Most fund managers have sought to operate within traditional asset classes such as Australian equities, property or hedge funds.
One, however, has chosen an asset class which has attracted very few fund managers to date — agriculture.
Rural Funds Management(RFM) was established six years ago to deliver agricultural investments, packaged in a unit trust, as an alternative investment.
Founder David Bryant says the company wants to be “good at farming and at managing funds that invest in farming”.
Since its inception, RFM has launched unit trusts in cotton and vineyard farm investments.
The cotton property is at Hillston in western New South Wales. The wine investments are centred on five vineyards in the Barossa Valley and the Adelaide Hills.
Investors can access both types of farming through the company’s diversified product that allows mixing units from all the offerings.
Bryant says the farming investments are offered as a unit trust, just as with an equities product. As a result, investors can sell their units once a year — something that cannot be done in tax-effective agribusiness schemes.
With tax-effective schemes dominating the agribusiness sector, hasn’t Bryant been tempted to ditch his investment concept and join the rush?
“We have been tempted to look at other areas of fund raising, especially when we saw a lot of money flowing into tax-effective schemes,” he says.
“We have stayed true to our original investment strategy.”
RFM is in the process of refining its management structure by separating the farming and fund management operations into two companies.
RFM Farm Management will look after managing the agricultural business and a new general manager for that company is in the process of being appointed.
The existing management structure for funds management will continue, with the same personnel including director Andrea Lemmon being responsible for compliance.
The company currently has about $90 million funds under management and Bryant expects this to grow to approximately $130 million by the end of the financial year.
The strong fund inflows have meant RFM is looking at buying more cotton properties and vineyards.
The drought has made it a tough year for cotton, Bryant admits, but RFM is looking to expand its cotton operations.
“We are looking to bring in some further cotton management expertise to get better returns for investors,” he says.
The key factor with cotton farming is water and Bryant says any expansion of this type of farming with be in the traditional growing areas in New South Wales and southern Queensland.
“We are targeting areas with proven cotton-growing potential and access to low-priced water,” he says.
“It is a mature industry and the development opportunities are limited.”
Meanwhile, RFM has 550 hectares of vines and with strong fund inflows into vineyards, the company is looking to buy more.
“We need to make another acquisition as the premium wine fund cash component is getting high,” Bryant says.
“We are looking at opportunities in Victoria and South Australia and possibly Western Australia. I can say the next vineyard will definitely be outside the Barossa.”
RFM is a grape wholesaler and has never been interested in creating wineries on-site.
“It was tempting to go into wine-making, especially when so many tax-effective schemes were doing so, but now many vineyards that have gone into bottling are struggling,” he says.
RFM has secured contracts for its grapes, which are used in premium wines made by a variety of wine makers.
The company offered an organic vineyard investment opportunity but this has been dropped due to the lack of demand from investors.
RFM is launching a new agribusiness investment sector in July — chicken farming.
The company expects to deliver seven per cent of Australia’s chicken meat supply and has already signed a contract with a large processor.
“It is not a glamorous industry, but it is reliable and low-risk,” Bryant says.
“We will have 107 sheds spread over 10 farms and the birds are turned over six times a year.”
The chickens will be grown from day-old chicks until harvesting at 55 days.
“We are diversifying the risks of investing in agriculture. In the next 12 months, we hope to add a fourth sector that doesn’t have any correlation with the others,” he says.
“However, with three sectors at present (wine, cotton and chickens), we are getting really good diversification.”
RFM uses financial planners for distribution of its investment trusts. The company funds, however, are often lumped in with tax-effective schemes, says sales manager Torben Pedersen.
“We are trying to promote investment in our business for the right reasons, which is as an agriculture investment and not for tax-effectiveness,” he says.
“We tell planners their clients are getting the opportunity to invest in some of the best agriculture investments in Australia, something they would not be able to do as an individual.”
Pedersen says it is important the advisers put their clients into the products for the right reasons — namely to diversify their portfolios.
“If up to 15 per cent of a client’s funds are invested in agribusiness it will help them get an increased return with lower volatility on a diversified portfolio,” he says.
“In a balanced portfolio, agriculture delivers a slightly higher return with less volatility.”
Pedersen says this is something tax-effective schemes cannot deliver because of the lack of diversification in the investment. The crop can often be subject to high volatility in the sale price.
“A traditional tax-effective scheme locks the money away for between 10 and 20 years, whereas we can offer annual redemptions for clients to move their funds when other asset classes are performing well,” he says.
“We are income-focused and the relationship with the investor will be cemented in the returns.”
However, while the vineyard returns are positive at present, with some exceeding prospectus forecasts (see table), there are risks, Pedersen warns.
“There is a price risk which we can hedge in cotton and fix through contracts with the viticulture,” he says.
“Water supply is also a risk but we have secured water supplies for our farms.
“Climate is also a risk, but we locate the farm assets in areas where the risk is minimised.
“Then there are pest and disease risks, but we operate our farms using integrated best management programs that are equivalent to ISO9003 standards.”
RFM has priced its fee structure more in line with the funds management industry rather than the tax-effective sector.
The entry fee is three per cent, minimum investment $10,000, and the annual management fee is 1.75 per cent. There is a trail for advisers of 0.75 per cent.
Pedersen says most advisers rebate all fees to the clients and 60 per cent of inflows come from superannuation.
RFM has been expanding its distribution base to become an approved investment on wraps.
It has just recently been listed on the BT Wrap and the numerous badged versions.
Pedersen says the company will be making a concerted push to be listed on more wraps and master trusts during the next 12 months.
