It’s that time of the year again, when the taxman is lurking and the issuers of agribusiness managed investment schemes get cracking on marketing their latest offerings. Dug Higgins surveys the market.
Following the collapses last year of Timbercorp and Great Southern, amongst others, and Forest Enterprises Australia (FEA) being placed into receivership in April, it will be thin pickings in the agribusiness sector this season – which will come as no great surprise to anyone.
Last season, investors stayed away in droves. This year will be worse for capital raising efforts as the nerves of gun-shy financial planners and their clients have been enlivened, not only by the recent fate of FEA but the public inquiries by the Parliamentary Joint Committee and others.
The question arises, is the sector dead? This is a difficult one. I think that for continuation in their previous form, the odds are stacked against them.
The Managed Investment Scheme (MIS) tax-effective structure has advantages and disadvantages.
However, MIS, contrary to popular opinion, is not specifically the problem, being a common structure used by many asset classes (although for the sake of simplicity I will use it in the context of agribusiness MIS here).
But like anything, it is open to misuse and abuse. If you do the wrong thing with it, the best assets in the world will not save you.
The inclusion of tax-effectiveness compounds the potential for misuse. It has often previously encouraged issuers to develop a system that maximises the upfront tax deduction, which is prone to creating problems with scheme cashflow later – hence the numerous mentions of a likeness to “Ponzi schemes” for the issuers involved. While we don’t believe a blanket ban should be imposed, the issues it creates should not be ignored.
Clearly things have to change. Fee structures of schemes, and business structures of the issuing entities, are key aspects, but there are myriad other details that will need reviewing if the sector is to survive and regain some form of trust, which will not be an easy or short process.
Some companies are quickly reacting and changing their structures as necessary. Others are already structured in such a way to somewhat mitigate these effects.
However, for some like FEA, change may come too late.
Is there a place for agriculture in an investment portfolio? I believe that the answer to that is yes, but the list of caveats is long.
Agribusiness generally has a low to negative correlation to broader asset classes, which is an obvious benefit in terms of portfolio construction. However, these benefits, when used to promote MISs, are often misconstrued.
This characteristic is often illustrated using standard deviation of returns or correlation comparisons against the wider asset classes of cash, equities, A-REITs et cetera. However, caution is needed. While several studies have been done in this area and have often been wheeled out in marketing campaigns, none of them has clear relevance to an agribusiness MIS because of the general lack of realistic comparison.
As an example, some use ASX-listed agribusiness stocks as the proxy for “agribusiness”. While this has in the past included companies such as Timbercorp, Great Southern and FEA, who were issuers of MISs, as well as other smaller companies which somewhat more closely approximate an investment into direct farming, it also includes larger entities like Incitec Pivot, Viterra (ABB Grain), Nufarm and Fosters, depending on whose index you use.
In any event, few ASX-listed entities could realistically draw a close comparison to an MIS as an investment, and they are of even less relevance as a justification of asset class performance.
Other comparisions are based on “agribusiness” being farmland and/or a farm business’s return on capital. Clearly then, too close a comparison with a MIS, in relation to other asset classes using such a measure, is potentially dangerous and misleading – unless at the very least you are investing in the land as part of a scheme (although there are some opportunities to do this).
MISs have a host of other issues affecting them, not the least of which is general illiquidity, over what is usually a long term, and higher management risk from many issuers. A MIS needs to be judged specifically on its merits and in accordance with its risks, both agricultural and management-based, not by a broad-based approach using dubious methods of comparison for the case for investing in agriculture.
Australian agriculture is an industry that often has sub-sectors, which can find injections of investor capital useful to allow expansion and improvements that would otherwise perhaps not occur.
There are many niche industries that have found this to be an overall positive in crystallising their competitiveness.
Unfortunately, there are comparatively few opportunities by which retail investors can gain access to direct investment in agriculture, as opposed to the other asset classes, and MISs have historically provided the main focus. Sadly, too many of these have found that formerly judicious levels of investment turned into a flood, with too much capital going into the hands of those who either did not have the foresight to see the implications of a massive surge in commodity production or deliberately chose to ignore it, seeing it as someone else’s problem.
Once capital inflows exceed the point at which an industry is self-sustaining, market forces can quickly become distorted – as the viticulture industry has proved, being only the latest in a string of incidences of this type.
Investors and advisers need to understand whether or not they are being exposed to industries which run the risk of magnified boom/bust scenarios or to managers or schemes which have no market imperative to get the supply/demand equation right.
Market signals need to be favourable in order to succeed. There are certainly worthwhile industries out there whose requirements for capital should be able to be aided by private investment. Sorting through them is the issue.
Last month, ASIC released a call for submissions for Consultation Paper 133: Agribusiness Managed Investment Schemes – Improving Disclosure for Retail Investors. CP133 details a proposed list of reporting benchmarks for MIS issuers, similar to those in place for mortgage and unlisted property schemes and finance company debentures.
CP133 proposes to provide a greater level of disclosure for investors and advisers and Zenith has made its own submission to ASIC in this regard.
We believe that it is important to note that while these efforts on the part of ASIC are positive, they will not be a “silver bullet” and advisers will need to be cognisant of the implications of such benchmarks which are likely to tell as much by what issuers don’t say as what they do under the proposed guidelines.
Now before everyone starts bombarding me with complaints, I need to make it clear that, in principle, I am a supporter of investment into agribusiness as an asset class – but only into agribusiness that’s done well. Investment into agriculture should be encouraged as long as it is driven by market forces that promote profitability and long-term sustainability.
There have been MISs that have performed reasonably to date, in contrast to some of the views expressed here. But they are generally few and far between. Going forward, scheme managers and advisers are going to have to work harder and smarter to ensure positive outcomes for investors in this sector.
Dugald Higgins is a senior investment analyst at Zenith Investment Partners and has been a specialist in analysing agribusiness and property MISs for 10 years. Prior to that he was a grazier in NSW where his family still runs a large cattle breeding operation