FUNDS: Food for thought (and investment) in emerging markets

By bne IntelliNews February 3, 2012

bne -

Rising food prices, bread riots, drought, famine, land grabs in emerging markets - headlines over the past several years clearly show that agriculture will be a key investment sector over the coming decade. So to help investors gain exposure to this under-invested sector, GAIA Capital Advisors has devised a new agricultural index that offers investors exposure to global farming companies, many in emerging markets, which will be the basis for the launch of an exchange-traded fund.

"Ten years ago there was no interest in this sector at all, but in 2008 people woke up to a very critical situation with respect to food inventory levels," says Coast Sullenger, managing director of GAIA, referring to events in 2007-08 when spiralling wheat prices prompted food riots in developing countries across the globe.

That short-term panic faded as the unfolding financial crisis stole the headlines, but the longer-term trends of a global food crunch remain intact. According to estimates from the UN's Food and Agriculture Organization (FAO), the world will need to produce 70% more food by 2050 as the population rises by 2.3bn people, at the same time as diets and the climate are changing.

In light of this, GAIA in May 2008 launched its GAIA World Agri Fund, which invests broadly across the agricultural sector and related segments, with a focus on large-scale farming operations in emerging markets such as East Europe, Latin America, Asia and Africa, to take advantage of this long-term sectoral growth story. "The total market cap of the entire listed agricultural industry is $500bn-600bn, which is tiny relative to its size and strategic importance - that's a small multiple compared with the energy sector, for example," says Sullenger.

Making the world a more fertile place

Given the projections for food demand over the coming decades, there's huge growth potential in the farming sector, which will require massive amounts of investment over the next few decades to raise the efficiency of the world's arable land.

GAIA doesn't invest in the underlying crops, citing the growing recognition of the negative social impacts that speculation on agricultural commodities is having. "The 2008 crisis saw the number of malnourished people on the planet go from 850m to over 1bn and crop prices spiked up 100% or more, which has taken its toll on many countries," says Sullenger. "But on equities, there's a great opportunity to participate not only in the great fundamentals of the sector, but also to make a social contribution by investing in companies that are producing equipment and technologies to produce better quality food more efficiently."

There are already several existing agricultural ETFs, of which the $1000-pound gorilla is Van Eck Global's Market Vectors Agribusiness ETF (the ticker is 'MOO'), which at over $1bn has captured the lion's share of investment capital into the sector. This tracks an index of 46 companies involved in the agriculture business, which have enjoyed an amazing run-up over the past few years, collectively putting on a 22% gain last year following the 57% posted in 2009. By early February, these stocks had climbed another 6.1% since the start of the year.

But GAIA argues the composition of the fund is too US-centric and focused on chemicals. "Farming itself is completely absent, yet farming represents 23% of the value added of the industry," says Sullenger.

So to give investors an alternative to get exposure to farming, GAIA teamed up with Indxis, a leading independent provider of bespoke indices, to develop the GAIA Farming Index, which focuses on agri-producing companies in all production segments, such as meat, grains, edible oils, dairy, fish, diversified farming and other plantations, and is well diversified geographically to emerging markets such as those in the former Soviet Union, Asia, Latin America and Africa.

After tracking and screening a host of food-producing companies operating for over a year in exotic places ranging from Kenya to Ukraine, GAIA arrived at an index that comprises over 50 global companies with a mid-cap focus, and adequate liquidity, solid fundamentals and growth. "Many of these companies operate in emerging markets and are less covered by large financial institutions," GAIA says. "They represent over 5bn hectares of agricultural land."

The proof of the pudding is in the eating (no pun intended), so how has the index performed?

Well, back-dating the data, over the past three years the GAIA Farming Index has had an annualized return of 20.29%, which outperforms not only such reference indices as the MSCI Emerging Markets Index by 8.56%, but also agri index peers, including the Market Vectors Agribusiness ETF and the Claymore Global Agriculture ETF.

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