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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 in opposition to 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 sudden solution to hedge in opposition to inflation and volatility is investing in farmland. 

Jose Minaya is the CEO of Nuveen, a division of TIAA, and he is hoping to reap beneficial properties from investing in agriculture belongings. Right here he’s, in dialog with Leslie Picker. 

(The content material under 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: , that is form of a part of the important thing cause we invested within the asset class. I feel after we began pure sources, the thought was, effectively, how do we offer higher diversification for our personal portfolio, trying to get higher publicity to volatility or defend ourselves in opposition to volatility, after which inflation was a key a part of simply assuming, sooner or later sooner or later, we will likely be experiencing increased ranges of inflation. How is our portfolio protected in opposition to 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 folks have to eat and the provision facet is inelastic in that they are not making any extra land around the globe. And if something, we have now 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 extremely correlated to inflation.

Picker: Having a look on the returns on a risk-return foundation, farmland has outperformed many different asset lessons, most different asset lessons 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 suppose are a few of the key hurdles?

Minaya: Effectively, if you concentrate on farmland on a worldwide foundation, I’d say effectively 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 at all times examine it to actual property – we’re a big actual property investor as effectively – 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 good to put folks in it. In the present day, it is acquired much more entry to capital markets, you will get public publicity to actual property. That is form of the place I imagine the trail goes for farmland. That institutional possession has elevated, I feel 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 quite a lot of alpha for us. It is why we like asset lessons 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 result of local weather change. I imply, we hear every single day on the information fires, destroying vineyards, floods, destroying farms, scorching temperatures, robust storms, droughts. I imply, would not all of that concern you as you place a lot cash behind this asset class? I imply, this asset class is altering dramatically by the 12 months.

Minaya: I feel it is the No. 1 threat issue that we take a look at in farmland. One of many issues for us after we determined, effectively, we’re investing in farmland, the place are we investing it? The primary one was [from a food] safety perspective. We needed to spend money on the main grain exporting areas around the globe – the U.S., Brazil, Australia, components of central Jap Europe. Once more, we do not need to cope with meals safety points, we need to cope with the areas which can be producing to feed your complete planet. The opposite piece that basically ties into farmland is water and there is totally different threat profiles. You may go to locations which have a well-established profile for having water. These returns are going to be lots decrease. You may produce other locations which can be extra uncovered to floods at occasions, to droughts, to fires. These are going to probably be increased return for decrease threat. For us, we play in that space the place we all know the infrastructure is in place, we have now extra water, we pay for that, which is why our returns are most likely 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 simply see alternative proper now greater than different particular crops or areas or, or issues that you are looking at that you simply suppose present the very best risk-return profile?

Minaya: I feel by way of rising our portfolio we discovered totally different areas of farmland – and it is attention-grabbing –  there’s totally different ranges of threat and return, proper? Your most conventional one is, I purchase land within the Midwest in Champaign, Illinois. And there may be form of the bottom threat profile … it is the place a few of the greatest land on the earth lies. What’s nice about this asset class is there is not 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 lease defaults. So it is a very, very low threat asset. Now, as we seemed into different components of agriculture, like vineyards, and went to locations like California and stated, “OK, there isn’t any 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 means, 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 threat, as a result of now you have acquired a bit of bit extra capex to take a position, however issues like vineyards grew to become very enticing. Almonds was one other one the place we stated, “OK, this is an finish crop that’s rising in demand, as a result of the demand is from Asia.” So we may be in a spot like California, the place I feel we are the third-largest almond grower on the earth, 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 way of a really protected funding within the U.S. These are the form of issues that we discovered actually enticing.

Picker: As an institutional investor in farmland, you’ll be able to get hold of principally a coupon or a yield from lease from the farmers who lease from you. And you then are also capable of generate returns by way of 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 simply talked about earlier?

Minaya: Sure, I feel the primary method that traders get publicity to it and it is a very boring method, if you concentrate on our stability sheet which presents assured earnings by way of annuities, quite a lot 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 will see extra assured earnings or secured earnings in 401(okay)s – very boring – however that is the diversification that performs into, offers you entry to a majority of these asset lessons. That being stated, 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 accessible in additional retail channels and particularly within the U.S. and U.S. retail, U.S. excessive web price 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. In the end, 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 accessible, extra inefficient, offers 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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