Agricultural investment schemes suffer from an image problem, but Canberra’s only fund manager wants to change all that, as John Wilkinson reports.
Investing in agricultural projects has not had a good image in recent years with a number of very spectacular failures.
Admittedly, the failures have been in the tax-effectiveness area and the merits of schemes sold on their commercial viability has not always been well-publicised.
A Canberra-based fund manager is hoping to prove that investing in agriculture will become a very acceptable investment class.
Rural Funds Management (RFM) is applying traditional fund manager rules to its agricultural investments from which its hopes to see returns of 15 per cent.
It has also picked up a very large mandate, $200 million, for investment in Australian agriculture from the US-based Hancock Agricultural Investment Group – part of the $US125 billion John Hancock Life.
RFM was formed in 1997 by a leading agriculturist Max Bourke and financial planner David Bryant. Bourke is now the chairman of RFM while Bryant is the managing director.
The idea of an agricultural fund manager was Bryant’s. “I had spent 10 years as a financial planner and had always intended to become involved in the investment side of the industry,” he says.
Bryant researched various options over five years, including looking at the tax-effective schemes that were being offered at that time.
“Many of the tax-effective schemes failed because they were deal-driven rather than yield-focussed,” he says.
This led Bryant to look at creating an income-focussed investment vehicle.
However, the final idea didn’t gel until Bourke arrived on the scene.
“Max was a client of the financial planning firm (Civic Financial Planning in Canberra) where I worked and we became involved in what was our first investment – Murrumbidgee Farming,” says Bryant.
This scheme raised $5 million for a cropping property based at Hay in New South Wales. The principal crops there are corn and soya beans.
The philosophy behind the investments is practical, as Bryant explains.
“If the investment does not work, we will sell it and find something else,” he says.
“We do not have a romantic view of agriculture.”
In 1998 RFM bought 6500 hectares at Hillston in New South Wales to start a large-scale cotton operation.
“Economies of scale are very important and we also have applied this to our wine investments,” he says.
This has led to purchases in the Barossa Valley and Adelaide Hills to produce premium wine grapes.
The hard commercial reality is also applied to these investments. If the grapes are not sold under contract, then no planting takes place. Likewise, the cotton is forward-sold for up to four years.
The company is also looking carefully at becoming competitive in global markets. Bryant sees France as a major competitor in the wine business. In France, one person looks after three hectares while at RFM’s vineyards, one person looks after 40 hectares..
RFM has also invested in the farms to improve profitability. At Hillston, the company spent $15 million on earth-moving to create the cotton fields, and another $5 million on equipment.
“When we develop a property we look to get $1.50 back on every dollar we spend,” says Bryant.
The wine and cotton properties have been placed in the Agricultural Income Trust 1.
This trust is not a tax-effective investment and looks to return 11 per cent in the first year.
The prospectus states that the investment “is designed to make a good profit, not a loss, and to pay profit to investors in a tax-efficient way”.
The return is achievable by purchasing existing vineyards. While the cotton fields and further vine plantings will come on-stream, later there will be income flowing into the trust from day one. The cotton fields will also provide income from an early stage in the investment.
Bryant says by diversifying the trust, each crop can counter any downturn in the respective industry.
“Our rule on diversity in the trust was to invest in two commodities in two geometrically different races,” he says.
“As a fund manager it would be silly to offer just Australian equities as an investment, we are operating on the same principle as other fund managers and diversifying our investment products.”
The trust is planning to raise $20 million through $1 units. The offer is to close in December, but Bryant is confident that it will close earlier. Investors are required to remain in the scheme for four years, after which their units can be traded. As the trust is new, there is no indication as to the liquidity of this potential secondary market.
However, the trust is designed to last 80 years, unlike tax-effective schemes which tend to last 15 years, and if the assets are sold, the proceeds are distributed to unitholders.
Management fees for the trust have been set at a reasonable amount, says the independent research by the Australian Agribusiness Group into the offering.
It notes that the initial fee to RFM is 1.65 per cent of the funds subscribed. As the report notes this does not require investors to outlay any further cash. RFM’s management fee is then performance-based, which will give investors higher returns. And there is a performance bonus of 22 per cent of any return it achieves above 10 per cent.
The initial adviser’s commission is up to 3 per cent and the trail is 0.44 per cent.
An important part of the investment strategy for RFM investment vehicles is the people it employs, says Bryant.
The company is careful to only appoint experienced farm managers who have worked in a property’s particular crop.
“Our approach has been to enter a commodity and find the best manager in that area,” he says. “We can afford to pay good wages and give the managers equity to ensure good performance.”
As with any other fund manager, RFM has a compliance procedure with external audits, says Andrea Lemmon, the company sectary.
The only difference with RFM’s compliance is that it extends to the farms where Occupational Health and Safety are also an issue.
“We want to be viewed as a fund manager, not a farmer,” says Lemmon. “We just invest in agriculture.”
RFM’s big coup this year has been to win the Hancock mandate, the first time the US fund manager has invested outside the United Sates.
RFM manager Andrew Strahley says the US fund manager looked at Australian agriculture and decided to invest on a long-term basis. The returns have to be 15 per cent or above and it will not invest in anything “with legs” says Strahley.
The mandate requires RFM to invest in a minimum of seven properties with widely diversified crops and geographical spread. The property value is to be between $2 and $30 million and no more than 40 per cent of the mandate is to be in developmental properties.
The commodity mix RFM has identified includes grapes, almonds, cotton, sweet corn, citrus and macadamia nuts. Strahley says the company is close to making the initial investments for Hancock.
The next step for RFM will be to launch the second Agricultural Income Trust, says Bryant.
The second trust will have an unlimited life and will allow assets to be bought and sold without forcing the closure of the vehicle.
RFM now has $70 million of funds under management, but Bryant intends that to grow to $500 million during the next four years.
