 2. The average return for a US IPO in the last quarter, according to Forbes, is 30%.
“Some people are coming [into the space] by following attractive returns, but it is an increasingly compelling story for people who want a good-quality global equities strategy,” says Maxime Le Floch, impact investment analyst at Hermes Investment Management.
Le Floch is part of a team that runs the Hermes Impact Opportunities Equity Fund, which had a fund size of €219.6 million as at July 31. Food security is among its nine investment themes and it has made a total of 30 investments. It has a year-to-date return of more than 20%, based on its Class F EUR fund.
Asset managers are also turning to ESG strategies as one of the few strongholds of the embattled active investment community that has seen its margins squeezed by low-cost index funds. Net outflows from active funds doubled in the second quarter of 2019 from the same period a year ago, according to Morningstar. In the 12 months to June, net outflows fell more than 10-fold. Observers say many of these firms are looking to diversify their assets as profits fall. “[ESG-based investing] may be the last area to charge a premium for asset managers and it is one of the last areas in which active managers have an edge over index funds,” says a global active-fund manager. “But measuring [ESG] impacts can be very costly, so it is not like there is a lot of premium on margin.”
Food that matters
Many of these funds are interested in innovation in the food and agriculture space. The Food for Generations fund is invested in US-based Trimble (main image), which provides equipment and software to automate large industrial machinery — such as tractors — for use in the agriculture industry. It also uses data to optimise the use of resources and predict crop yield more accurately.
Le Floch says the fund focuses on solution providers, such as companies that can help reduce food waste, keep food pathogen-free or use geospatial data to increase agricultural yields. “The real challenge is [finding] companies that meet the criteria for impact and financial attractiveness,” he says.
What is the impact?
Indeed, the biggest challenge in this space is not just finding attractive bets, but justifying their impact on the environment and the community. The latter can be a very costly exercise. Most fund managers take at least some steps to assess the social and environmental impact of their portfolio of companies, looking at their R&D budget or capital expenditure. They also rely on companies to disclose specific environmental and social indicators annually.
Soussan says: “To be more specific, we have a team of ESG analysts rating companies. We exclude companies with the worst global ESG rating. We use two external providers to exclude companies with the worst ESG controversies. A controversy is a special issue that can damage a company’s reputation such as child labour in the supply chain or health concerns on some products. Beyond exclusions, we also measure the impact of our fund on the environment.” He adds that the managers also consider factors such as forest, water and waste management.
Intergovernmental organisations have called for more of such private investments to take charge of solving problems involving the world’s food supply. If done well, these investments have an opportunity to create jobs, develop rural infrastructure, improve the livelihoods of smallholder farmers and increase global agricultural yields, according to the Global Food Policy Report published by International Food Policy Research Institute last year. The study warns, however, that without proper governance, international investments may do more harm than good, regardless of the financial returns they may bring.
But there are also challenges to investing in the food and agriculture space. “One of the main challenges is the price volatility of agriculture products such as corn, soybean and sugar. As production can be affected by weather, it is difficult to predict the supply-demand balance for these products. It therefore creates some volatility for agriculture equities and can also affect the value chain downstream, food processors, retailers and restaurants,” says Soussan.
Other investors worry that the fragmentation in the Asian agriculture space would make it harder for investments to bear fruit. For instance, many farmers either lack proper certification for their land or might resist adopting new technologies and farming methods. It is also time-consuming and resource-intensive to reach smallholder farmers, who make up the majority of farming businesses in Asia.
Some investors are also concerned about whether the returns can be sustained. Ritu Verma, co-founder of Ankur Capital, whose funds invest heavily in food and agriculture companies, says: “Food and agriculture companies need a lot more mainstream capital as the companies grow bigger… People do not understand the sector and, in [some markets in Asia], there are still gaps in funding. We need more investors in this space, both in equity and debt.”
Despite these shortfalls, asset managers and investors in this area say macro-trends such as population growth still make the food and agriculture space an attractive bet.
