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If life throws lemons at you, learn to make lemonade! March 30, 2011
This article introduces you to an unique themed fund. This fund will not only provide you with global diversification but also let you profit from rising food prices
Author : Manjunath Gaddi


If life throws lemons at you, learn to make lemonade!

The increase in the prices of food items continues to be a persistent problem for the economy. The political turmoil in North Africa and Middle East has already raised the crude oil prices which will again lead to higher fuel prices. All these factors are leading to increased cost of living and people would have to pay more from their pockets. Thus, inflation is a cause of concern to everyone, the policy makers, the common man and investors too.  

Inflation impacts in following ways:

  • Increases your livelihood expenses thereby, reducing the investment money available with you
  • Also, eats into the ‘real’ returns earned by your investments. Real returns are the returns earned by your investments minus the rate of inflation. So, on a given date having  a certain rate of return on your investments means a higher inflation rate would give way to lower real returns
  • High levels of inflation generally forces the central bank of that country (RBI, in our case) to hike interest rates which impacts equities and debt assets

Food Inflation: A cause of concern

One of the contributors to high inflation in India is the persistent rise in the prices of food articles. However, food inflation is not localised to India but is impacting the whole world. The chart 1 on the side, shows the rate of food price increase across the world, as seen by the sharp rise in the FAO Food Price Index published by the UN Food and Agriculture department and the rise is much higher in comparison to that of India.

Chart 1: Food price increase in India and World

Food Inflation: an opportunity to profit

There are very few products available in the India that could help an investor profit from food inflation.  Here, either you will have to use commodity futures from the commodity exchanges or you can consider DWS Global Agribusiness Offshore fund.

DWS Global Agribusiness Offshore fund

The DWS Global Agribusiness Offshore fund (offshore fund) is an overseas Fund of Funds (FoFs) which invests into DWS Invest Global Agribusiness Fund (underlying fund). The offshore fund is managed in India by Aniket Inamdar and Kumaresh Ramakrishnan and the underlying fund is managed by Dr. Oliver Kratz.  The offshore fund was incepted in India on 14 May 2010. The underlying fund does not have a benchmark. However, in India the fund has MSCI World Index as the benchmark following SEBI norms which state every fund to have a benchmark.

Investment Theme

The fund’s agriculture oriented theme is based on investing in businesses that service and earn profits from increasing global population, rising income of the people (especially in the developing world)and limited land/water resources. All these factors will help companies orient themselves towards the agriculture sector to earn profits in the long run.

This underlying fund does not seek to profit by investing into futures of food commodities, as this would increase food prices and can be the cause of socio, economic and political crisis across the world. However, the fund seeks to profit from the increase in the share prices of agriculture related companies. The fund will invest in companies that profit from the agriculture sector i.e., right from seed and fertilizer manufacturer to supermarkets.

Performance

Although, the offshore fund has a history of less than one year, it has already outperformed SENSEX and MSCI World Index (in INR) by good margin. As at 25 March 2011, this fund has given 20.3% since its inception, while SENSEX and MSCI World Index have given 9.0% and 14.0% since the fund’s inception. The chart below shows the performance of the fund against the performance of SENSEX and MSCI World.

Portfolio Composition

As at January 2011 end, the underlying fund has allocation of more than 56% in companies incorporated in US, Switzerland, Brazil and Canada.  India does not figure in the top 10 countries.

Syngenta, Monsanto, Archer Daniel Midland, Viterra and Bunge are the top five companies that this fund has invested into with these five companies accounting for 28.5% of the portfolio. Monsanto is a seed producer, Syngenta is a herbicide / an insecticide company, Archer Daniel Midland, Bunge and Viterra are food grain procurers, transporters and processers.

 Conclusion

One can consider investing in this fund considering two perspectives; ‘theme based diversification’ and ‘geographical diversification’.
Chart 2: Performance of DWS global Agribusiness
offshore fund along with SENSEX and MSCI World Index

The fund is based on the agricultural theme, which is unique in India with none of the domestic funds offering a similar theme. Additionally, the agriculture theme is expected to do well on a global scale in the future considering the increasing problems in living conditions. The current increase in food prices will increase the cash flows of companies in the agriculture space and ultimately, increase in profits. This would benefit the investors investing in this fund and the agricultural space.

In terms of geographical diversification, the fund is investing into companies related to agriculture across the world. Since, India does not figure out in the top 10 countries, the investor in this fund will also accrue diversification benefits. This is seen in the level of correlation between the daily fund returns and that of SENSEX. The fund’s daily returns have 25.7% correlation with the SENSEX’s daily returns whereas domestic equity fund has a higher degree of correlation with the SENSEX’s movements.


iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.

 


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