From real estate to real assets
Agricultural land, an interesting option for pension portfolios
Pensioenfonds PostNL makes a sustainable difference by investing in agricultural land.
In brief:
- Investing in agricultural land means investing in the food transition
- Agricultural land enjoys a low correlation with equities and bonds
- Investing in agricultural land combines financial and sustainable objectives
Historically, the allocation to real assets in the alternative or illiquid portion of pension fund investment portfolios has mostly been made up of real estate. Yet the real assets class contains much more and, looking to the future, real estate is facing several challenges. Returns are being squeezed and Dutch real estate is no longer viewed as a safe haven.
Other real assets, such as infrastructure, forestry and agricultural land, currently only form a small part of pension fund investment portfolios but enjoy interesting characteristics. ‘This means pension funds are missing out on opportunities for improving and diversifying risk, return and sustainability,’ says Wilse Graveland, head of fiduciary management at Van Lanschot Kempen.
‘Real assets have several drivers of return and the risk and return characteristics differ according to the type of real assets. The Future Pensions Act (WTP) gives pension funds an additional incentive to examine these more carefully, in part because the allocation to equities could increase and a more diversified long-term return is required within that.
Other real assets, such as infrastructure, forestry and agricultural land, currently only form a small part of pension fund investment portfolios but enjoy interesting characteristics. ‘This means pension funds are missing out on opportunities for improving and diversifying risk, return and sustainability,’ says Wilse Graveland, head of fiduciary management at Van Lanschot Kempen.
‘Real assets have several drivers of return and the risk and return characteristics differ according to the type of real assets. The Future Pensions Act (WTP) gives pension funds an additional incentive to examine these more carefully, in part because the allocation to equities could increase and a more diversified long-term return is required within that.
‘It was a difficult decision for Pensioenfonds PostNL,’ Board Chair René van de Kieft reflects, looking back to March 2021 when the fund started this journey. The pension fund wanted to make its illiquid investments more sustainable and identify alternative and complementary investments to real estate and so got talking to the fiduciary team about the option of investing in agricultural land. Direct experience of agricultural land in the Netherlands played a part here too.
‘We had three arguments in favour of focusing on agricultural land,’ Van de Kieft explains. ‘Agricultural land plays an important role in the two SDGs singled out by Pensioenfonds PostNL: good health & well-being and climate action. Agriculture is the basis for the food chain, but industrial agriculture also depletes the soil and emits a large amount of carbon dioxide and other greenhouse gases. We sought agriculture with an impact and wondered whether we could invest in projects aimed at making agriculture more sustainable. So that we can contribute positively to the cultivation of healthy crops by using an agricultural approach that contributes to fewer greenhouse gases and greater biodiversity.’
A second argument was that agricultural land as an alternative investment enjoys a low correlation with other asset classes, such as equities and bonds, and a slightly higher expected return. Van de Kieft: ‘What also played a role was the fact that it’s harder to make the real estate in our portfolio more sustainable as it’s housed in a fund for joint account. There were also questions surrounding expected future returns.’
Groundbreaking journey
The main question on the table for Pensioenfonds PostNL was: can we invest in agricultural land and make a sustainable difference? The search for an answer to that question was the start of a groundbreaking journey.
‘The Board wasn’t initially that keen,’ Van de Kieft admits. ‘One member asked: “Why invest in agriculture when we already have a variety of asset classes?” and another commented: “We don’t know anything about it, are we in a position to assess the investment properly in terms of risk and return?” We encountered a great deal of resistance, and rightly so, but took the time to provide the Board with proper insight into all the aspects of investing in agricultural land. The Board’s enthusiasm grew over time. The best part is that the projects appeal to the imagination and the start-up and accrual phases went well.’
Once they had received the green light for diverse global investment in agricultural land, the next challenge was how to go about this. Pensioenfonds PostNL questioned its fiduciary manager Van Lanschot Kempen Investment Management closely about the knowledge and expertise that was required. The fund’s confidence in VLK derived from the bank clearly being able to show that it worked with many expert parties and partners. This resulted in an agriculture mandate that invests in agricultural funds selected by Van Lanschot Kempen and in the newly created Van Lanschot Kempen SDG Farmland Fund. A new fund for agricultural land proved to be essential, as other funds had no exposure to Europe and were unable to comply with Pensioenfonds PostNL’s ambitious sustainability policy.
Weighing up options
Van de Kieft says that his pension fund wanted to be closely involved in constructing the portfolio. ‘We needed to weigh up our options and make decisions on tough questions. Do we restrict ourselves to investing in arable farming or is livestock farming also eligible? Do we combine agriculture with forestry? Do we opt for buy & lease, in which we own the land and lease it to a farmer? Or do we go for own & operate, in which the land is owned by partners involved in production? Or do we choose a flexible variant of these? And which crops best suit the land? Permanent or annual crops or a mix?’
Van de Kieft: ‘We asked our fiduciary manager not only about above-ground issues but also underground issues. How do we deal sustainably with irrigation, fertilisers and soil quality?’
And the most important aspect when it comes to making an impact: what standards do we set? ‘For example, we want to improve soil quality. What does the zero measurement show and where do we want to be in five years’ time?’ Van de Kieft continues. ‘In this respect we regularly asked whether we could go even further in setting sustainable objectives, so that we can have an impact more quickly.’
Van Lanschot Kempen was able to answer Pensioenfonds PostNL’s questions based on the collected data and developed a sustainable investment strategy for agricultural land. The Board decided to invest solely in agricultural land, primarily because of the higher potential return versus livestock farming and forestry. Apart from the lower return on livestock farming, animal welfare can also pose problems. Forestry involves greater dependence on timber as the sole product.
By investing in agricultural land, the fund can also contribute to the challenge of distinctive long-term trends, such as global population growth and healthier food. Agricultural land offers many options for diversification too thanks to the wide variety of crops.
Food transition
‘Investing in agricultural land means investing in the food transition. In contrast to the energy transition, the food transition has so far received little attention,’ Richard Jacobs points out. He is one of the portfolio managers of the Van Lanschot Kempen SDG Farmland Fund and as a smallholder himself manages a vineyard and forest garden in his spare time.
‘The growth in the global population calls for more food. Food quality has been under pressure for some time as well. Agricultural production will increase to meet the growing demand for food. At the same time, the available agricultural land is becoming less fertile and production growth is reaching the limits of current agricultural methods. Food production is responsible for 30% of the carbon footprint*.’
According to Jacobs, it is inevitable ‘that we switch from intensive forms of agriculture to forms of holistic, regenerative agriculture. The idea is to enhance natural resources rather than deplete them. We aim to improve the soil quality of the agricultural land we invest in via the Farmland Fund. With a greater focus on the organic and physical properties of the soil, food quality and resilience of production.’
On the Van Lanschot Kempen SDG Farmland Fund land in Wisconsin (United States), farmers have switched from the monoculture of soya or corn to mixed cultivation via the rotating cultivation of non-genetically modified soya, corn, grains and a perennial crop, such as alfalfa. This enables the soil to rest and recover. At a plum orchard in New South Wales (Australia), artificial fertiliser has been completely replaced by compost and the necessary biostimulants.
Sustainability plan
The Van Lanschot Kempen SDG Farmland Fund draws up a sustainability plan for each investment. Together with local consultants and specialists, it sets risks and sustainable priorities and establishes detailed KPIs. An accredited auditor reports annually on the KPIs and the extent to which the fund is achieving its sustainability goals.
‘At the olive grove in Portugal, the principal KPI was zero or minimal tillage to prevent soil degradation. We’re restricting the use of artificial fertilisers and increasing the amount of vegetation and CO2 storage by planting green manure crops combined with the use of organic fertilisers,’ portfolio manager Jacobs explains.
Familiar and tangible
Investing in the Van Lanschot Kempen SDG Farmland Fund combines financial and sustainable objectives according to Jacobs. ‘Our vision for agriculture offers opportunities for sustainable, innovative food production. We apply tangible performance indicators for improving soil quality, enhancing biodiversity and reducing the use of pesticides, artificial fertilisers and water.’
The potential return derives from a variety of sources: crop yields, productivity improvements that lead to higher yields from the same resources, an increase in the value of the land due to, for example, the general upturn in the price of goods and shortage of fertile agricultural land and an environmental return through compensation for CO2 storage and enhancing biodiversity.
There are of course risks. In addition to the restricted marketability of the investments, the portfolio manager says the main risks for agricultural land are the climate and the weather. Principally heat and drought but also extreme rainfall during the sowing, planting or harvesting seasons as well as crop diseases and pests.
‘Investing in agricultural land is a good choice,' Van de Kieft of Pensioenfonds PostNL concludes. ‘The return hasn’t yet reached the target level but that can be explained by the start-up costs. Just as important is the fact that this investment is a highly tangible contribution to our sustainability goals. It’s also worth noting the enthusiasm of pension fund members at the last member meeting. Everyone can immediately picture agricultural crops, they’re familiar and tangible. The fund has already been asked whether we can invest in Dutch agricultural land as well.’
* ‘Food and agriculture’ by Joshua Katz and Peter Mannion, McKinsey Quarterly, August 2022.
General risks associated with investing in agricultural land
All investments are subject to market fluctuations. Investing in agricultural land involves an average amount of risk. These asset classes generally enjoy a stable income and relatively stable collateral. However, the investments may have restricted marketability.
Disclaimer
This is a marketing message for professional investors.
Van Lanschot Kempen Investment Management NV is authorised as a management company and regulated by the Dutch Authority for the Financial Markets (AFM). The Kempen SDG Farmland Fund is registered under the license of Van Lanschot Kempen Investment Management NV at the Dutch Authority for the Financial Markets (AFM). The Fund is notified for offering in a limited number of countries. The countries where the Fund is notified can be found on the website. The Fund is only available for professional investors.
The information in this document provides insufficient information for an investment decision.
Please read the the prospectus (available in English) and the sustainability-related disclosures before making an investment decision. These documents of the Fund are available on the website of VLK (vanlanschotkempen.com/en-nl/investment-management/fund-library) The information on the website is (partly) available in Dutch and English. Here you can also find our sustainability-related disclosures.
‘We had three arguments in favour of focusing on agricultural land,’ Van de Kieft explains. ‘Agricultural land plays an important role in the two SDGs singled out by Pensioenfonds PostNL: good health & well-being and climate action. Agriculture is the basis for the food chain, but industrial agriculture also depletes the soil and emits a large amount of carbon dioxide and other greenhouse gases. We sought agriculture with an impact and wondered whether we could invest in projects aimed at making agriculture more sustainable. So that we can contribute positively to the cultivation of healthy crops by using an agricultural approach that contributes to fewer greenhouse gases and greater biodiversity.’
A second argument was that agricultural land as an alternative investment enjoys a low correlation with other asset classes, such as equities and bonds, and a slightly higher expected return. Van de Kieft: ‘What also played a role was the fact that it’s harder to make the real estate in our portfolio more sustainable as it’s housed in a fund for joint account. There were also questions surrounding expected future returns.’
Groundbreaking journey
The main question on the table for Pensioenfonds PostNL was: can we invest in agricultural land and make a sustainable difference? The search for an answer to that question was the start of a groundbreaking journey.
‘The Board wasn’t initially that keen,’ Van de Kieft admits. ‘One member asked: “Why invest in agriculture when we already have a variety of asset classes?” and another commented: “We don’t know anything about it, are we in a position to assess the investment properly in terms of risk and return?” We encountered a great deal of resistance, and rightly so, but took the time to provide the Board with proper insight into all the aspects of investing in agricultural land. The Board’s enthusiasm grew over time. The best part is that the projects appeal to the imagination and the start-up and accrual phases went well.’
Once they had received the green light for diverse global investment in agricultural land, the next challenge was how to go about this. Pensioenfonds PostNL questioned its fiduciary manager Van Lanschot Kempen Investment Management closely about the knowledge and expertise that was required. The fund’s confidence in VLK derived from the bank clearly being able to show that it worked with many expert parties and partners. This resulted in an agriculture mandate that invests in agricultural funds selected by Van Lanschot Kempen and in the newly created Van Lanschot Kempen SDG Farmland Fund. A new fund for agricultural land proved to be essential, as other funds had no exposure to Europe and were unable to comply with Pensioenfonds PostNL’s ambitious sustainability policy.
Weighing up options
Van de Kieft says that his pension fund wanted to be closely involved in constructing the portfolio. ‘We needed to weigh up our options and make decisions on tough questions. Do we restrict ourselves to investing in arable farming or is livestock farming also eligible? Do we combine agriculture with forestry? Do we opt for buy & lease, in which we own the land and lease it to a farmer? Or do we go for own & operate, in which the land is owned by partners involved in production? Or do we choose a flexible variant of these? And which crops best suit the land? Permanent or annual crops or a mix?’
Van de Kieft: ‘We asked our fiduciary manager not only about above-ground issues but also underground issues. How do we deal sustainably with irrigation, fertilisers and soil quality?’
And the most important aspect when it comes to making an impact: what standards do we set? ‘For example, we want to improve soil quality. What does the zero measurement show and where do we want to be in five years’ time?’ Van de Kieft continues. ‘In this respect we regularly asked whether we could go even further in setting sustainable objectives, so that we can have an impact more quickly.’
Van Lanschot Kempen was able to answer Pensioenfonds PostNL’s questions based on the collected data and developed a sustainable investment strategy for agricultural land. The Board decided to invest solely in agricultural land, primarily because of the higher potential return versus livestock farming and forestry. Apart from the lower return on livestock farming, animal welfare can also pose problems. Forestry involves greater dependence on timber as the sole product.
By investing in agricultural land, the fund can also contribute to the challenge of distinctive long-term trends, such as global population growth and healthier food. Agricultural land offers many options for diversification too thanks to the wide variety of crops.
Food transition
‘Investing in agricultural land means investing in the food transition. In contrast to the energy transition, the food transition has so far received little attention,’ Richard Jacobs points out. He is one of the portfolio managers of the Van Lanschot Kempen SDG Farmland Fund and as a smallholder himself manages a vineyard and forest garden in his spare time.
‘The growth in the global population calls for more food. Food quality has been under pressure for some time as well. Agricultural production will increase to meet the growing demand for food. At the same time, the available agricultural land is becoming less fertile and production growth is reaching the limits of current agricultural methods. Food production is responsible for 30% of the carbon footprint*.’
According to Jacobs, it is inevitable ‘that we switch from intensive forms of agriculture to forms of holistic, regenerative agriculture. The idea is to enhance natural resources rather than deplete them. We aim to improve the soil quality of the agricultural land we invest in via the Farmland Fund. With a greater focus on the organic and physical properties of the soil, food quality and resilience of production.’
On the Van Lanschot Kempen SDG Farmland Fund land in Wisconsin (United States), farmers have switched from the monoculture of soya or corn to mixed cultivation via the rotating cultivation of non-genetically modified soya, corn, grains and a perennial crop, such as alfalfa. This enables the soil to rest and recover. At a plum orchard in New South Wales (Australia), artificial fertiliser has been completely replaced by compost and the necessary biostimulants.
Sustainability plan
The Van Lanschot Kempen SDG Farmland Fund draws up a sustainability plan for each investment. Together with local consultants and specialists, it sets risks and sustainable priorities and establishes detailed KPIs. An accredited auditor reports annually on the KPIs and the extent to which the fund is achieving its sustainability goals.
‘At the olive grove in Portugal, the principal KPI was zero or minimal tillage to prevent soil degradation. We’re restricting the use of artificial fertilisers and increasing the amount of vegetation and CO2 storage by planting green manure crops combined with the use of organic fertilisers,’ portfolio manager Jacobs explains.
Familiar and tangible
Investing in the Van Lanschot Kempen SDG Farmland Fund combines financial and sustainable objectives according to Jacobs. ‘Our vision for agriculture offers opportunities for sustainable, innovative food production. We apply tangible performance indicators for improving soil quality, enhancing biodiversity and reducing the use of pesticides, artificial fertilisers and water.’
The potential return derives from a variety of sources: crop yields, productivity improvements that lead to higher yields from the same resources, an increase in the value of the land due to, for example, the general upturn in the price of goods and shortage of fertile agricultural land and an environmental return through compensation for CO2 storage and enhancing biodiversity.
There are of course risks. In addition to the restricted marketability of the investments, the portfolio manager says the main risks for agricultural land are the climate and the weather. Principally heat and drought but also extreme rainfall during the sowing, planting or harvesting seasons as well as crop diseases and pests.
‘Investing in agricultural land is a good choice,' Van de Kieft of Pensioenfonds PostNL concludes. ‘The return hasn’t yet reached the target level but that can be explained by the start-up costs. Just as important is the fact that this investment is a highly tangible contribution to our sustainability goals. It’s also worth noting the enthusiasm of pension fund members at the last member meeting. Everyone can immediately picture agricultural crops, they’re familiar and tangible. The fund has already been asked whether we can invest in Dutch agricultural land as well.’
* ‘Food and agriculture’ by Joshua Katz and Peter Mannion, McKinsey Quarterly, August 2022.
General risks associated with investing in agricultural land
All investments are subject to market fluctuations. Investing in agricultural land involves an average amount of risk. These asset classes generally enjoy a stable income and relatively stable collateral. However, the investments may have restricted marketability.
Disclaimer
This is a marketing message for professional investors.
Van Lanschot Kempen Investment Management NV is authorised as a management company and regulated by the Dutch Authority for the Financial Markets (AFM). The Kempen SDG Farmland Fund is registered under the license of Van Lanschot Kempen Investment Management NV at the Dutch Authority for the Financial Markets (AFM). The Fund is notified for offering in a limited number of countries. The countries where the Fund is notified can be found on the website. The Fund is only available for professional investors.
The information in this document provides insufficient information for an investment decision.
Please read the the prospectus (available in English) and the sustainability-related disclosures before making an investment decision. These documents of the Fund are available on the website of VLK (vanlanschotkempen.com/en-nl/investment-management/fund-library) The information on the website is (partly) available in Dutch and English. Here you can also find our sustainability-related disclosures.
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Risque de perte en capital. La valeur des investissements et des revenus qui en découlent peut évoluer à la hausse comme à la baisse. Les investisseurs sont susceptibles de ne pas récupérer l’intégralité de leur investissement initial. Les performances passées ne présagent pas des performances futures et ne sont pas constantes dans le temps.
Risque de perte en capital. La valeur des investissements et des revenus qui en découlent peut évoluer à la hausse comme à la baisse. Les investisseurs sont susceptibles de ne pas récupérer l’intégralité de leur investissement initial. Les performances passées ne présagent pas des performances futures et ne sont pas constantes dans le temps.