Insights for advisers, by advisers

Big, energetic and different


Outside equity, fixed income and well-known alternatives there is another world of investment options that rarely find their way into portfolios. Examples include agricultural land and businesses, energy and carbon trading, water rights, fishing licences or music royalties.

It is unsurprising that few consider these options, as they are far from simple to judge and have little to no independent assessment. Yet they are essentially totally uncorrelated to equity and fixed income markets.

Choosing to spend time on one or two may turn up an option or at least illustrate what and why other investment pathways appeal to a select base, particularly owners with long-term time horizons.

There have been a number of agricultural funds, many of which have not covered themselves in glory. One key observation is that the price/valuation of farmland is essentially derived from comparable purchases. There is little regard for any metric on expected returns, as is the standard in investment circles. Frustratingly, it seems clear that there are plenty of ways to make a good return in farming, accepting that weather and other conditions will play a big part.

Equate those to interest rates and changing consumer behaviour in the world of equities. Institutional funds are not here for fun; they anticipate a contribution to their capital value of their portfolios. This may become an even bigger issue as climates change and existing land is degraded. Sustainable regenerative farming is now becoming the norm.

Water rights are even more challenging, being replete with political and vested-interest overtones. The US is currently toying with a similar scheme to Australia. The premise is that those with a water allowance in any one year have an incentive to use it, regardless of requirements, rather than sell it to others; therefore the concept is that there should be a tradable price. There is an unresolved dilemma on how farmers compete with institutional buyers. Yet throwing out the proverbial bathwater ignores a few transactions that might be working for the better interest of the environment through water allocation.

Energy trading is hardly new. The regulator encourages activity to create a deeper market, and most in the industry use futures to structure their requirements. At its elementary level, producers of energy are ‘long,’ while buyers are ‘short.’ As renewable capacity has sharply increased, this dynamic has changed. Yet assessing where and when supply and demand may not match up well is a natural sliver for a trader. The inefficiency lends itself to intermediaries to judge where the valuation may be incorrect, just like any market, but with far fewer financial participants.

Carbon trading may become similar. Corporations that have committed to a carbon goal are less likely to want to trade the nuances in order to get set for their reporting requirements. Knowhow will be critical.

At a broader level, where there are assets that others find difficult to assess and manage (agriculture) or where there are disparities between the nature of the buyers and sellers (energy markets), a select number of managers with a deep understanding of these sectors can represent an investment option that others are unwilling to consider.  

IN Partnership

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