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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 solution 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 good points 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 these days. How does farmland play into that?

Jose Minaya: You recognize, that is form of a part of the important thing cause we invested within the asset class. I feel once we began taking a look at pure sources, the concept was, nicely, how do we offer higher diversification for our personal portfolio, trying to get higher publicity to volatility or defend 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 aspect and the inflation aspect, as a result of what attracted us to farmland and what drives the correlation traits is that each demand aspect is inelastic when it comes to folks must eat and the availability aspect is inelastic in that they don’t seem to be making any extra land all over the world. And if something, we now have a discount in land given what’s taking place 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: Looking 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 during the last 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 number of the key hurdles?

Minaya: Effectively, if you concentrate on 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 at all times examine 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 buyers, proper? And also you constructed a constructing otherwise you constructed actual property as a result of it’s essential put folks in it. At present, it is obtained much more entry to capital markets, you will get public publicity to actual property. That is form of the place I consider the trail goes for farmland. That institutional possession has elevated, I feel considerably during the last 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 a whole 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 because 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 place a lot cash behind this asset class? I imply, this asset class is altering dramatically by the yr.

Minaya: I feel it is the No. 1 danger issue that we have a look at in farmland. One of many issues for us once we determined, nicely, we’re investing in farmland, the place are we investing it? The primary one was [from a food] safety perspective. We wished to spend money on the main grain exporting areas all over the world – the U.S., Brazil, Australia, components of central Japanese Europe. Once more, we do not wish to cope with meals safety points, we wish to cope with the areas which can be producing to feed the whole planet. The opposite piece that actually 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 so much decrease. You’ll be able to produce other locations which can be extra uncovered to floods at occasions, to droughts, to fires. These are going to doubtlessly be larger return for decrease danger. For us, we play in that space the place we all know the infrastructure is in place, we now have 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 steady 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 suppose present the very best risk-return profile?

Minaya: I feel via rising our portfolio we discovered totally different areas of farmland – and it is attention-grabbing –  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’s form of the bottom danger profile … it is the place a number of the greatest land on the earth lies. What’s nice about this asset class is there is no vacancies. We do not have to fret about, “Can this be rented?” We receives a commission firstly of the season so there aren’t any hire defaults. So it is a very, very low danger asset. Now, as we appeared into different components of agriculture, like vineyards, and went to locations like California and mentioned, “OK, there is no such thing as a extra acreage to be constructed right here. It isn’t allowed.” The demand for wine consumption goes up and what we’re seeing within the demographics. Our capability, 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 obtained 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 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 via a really protected funding within the U.S. These are the form of issues that we discovered actually engaging.

Picker: As an institutional investor in farmland, you’ll be able to acquire mainly a coupon or a yield from hire from the farmers who lease from you. And then you definitely are also capable of generate returns via capital appreciation. What about [the] common investor? Is there a manner 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 feel the primary manner that buyers get publicity to it and it is a very boring manner, if you concentrate on our steadiness sheet which provides assured earnings via annuities, a whole 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 may see extra assured earnings or secured earnings in 401(okay)s – very boring – however that is the diversification that performs into, provides you entry to most of these asset lessons. That being mentioned, Leslie, sure, that is nonetheless very a lot in institutional arms. We simply launched final yr our first open-ended fund that gives extra liquidity. It is now obtainable in additional retail channels and particularly within the U.S. and U.S. retail, U.S. excessive internet 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 obtainable, 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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