Weighing up the pros and cons of agribusiness
Zenith Investment Partners' analyst Dugald Higgins lists the pros and cons for investors considering an exposure to the agribusiness sector.
Pros
- Agribusiness as an alternative asset class has a low correlation to mainstream assets like equities, property, fixed income and cash.
- Thematic drivers like global population growth, changing dietary patterns and rising affluence make grains, oilseeds, dairy and protein (meat) look attractive.
- There can be tax benefits for investors with the right characteristics, but investment in an agribusiness MIS must not be considered purely for tax reasons.
- It must be considered as a way of bringing effective diversification to an investment portfolio first, and as a tax planning measure a distant second.
Cons
- All investments are only as good as their structure. You can’t make poor assets better through structuring, but you can make good assets useless if the structure isn’t right.
- Most forms of agribusiness operations involve long-dated, relatively illiquid assets like forestry and, as such, many funds can either have low liquidity with very shallow secondary markets or nil liquidity.
- Agricultural investments are characterised by a wide variety of risks associated with climatic and environmental influences, manager risks to operations and risks posed by natural disasters.
- Use of high levels of borrowing by the fund manager and the investor (if using personal gearing) significantly increases dangers.
- High level of counterparty risk with the responsible entity and the investment manager. We would suggest that these risks are generally higher in agribusiness tax-effective schemes than for other asset classes.
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