“Invariably it ends up nastily. So that sort of aspect, while it’s a bit of a drag, it is certainly worthwhile.” Higgins says risks that affect agribusiness schemes can be quite different from “mainstream” investments and asset classes. “You’ve got fire, flood, disease and all those sorts of things,’ he says. “They affect most investment types. But there will be others, where there might be commodity-specific risks affecting that project. It might be in relation to the markets and prices that those projects operate in. It might be specific agricultural risks that they operate in.”
Higgins says it’s also very important to understand what’s going to happen to the commodity if and when it’s harvested. “Firstly, you’d have to be asking yourself what certainty is there that there is a market for the produce when it’s harvested,” he says. “But given that you tend to be quite often on long timeframes, the second thing is, well, is the market still going to be there when the product is harvested? And thirdly, what arrangements are there in place to allow some sort of certainty for sale of the product when that happens?
“Some companies will have sales contracts in place – some will be fixed-price and some will not be, just depending on ongoing timeframes and everything else – and quite often some of these projects won’t have sales contracts in place. “The presence of at least some sort of marketing plan and strategy for the product is a positive to look for; I am always a little bit hesitant – and you don’t get this very much any more – about managers that say, look, we’ll worry about that when the time comes. That’s something you want to be very wary of.
Whatever strides towards mainstream credibility agribusiness schemes may have made, not all major players are convinced of their investment merits. Anthony Serhan, head of adviser and research for Morningstar, says he has “never used them, and I do not advocate the use of them”. “When I have spent time looking at them…I have seen very few that stack up on an investment case basis,” he says. “And for that fact alone we’ve never covered them. They also tend to be high-commission-structure vehicles. Saying there’s a very strong investment case for them has been very difficult. “For that reason, we haven’t done it. But most [planning firms] do have an agrischeme or two on their [approved] lists, from a tax planning perspective – and to be fair, I think the industry has cleaned itself up a bit from where it may have been previously.”
Serhan says issues that financial planners need to consider include “to what extent do you think the investment case has improved, and to what extent can you point to schemes that have run their 10- year course and have returned a lot of capital based on their investment merits?” “These things have been sold for a long time – show me some schemes that have matured,” Serhan says. “It’s always about the next [selling] opportunity. But show me what they have done.”
Higgins agrees that it can be difficult to compare fees and charges and even commissions from one scheme to the next. “It’s notoriously difficult for an investor to work out whether or not those fees and charges are reasonable because, unlike perhaps broader managed funds, where fee benchmarks, et cetera, are a lot more transparent and widely known, things like this are very difficult and vary related to the various commodity subsectors that they’re operating in,” Higgins says.
“We know that adviser commissions in this area tend to be higher than most other investment sectors. It averages 8 per cent across the industry – that’s on a preliminary set of numbers I’ve worked up based on 200 projects over the last couple of years. It’ll go perhaps as low as 5 [per cent] to as high as 15 [per cent]. “Mostly the levels of commission will be disclosed in product disclosure statements (PDSs); sometimes, however, they won’t, and I usually take a fairly dim view of that, if you really do not know how much the product is being pushed.
We just know for a fact that products with higher levels of commission tend to be riskier than stuff that’s mainstream. Certainly in the property industry, on the unlisted side, there’s a very strong correlation between high commissions and product failures. “It’s an accepted part of the world, in that the riskier a product is, the higher the level of commission you need to get a sale. To a certain extent, that’s a fact of life. It’s a wise thing to go and check what commissions a project offers generally.”
Higgins says it’s also necessary to understand how tax benefits will accrue, and how investors can expect to receive returns over the life of a project. “The projects on offer tend to have a broad range of how the income streams will act,” he says. “Some projects will have a lump sum at the end, like forestry; other projects might be looking to pay a return each year, once they’re set up and established, so that’s things like horticultural projects, or viticultural projects. “Other projects might have a shorter start-up time there’s a couple of grains projects out there that really only take a season to get going.
So if you were looking perhaps to have a regular income, you might buy some units in a forestry scheme that gives you a lump sum at the end, and mix that with some units in a scheme that also pays you ongoing income. “And that aspect flows through to the tax implications as well. Some projects will pay all their fees upfront, so you get all the tax deduction upfront; others might have a lump sum upfront but they might have ongoing annual payments as well, so you also get a continuing knock-on effect from the tax-effective point of view as you go. “So there’s the ability to mix-and-match not only on the diversification or risk side, but also the income side as well.”
