BT poised to plough into farmland for inflation match

The trustee board of the £35bn BT Pension Scheme has instructed its management team to invest 2.5% of the fund’s assets in farmland.

But it has so far failed to find suitable investments due to the size of the mandate.

The mature fund has become convinced of the asset class’s ability to provide a hedge against inflation risk, while also providing stable positive returns.

“We are interested in farmland as a matching asset rather than a return-seeking asset,” said Helene Winch, director and head of policy at BT Pension Scheme Management.

Schemes with a high proportion of pensioners compared with active members are increasingly looking for steady inflation-matching investments that offer diversification from their core assets.

Farmland is being touted as an asset class with just the right characteristics, but so far very few other UK schemes have made similar investments.

A review of schemeXpert.com’s sister title MandateWire has found only one UK scheme to have tendered for a farmland mandate over the past three years.

This was the Pension Protection Fund (PPF), which publicly issued a tender in the Official Journal of the European Union in February. Two more schemes have shown interest in investing in agriculture.

Elsewhere in Europe, a German scheme made a £64m direct investment late last year, while in Denmark two large schemes are currently looking to make allocations.

BT’s interest in farmland

The BT scheme is a mature fund, with 50% of members receiving a pension.

“Eight years ago we began to move out of equities and into commodities for diversification and to have a positive relationship to inflation,” said Winch, speaking at the National Association of Pension Funds (NAPF) Investment Conference.

Compared to other real assets, it has a higher return than most, but with lower volatility

Over that period, the scheme has increased its allocation to commodity futures to 3%. But it has since decided it would like to switch this to farmland.

The main inflation measure, the retail prices index, tracks the price changes of a basket of goods, of which 10% is based on food products.

BT therefore wanted to be invested in assets that kept pace with changes in food prices.

The scheme ruled out food equities due to a history of underperformance. It also discounted commodities as storage of food was a costly and politically charged risk.

Winch said the scheme had invested in commodity index funds, which were cheap and effective.

But it was now put off from further investment as they had been shown to be too closely correlated to other assets.

The scheme has now decided to invest in agriculture by owning farmland and letting it out to local tenants to manage. This would provide the fund with a long-term, inflation-matching asset.

The trustee board set a minimum of 2.5% of the fund’s assets to be invested in farmland, with an initial investment of £200m.

But Winch said this had led to a problem as it was hard to find investments on that scale.

“For us that is £1bn, which is a very big part to allocate,” she said. "We have got stuck on the allocation."

Farmland’s attraction

Also speaking at the NAPF event was Abdallah Nauphal, chief executive of Insight Investments, which manages a farmland fund.

He said there were five main advantages for investing in farmland: capital protection; income protection; emerging market exposure; supply constraints and potential to benefit from technological advancements.

A thorough sustainability analysis is part of the manager selection process

“Compared to other real assets, it has a higher return than most, but with lower volatility,” he said.

“There is also negative correlation with other hard assets.”

The two main risks for farmland investing are political risk and the potential for crop failure.

The BT scheme will not invest in African or frontier markets as it does not want to be seen to be making a “land grab” and depriving local people of their land.

Following the scheme’s concerns on the ethics of farmland investment, Winch helped develop the Principles of Responsible Investment in Farmland (see box, above right).

These include an emphasis on promoting environmental sustainability and respecting human rights and existing land rights.

Winch advised schemes considering investing in farmland to incorporate the principles into any mandate tenders.

The PPF was also concerned over how the land was managed. “A thorough sustainability analysis is part of the manager selection process,” said Ebba Schmidt, responsible investment manager at the PPF.

“This will include the assessment of managers’ guidelines, policies and processes, as well as the expertise and experience they have to manage farmland assets sustainably.”

The risk of crop failure can be mitigated by diversifying by crop and geographical location.