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Nuveen has an uncommon multibillion-dollar inflation hedge. CEO Jose Minaya explains

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There are conventional methods to hedge towards inflation — issues like gold and TIPS (Treasury inflation-protected securities). There are newer approaches; crypto advocates say bitcoin falls into that camp. However maybe an surprising option 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 reap features from investing in agriculture belongings. Right here he’s, in dialog with Leslie Picker. 

(The content material beneath has been edited for size & readability)

Leslie Picker: We have seen some fairly scary inflation readings currently. How does farmland play into that?

Jose Minaya: You already know, that is sort of a part of the important thing purpose we invested within the asset class. I believe after we began taking a look at pure assets, the thought was, nicely, how do we offer higher diversification for our personal portfolio, trying to get higher publicity to volatility or shield ourselves towards volatility, after which inflation was a key a part of simply assuming, sooner or later sooner or later, we can be experiencing larger ranges of inflation. How is our portfolio protected towards that? And farmland is an asset class that we felt does each on the volatility facet and the inflation facet, as a result of what attracted us to farmland and what drives the correlation traits is that each demand facet is inelastic when it comes to individuals must eat and the provision facet is inelastic in that they are not making any extra land world wide. And if something, now we have a discount in land given what’s occurring from an environmental perspective. And it is a commodity that’s producing on the finish of the day, which is very correlated to inflation.

Picker: Having a look on the returns on a risk-return foundation, farmland has outperformed many different asset courses, most different asset courses actually, together with indexes just like the S&P and gold and Treasurys over the past 50 years or so. If that is the case, why aren’t there extra funds and extra belongings behind this? It is my understanding that solely about 80% of farmland has been institutionalized at this level. What do you assume are a number of the key hurdles?

Minaya: Nicely, if you consider farmland on a worldwide foundation, I might say nicely over 90% of it’s nonetheless within the arms of people and households. So it is an asset class that’s nonetheless very nascent when it comes to its entry to capital markets. I all the time evaluate it to actual property – we’re a big actual property investor as nicely – you return 100 years, it was largely within the arms of personal traders, proper? And also you constructed a constructing otherwise you constructed actual property as a result of it’s essential to put individuals in it. Right now, it is acquired much more entry to capital markets, you may get public publicity to actual property. That is sort of the place I imagine the trail goes for farmland. That institutional possession has elevated, I believe considerably over the past decade, but it’s nonetheless just about in personal arms. So a way more inefficient market from a capital markets perspective, however once more, in there lies plenty of alpha for us. It is why we like asset courses that aren’t as environment friendly and we will drive extra returns given the chance we’re taking.

Picker: You talked about briefly that the footprint of farmland itself is shrinking as a consequence of local weather change. I imply, we hear day-after-day on the information fires, destroying vineyards, floods, destroying farms, scorching temperatures, sturdy storms, droughts. I imply, does not all of that concern you as you set a lot cash behind this asset class? I imply, this asset class is altering dramatically by the 12 months.

Minaya: I believe it is the No. 1 danger issue that we take a look at in farmland. One of many issues for us after we determined, nicely, we’re investing in farmland, the place are we investing it? The primary one was [from a food] safety perspective. We needed to put money into the main grain exporting areas world wide – the U.S., Brazil, Australia, elements of central Jap Europe. Once more, we do not need to take care of meals safety points, we need to take care of the areas which are producing to feed all the planet. The opposite piece that basically ties into farmland is water and there is totally different danger profiles. You’ll be able to go to locations which have a well-established profile for having water. These returns are going to be loads decrease. You’ll be able to produce other locations which are extra uncovered to floods at occasions, to droughts, to fires. These are going to probably be larger return for decrease danger. For us, we play in that space the place we all know the infrastructure is in place, now we have extra water, we pay for that, which is why our returns are in all probability extra within the excessive single digits, mid-single digits, but very secure with decrease dangers because it pertains to local weather change. 

Picker: Are there particular areas inside farmland that you just see alternative proper now greater than different particular crops or areas or, or issues that you are looking at that you just assume present the perfect risk-return profile?

Minaya: I believe by rising our portfolio we discovered totally different areas of farmland – and it is fascinating –  there’s totally different ranges of danger and return, proper? Your most conventional one is, I purchase land within the Midwest in Champaign, Illinois. And there may be sort of the bottom danger profile … it is the place a number of the finest land on the planet lies. What’s nice about this asset class is there isn’t any vacancies. We do not have to fret about, “Can this be rented?” We receives a commission initially of the season so there aren’t any hire defaults. So it is a very, very low danger asset. Now, as we regarded into different elements of agriculture, like vineyards, and went to locations like California and mentioned, “OK, there isn’t a extra acreage to be constructed right here. It is not allowed.” The demand for wine consumption goes up and what we’re seeing within the demographics. Our capacity, then to have a look at issues like vineyards then took us from a mid-single-digit return to a low double-digit return. Little bit extra danger, as a result of now you have acquired just a little bit extra capex to take a position, however issues like vineyards turned very engaging. Almonds was one other one the place we mentioned, “OK, here is an finish crop that’s rising in demand, as a result of the demand is from Asia.” So we could be in a spot like California, the place I believe we are the third-largest almond grower on the planet, the demand is coming from Asia, so we will tie to that publicity of a rising demand, rising markets in rising markets in locations like China, in India, but we’re doing it by a really protected funding within the U.S. These are the sort of issues that we discovered actually engaging.

Picker: As an institutional investor in farmland, you’ll be able to get hold of principally a coupon or a yield from hire from the farmers who lease from you. And then you definately are also in a position to generate returns by capital appreciation. What about [the] common investor? Is there a method for anybody who’s watching this to get entangled on this asset class, particularly as a diversifier and inflation hedge that you just talked about earlier?

Minaya: Sure, I believe the primary method that traders get publicity to it and it is a very boring method, if you consider our steadiness sheet which affords assured revenue by annuities, plenty of that is embedded within the diversification of that asset class. We have seen what’s occurred now with the Safe Act and the concept that you may see extra assured revenue or secured revenue in 401(ok)s – very boring – however that is the diversification that performs into, provides you entry to these kind of asset courses. That being mentioned, Leslie, sure, that is nonetheless very a lot in institutional arms. We simply launched final 12 months our first open-ended fund that gives extra liquidity. It is now out there in additional retail channels and particularly within the U.S. and U.S. retail, U.S. excessive web value channels. So once more, when you return to actual property, that is the way it began, personal arms, extra institutional arms, you began seeing it extra within the wealth channels. Finally, you noticed REITs, public REITs. You are beginning to see that occur in agriculture. Once more, that is a part of what we love – the truth that it is broadly out there, extra inefficient, provides us extra returns. That liquidity is coming and the totally different autos are coming behind it.

— Ritika Shah contributed to this text

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