Q .What is the underlying methodology used to pick stocks for inclusion in the fund?
The investment universe consists of roughly 250 agriculture-related companies. This includes both upstream and downstream companies.
Upstream: basic resources and raw materials producers
Downstream: product processors and distributors
Combining Top-Down & Bottom-Up Analyses to Select Stocks
The strategy is managed using an active, disciplined and risk-controlled investment process that combines macro/commodity market analysis with rigorous fundamental research of securities. Stocks are selected using 50% top-down and 50% bottom-up investment approach.
Using the supply/demand estimates and medium-term commodity price expectations, the team sets a target upstream and downstream allocation for the overall portfolio. They typically overweight the upstream segment when the agricultural commodities have a more bullish outlook and overweight higher-growth opportunities within the downstream segment when commodity prices are expected to trade flat or decline. Finally, the team identifies investment themes within both the upstream and downstream segments, and searches for individual stocks best positioned to benefit from those themes.
Q. What themes within the agricultural space are currently looking attractive?
One Overriding Theme
The Global Agricultural Trends strategy is based on a simple theme: global population growth alongside rising incomes, particularly in emerging markets, has led to changes in how much, what, and how the world eats. At the same time long-term food demand is increasing, supply is constrained by finite arable land, climate change, and by productivity declines resulting from a long-term shift towards the production of more resource intensive products like meats, dairy, and organic foods.
This thematic approach to investing in agriculture includes exposure to multiple sectors spanning the entire food supply chain, from companies that offer solutions to increase output per acre, to companies that process and distribute food to end consumers.
Q. With regard to global supply and demand dynamics, how do you think the next twelve months will play out for the fund?
Global food markets remain historically tight, and we believe the agricultural sector’s drivers remain intact. Recent production shortfalls in North America and Eastern Europe have drawn much needed attention back towards the need for farmers to increase yields to alleviate the pressure from record tight supply/demand conditions, and we expect farmers worldwide will respond to the higher prices by increasing investments in productivity enhancing farm inputs like fertilizers, farm machinery, seeds, and irrigation equipment. While we are positioned for continued tightness in agriculture markets, we are closely monitoring the broader macroeconomic landscape, and remain flexible in shifting the Fund’s exposures should conditions warrant.
Q. At present, the fund has significant exposure to the USA. Given the anticipated budget cuts there in 2013, how do you expect these to affect the fund, if at all?
The Fund is invested heavily in U.S. stocks, with a nearly 50% weighting to the country as of September 30, 2012. These stocks are highly exposed to global factors as the U.S. domiciled fertilizer, farming equipment and seed production companies are largely catering to end demand outside of the U.S. As such, we are more concerned with the macro economic backdrop and government policies outside of the U.S.
Still, we are watching the impact scheduled U.S. budget cuts could have on farm policy and the investments in the Fund. Automatic spending cuts are scheduled to take effect at the beginning of 2013 unless Congress acts. The so called fiscal cliff includes these spending cuts and tax increases, both totalling approximately $650 billion in 2013.
Our base case is for a compromise that will prevent the U.S. from falling off the fiscal cliff. Last minute deals to delay or reduce the fiscal cliff in 2013 are likely to surface this year after the election.
Q. The fund has been among the best performing agricultural funds over the past 3 years. What particular themes/strategies have driven this performance?
Equity markets and agricultural commodities have experienced volatility over the past three years. During this period we have successfully generated alpha through investments in both upstream and downstream companies.
The Fund benefited from upstream investments in fertilizer companies and palm oil producers. Outperforming downstream investments include food processors and distributors and food retailers.
The Fund seeks to outperform the broad market, the agricultural equity universe and its peers by identifying investment opportunities across the agricultural value chain.