Super Fund’s farm buys look good value
The NZ Super Fund recently announced that it had made its first offshore farm investment taking a stake in a leading Australian beef stud. This brings the fund’s rural land portfolio to 33 farms worth approximately $340 million or just under 1 per cent of the Super Fund’s total assets. Commenting on the acquisition chief investment officer Matt Whineray said: “We continue to see rural land as an attractive long term investment and a good diversifier for our portfolio.”
While the Super Fund has the resources to buy a portfolio of farms most NZ retail investors do not and unfortunately farming, like residential property, is totally unrepresented on the NZX making access difficult for most New Zealanders.
This is a shame as both asset classes have a long-term track record of successful wealth accumulation for many New Zealanders.
When most people think of farming they think of getting up early in the morning and working long hours. If that wasn’t enough to put you off, the income generated by farms historically hasn’t been great meaning the investment rationale is dependent on capital growth which you don’t realise until you sell.
The NZ Super Fund with $36.4 billion in assets has access to just about every investment opportunity under the sun so why would they choose dairy farms in NZ and beef farms in Australia?
I spoke to Neil Woods, rural portfolio manager for the Super Fund, and he said that the original modelling when it bought the dairy farms projected a total-long term return of 8 per cent made up of 5 per cent in cash and 3 per cent in capital growth. He added “we remain of the view that this is achievable in this sector across geographies and select assets, with focused management. Recent analysis of the farms we own indicates that for our relatively short investment period to date (which commenced in production season ending 2012) the capital returns were slightly above 3 per cent with cash returns (derived on annually revised independent valuations) slightly lower than 3 per cent. The period includes two very low pay out seasons where the milk price was significantly below 10-year average real levels. We remain confident that our expected total returns are achievable”.
Woods added that although the Super Fund’s rural portfolio is currently 90 per cent invested in dairy that it is “currently actively looking in the beef and horticultural sectors for additional opportunities”.
That 8 per cent return looks okay relative to corporate bonds yielding 4 per cent, NZ shares with a prospective return of 8 per cent and international stocks priced to return 6 per cent.
Many analysts use the Gordon Growth Model to forecast long-term returns.
The model simply says that the return of an asset is equal to the dividend you buy it at plus the long-term projected rate at which profits will grow.
The Super Fund assumes a 5 per cent income from its dairy farms and that profits will grow at inflation (2 per cent) plus 1 per cent real growth. Similarly we get to an 8 per cent projected return for NZ shares given that the dividend is about 5 per cent and historically dividends have grown at 1 per cent above inflation.
The stockmarket has gone from strength to strength since the global financial crisis (GFC), however, average dairy farm prices haven’t benefited from the same re-rating.
This probably reflects two issues — firstly NZ companies have grown their profits strongly since the GFC and, more importantly, NZ shares have got more expensive in terms of valuation multiples. Dairy farms thus look better relative value versus shares than they did in 2008.
Just before it lost the election the National Government said that there was no rationale for Government to own farms and that Landcorp should divest its holdings. This raises the possibility that the Super Fund could buy Landcorp’s assets, manage the entity and IPO half of the Landcorp properties.
Listing would mean the Super Fund had a market price for valuation purposes and the potential to grow the asset via new equity and take NZ institutions and retail investors along for the ride.