With the world population set to reach 10 billion by 2050 and with resources scarce, Noel O'Halloran, director-chief investment officer at KBI Global Investors, discusses with this news service the success behind the KBIGI Global Resource Solutions Strategy, which focuses on water, food and clean energy.

Climate change, Russia's invasion of agriculture-rich Ukraine and concerns about post-pandemic supply chains have put the term "food security" firmly into the public gaze. And that's attracting attention from wealth managers.

As an example, Noel O'Halloran, at Irish-based KBI Global Investors, recently highlighted the importance of producing more food using fewer resources to feed a growing population sustainably.

Precision agriculture which optimises crop productivity is a key tool for achieving this, enabling farmers, for instance, to target their fertilizer application more precisely, he said. The KBIGI Global Resource Solutions Strategy (GRS) invests in this, including firms such as Trimble Navigation, a company which provides satellite technology and equipment to ensure the optimal application of fertilizers, seeds, water and the optimal use of arable land to maximise crop yield. “With agriculture being a big user of water, it also invests in drip irrigation equipment, to produce more crops per drop,” O’Halloran told this news service in an exclusive interview. It is designed to precisely release water to the roots of plants.

In addition, the GRS invests in the transport and storage of agricultural commodities to cut waste, since up to 50 per cent of global harvests result in waste from farm to fork. Firms such as US agribusiness Bunge and US multinational ADM, which buy, transport, store and process agricultural commodities, help to achieve this. Other investments include agricultural input firms such as seed and fertilizer providers, including US-based The Mosaic Company, which mines phosphate, potash and collects urea for fertilizers, Deere & Co, a US agricultural machinery manufacturer, as well as professional farmers Gladstone Land.

With the food system accounting for 30 per cent of emissions, the fund also invests in companies that produce supplements to reduce methane emissions from livestock to combat climate change, he said. Holdings include Dutch multinational DSM, which specialises in nutritional and speciality food ingredients. Other holdings are Irish-based food company Kerry Group, which builds out agribusiness infrastructure to ensure that agricultural commodities have a clear pathway from farm to fork. Investment in agriculture infrastructure is needed to reduce the large wastage that occurs between production and consumption.

“There are also some stocks in our universe in vertical farming and plant-based meat, but they are not a major part of our portfolio,” O'Halloran said. Vertical farming involves growing fruit and vegetables indoors all year round with LED lighting, using 95 per cent less water than traditional farms do. “We invest too in organic farming, as it does bring ESG and climate benefits. We do see alpha opportunities in organic farming and it offers a nice diversification, as does vertical farming,” he continued.

Investment philosophy      
The firm believes that there are compelling investment opportunities in companies that provide solutions to resource scarcity across water, food and energy, driven by five long-term trends. These include an adequate supply of water, cleaner energy and arable land for farming as well as increasing demand for resources, driven by population growth, industrialisation and urbanisation. It also includes increasing regulation and government support; increasing investment in infrastructure to address urgent global requirements and increasing investment in technology to create solutions and facilitate the more efficient use of resources.

Typically, up to a quarter of the GRS is invested in agribusiness. The firm believes that the agribusiness sleeve adds a nice balance to the overall portfolio when combined with the energy transition which is more secular growth-oriented and water which is cyclical. “The agribusiness sleeve tends to be the most value-oriented and is the most inflation sensitive sleeve in GRS given the link to agricultural commodity prices. That said it is not 100 per cent invested in agribusiness as it can be volatile in terms of performance, with many agribusiness firms being price takers versus price makers. Agribusiness is more tied to the vagaries of weather and geopolitics. This highlights the value of blending agriculture with water and the energy transition,” the firm continued.

Performance  
Agribusiness was a top performer in 2021 and the start of 2022 with a rotation to value stocks and inflation being top of mind for investors in this period. “Other factors supporting agribusiness in this period were the supply and demand constraints impacting agribusiness inputs and crop prices exacerbated by geopolitical issues like the invasion of Ukraine and drought conditions across major production regions. The GRS portfolio benefited from an increased agribusiness allocation during this period,” the firm said.

Nevertheless, that performance has unwound in the 12 months to the end of the first half of 2023, as crop prices came down from their peaks, the firm added. “Agribusiness stocks have rerated similarly. We had successfully reduced GRS’s agribusiness allocation in April 2022 on the back of profit taking,” the firm continued.

The strategy has consistently outperformed the benchmark, the S&P Global Natural Resources NR Index, over the past one-, three- and five-year period. Top 10 holdings include French firm Veolia Environment, which specialises in water, waste management and energy, as well as the Canadian fertilizer company Nutrien, and the American Water Works Company. Holdings are mainly found in North America and Europe, with some exposure to emerging markets and Japan.

Looking at agribusiness today, with the bottoming out of the prices of agribusiness commodities and inputs and the relative valuations of the agribusiness stocks vs water and energy transitions stocks, the firm finds the agribusiness theme attractive and said that it has increased its allocation.