Agriculture allocations cushioned sell-off

22 May 2020

Allocations towards agriculture stocks have cushioned some of the blow from the COVID-19 pandemic induced sell-off earlier this year for funds with overweight positions.

Though the share price of two of Australia’s largest agriculture businesses – Elders and Graincorp – have fallen in line with the global sell-off as a result of the COVID-19 pandemic, the two stocks have managed to recover.

Since the beginning of the year to 20 May, 2020, the Elders stock has returned 54.25% and Graincorp 7.24%.

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Performance of Elders and Graincorp from 1 January 2020 to 20 May 2020

Source: FE Analytics

However, since the start of the year to 30 April, 2020, the five funds with greater than 1% allocations towards either stock are still feeling the pinch of the sell-off.

According to FE Analytics data, within the Australian Core Strategies universe, the best performing of these funds was Pendal Smaller Companies fund at a loss of 13.08%.

This was followed by Perpetual Pure Value Share fund at a loss of 13.26%, Perpetual Wholesale Smaller Companies fund (-14.21%), UBS Australian Small Companies fund (-16.06%), and Yarra Emerging Leaders Direct fund (-18.67%).


Performance of funds with over 1% allocated to Graincorp or Elders over four months to 30 April 2020

Source: FE Analytics

Pendal senior portfolio manager, Paul Hannan, told Money Management that Elders performed exceptional well as it outperformed significantly during the sell-off and was not well above its pre-COVID-19 highs and helped cushion the sell-off blow. Graincorp, he said, had also performed well.

Hannan said the fund had an overweight towards Elders and Pendal’s March factsheet noted it was a high-quality defensive stock which served well during the sell-off.

“Agribusiness has seen little impact from COVID-19, given social distancing measures are having limited impact, outside of some issues with labour supply in horticulture – while food demand remains robust,” the factsheet said.

“Drought-breaking rainfalls in many parts of the country, coupled with a weaker Australian dollar, are also adding to the tailwinds.”

Earlier this week, China announced it would slap Australia’s barley farmers with two tariffs that expect to cost these farmers hundreds of millions of dollars

However, Hannan said they were unconcerned about the tariffs.

“We haven’t changed our agriculture weights over concerns on the proposed tariffs. Elders is well diversified in terms of geography and commodity-wise and any impact will be reasonably small,” he said.

“Elders is one of our largest positions and is an exceptional company. It has taken a lot of cyclicality out of the earnings and its focus on return on investor capital in various businesses seems to have worked exceptionally well during the last three pretty tough seasons.”

The Yarra fund also had an active overweight towards Elders as it was supportive of the firm’s acquisition of Australian Independent Rural Retailers.

“More broadly, we see cyclical upside (as cropping recovers from depressed levels following the drought), the potential for further accretive acquisitions, strong corporate appeal given its attractive business segments, a simplified capital structure relative to prior years and modest valuation,” its April factsheet said.

“We expect the stock to rerate from its 12-month forward price to earnings multiple of 13.5 times.”

However, looking over the longer term, Perpetual’s Pure Value Share fund had been the slowest to recover as its performance is still in the red, compared to the other funds.

Over the three years to 30 April, 2020, the UBS fund was the top performer at 25.42%, followed by the Pendal fund (9.67%), Yarra’s fund (7.74%), Perpetual Wholesale Smaller Companies fund (4.25%), and Perpetual Pure Value Share fund (-7.2%).

Performance of funds with over 1% allocated to Graincorp or Elders over the three years to 30 April 2020

Source: FE Analytics

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