The NakedFunds Australian Share Fund (NakedFunds) has invested in Graincorp (GNC).
Each month NakedFunds directly engages with its Members (investors and potential investors) while conducting detailed research and analysis on a particular industry segment which they call their Investment Focus. The Investment Focus for February, selected by Members via NakedFunds’ state of the art website (www.nakedfunds.com.au), was agriculture.
Commenting on the investment, NakedFunds CEO, Tim Bryden said Graincorp has changed significantly over the last several years. “These changes have given the company more flexibility and greater earnings diversification,” he said. “Graincorp has maintained a dominant position in grain storage and logistics and they are very leveraged to years where grain volumes are up. 2011 is shaping to be a record year and given recent high rainfall the likelihood of the next wheat crop being good is also high.”
Agricultural Overview
Mr Bryden said agriculture is, for obvious reasons, a very seasonal and highly variable sector. “Fundamentally though it continues to enjoy underlying growth momentum driven by continuing global population growth and rising living standards, especially in the major emerging markets,” he said. “Those companies who can manage their seasonal risks while positioning to maximise value from good years are well positioned to provide excellent returns in the medium to long term.”
- Some of the findings included: According to the Australian Bureau of Statistics the gross value of Australian agricultural production was over $41 billion in 2008-09. Close to 55% of this value related to crops while about 15% related to livestock products such as milk and wool, with the balance relating to livestock slaughtering. Interestingly, preliminary estimates for the 2009-10 year suggest a fall in gross value to below $40 billion mainly driven by reduced prices for major crops and livestock products.
- The world’s population is currently approaching 7 billion people with some estimates suggesting this will increase by 30% to reach 9 billion by 2050. During this time it is also estimated that average levels of consumption will rise as living standards increase. The result, some commentators suggest, is that by 2050 global food demand will increase by about 70%. The majority of Members, over 70%, thought these forecasts are reasonable.
Industry Trends
- With respect to mergers and acquisitions activity within the agricultural industry, just over half the Members think this will likely increase in 2011, while most others think it will be at least similar to 2010, which was a reasonably active year. One of the potential drivers of this activity will be companies seeking to increase their level of vertical integration. Most Members believe that vertical integration makes sense within the Agricultural sector.
- Given recent weather events it was not surprising that most Members thought that the biggest risks facing agriculture are ‘drought/water security’ and ‘climate change’. Mr Bryden said that drought has been a significant factor in most of the Australian agricultural landscape over the past decade, although recent levels of rainfall in many parts of Australia (but not all) have largely addressed this issue in the short-term. “What this highlights is that companies need to have good risk management capabilities while ensuring they are positioned to extract maximum value in the good years,” he said.
Consumer Preferences
Members were asked which factor would most influence their eating habits over the next 5 years. The choices included: Convenience, Ethics, Health, Price/Value, and Quality/Flavour/Taste. About half of Members selected Price/Value while a quarter selected Health and 15% Convenience. These results certainly suggest that price competition will continue to be a major influencer of consumer behaviour although we can expect to see a continuation of efforts to differentiate products and/or food groups on health and quality.
The NakedFunds Investment Process
NakedFunds reviews all listed Australian companies within the chosen focus and publishes a shortlist. During the month Members, who can sign up for free, are invited to share their opinion on likely trends and changes within that Focus via simple multiple choice questions. The question process gives NakedFunds unique insights and has the added benefit of letting investors and potential investors really engage with NakedFunds and learn more about how their money is being managed.
Transparency is the Key
By being transparent NakedFunds allows investors and potential investors to ‘see everything’. This means that Members can invest in the fund and then see exactly what underlying shares are held, participate in the overall process and learn more about those companies. Members also have a NakedFunds status which measures involvement and can lead to significant fee rebates on the Funds already competitive Fees. Commenting on this Mr Bryden said “this is great for people who want to get a better understanding, and have an interest in, where their money is being invested. We have a mix of younger investors and also people running their own self-managed super funds. That diversity is also really useful in the question process and results”.
The questions and related analysis relating to this month’s investment focus can be viewed on the NakedFunds Website at the February 2011 – Agriculture Questions Page
Before making any decision to invest, consult the PDS available at www.nakedfunds.com.au
For more information visit www.nakedfunds.com.au