June 3, 2023

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Truly Business

Nuveen has an strange multibillion-dollar inflation hedge. CEO Jose Minaya clarifies

7 min read

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There are traditional strategies to hedge towards inflation — factors like gold and Ideas (Treasury inflation-guarded securities). There are newer techniques crypto advocates say bitcoin falls into that camp. But potentially an unexpected way to hedge towards inflation and volatility is investing in farmland. 

Jose Minaya is the CEO of Nuveen, a division of TIAA, and he is hoping to harvest gains from investing in agriculture belongings. Right here he is, in dialogue with Leslie Picker. 

(The articles beneath has been edited for duration & clarity)

Leslie Picker: We’ve found some pretty frightening inflation readings currently. How does farmland play into that?

Jose Minaya: You know, this is form of element of the key cause we invested in the asset course. I consider when we started on the lookout at purely natural methods, the plan was, properly, how do we supply far better diversification for our individual portfolio, hunting to get much better publicity to volatility or secure ourselves against volatility, and then inflation was a key component of just assuming, at some level in the potential, we will be suffering from higher concentrations of inflation. How is our portfolio shielded versus that? And farmland is an asset class that we felt does both equally on the volatility facet and the inflation side, since what attracted us to farmland and what drives the correlation attributes is that both equally desire aspect is inelastic in terms of folks will need to try to eat and the offer facet is inelastic in that they’re not making any much more land around the environment. And if anything, we have a reduction in land presented what is occurring from an environmental viewpoint. And it is really a commodity that is making at the conclude of the day, which is really correlated to inflation.

Picker: Using a appear at the returns on a threat-return foundation, farmland has outperformed lots of other asset classes, most other asset courses seriously, such as indexes like the S&P and gold and Treasurys about the final 50 several years or so. If that is the case, why are not there extra resources and more belongings at the rear of this? It truly is my knowledge that only about 80% of farmland has been institutionalized at this point. What do you imagine are some of the key hurdles?

Minaya: Very well, if you feel about farmland on a around the world basis, I would say well above 90% of it is continue to in the arms of folks and families. So it is an asset course that is continue to pretty nascent in conditions of its access to capital markets. I normally compare it to genuine estate – we’re a significant authentic estate trader as perfectly – you go back 100 decades, it was largely in the hands of private buyers, appropriate? And you built a developing or you designed real estate due to the fact you want to set people in it. Currently, it can be acquired a good deal more entry to money marketplaces, you can get public exposure to genuine estate. This is kind of where I feel the route is going for farmland. That institutional ownership has improved, I feel appreciably more than the past ten years, yet it is nonetheless fairly a lot in private hands. So a significantly far more inefficient sector from a capital markets standpoint, but yet again, in there lies a great deal of alpha for us. It is really why we like asset classes that are not as effective and we can travel surplus returns specified the danger we’re using.

Picker: You described briefly that the footprint of farmland by itself is shrinking because of to climate transform. I suggest, we hear each and every day on the information fires, destroying vineyards, floods, destroying farms, warm temperatures, sturdy storms, droughts. I mean, won’t all of that concern you as you place so considerably dollars powering this asset class? I imply, this asset course is transforming significantly by the calendar year.

Minaya: I consider it can be the No. 1 hazard factor that we glance at in farmland. A person of the matters for us when we made a decision, very well, we’re investing in farmland, exactly where are we investing it? The to start with one was [from a food] safety viewpoint. We preferred to commit in the big grain exporting locations all-around the earth – the U.S., Brazil, Australia, pieces of central Eastern Europe. All over again, we never want to offer with food stuff protection issues, we want to deal with the locations that are making to feed the entire world. The other piece that actually ties into farmland is drinking water and there is certainly diverse risk profiles. You can go to destinations that have a well-recognized profile for obtaining h2o. All those returns are heading to be a large amount lower. You can have other spots that are additional uncovered to floods at situations, to droughts, to fires. Individuals are going to possibly be higher return for reduced hazard. For us, we enjoy in that spot in which we know the infrastructure is in position, we have extra water, we pay out for that, which is why our returns are almost certainly much more in the high single digits, mid-single digits, yet really steady with reduced challenges as it relates to local weather change. 

Picker: Are there precise areas inside farmland that you see chance right now extra than other certain crops or locations or, or things that you might be on the lookout at that you assume offer the best risk-return profile?

Minaya: I believe via escalating our portfolio we observed various locations of farmland – and it’s fascinating –  there is unique levels of possibility and return, ideal? Your most traditional one is, I buy land in the Midwest in Champaign, Illinois. And there is kind of the lowest chance profile … it’s where some of the ideal land in the earth lies. What is actually good about this asset course is there’s no vacancies. We don’t have to fear about, “Can this be rented?” We get paid out at the starting of the season so there are no lease defaults. So it can be a extremely, extremely lower hazard asset. Now, as we seemed into other components of agriculture, like vineyards, and went to sites like California and stated, “Ok, there is no far more acreage to be designed right here. It really is not authorized.” The desire for wine use is heading up and what we are looking at in the demographics. Our ability, then to glance at items like vineyards then took us from a mid-single-digit return to a small double-digit return. Very little little bit extra risk, for the reason that now you have received a minor bit additional capex to devote, but things like vineyards grew to become extremely eye-catching. Almonds was another just one exactly where we said, “Okay, here’s an stop crop that is escalating in demand from customers, mainly because the demand from customers is from Asia.” So we can be in a area like California, exactly where I consider we’re the third-major almond grower in the globe, the need is coming from Asia, so we can tie to that publicity of a developing desire, increasing marketplaces in emerging markets in destinations like China, in India, still we are undertaking it by a quite safe financial investment in the U.S. All those are the variety of issues that we identified definitely interesting.

Picker: As an institutional trader in farmland, you are in a position to get basically a coupon or a yield from lease from the farmers who lease from you. And then you also are capable to deliver returns via funds appreciation. What about [the] average investor? Is there a way for any individual who’s observing this to get included in this asset course, primarily as a diversifier and inflation hedge that you talked about previously?

Minaya: Sure, I imagine the first way that traders get exposure to it and it truly is a quite dull way, if you consider about our stability sheet which delivers assured earnings by means of annuities, a good deal of this is embedded in the diversification of that asset class. We have viewed what is occurred now with the Secure Act and the plan that you may see a lot more assured earnings or secured revenue in 401(k)s – pretty tedious – but this is the diversification that performs into, provides you accessibility to these styles of asset lessons. That currently being mentioned, Leslie, yes, this is even now quite substantially in institutional arms. We just launched past calendar year our first open-ended fund that supplies additional liquidity. It is now accessible in more retail channels and specially in the U.S. and U.S. retail, U.S. superior net really worth channels. So all over again, if you go again to true estate, that’s how it begun, personal palms, a lot more institutional arms, you began viewing it far more in the wealth channels. Ultimately, you observed REITs, general public REITs. You are commencing to see that come about in agriculture. Once again, that is element of what we adore – the point that it is broadly available, additional inefficient, gives us a lot more returns. That liquidity is coming and the unique autos are coming at the rear of it.

— Ritika Shah contributed to this write-up

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