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Large pension funds pull plug on agricultural futures

Leading asset owners concerned over speculative price movements

Some of Europe’s biggest pension funds have ended their investments in agricultural futures, after concerns were raised about speculative price movements in these investments impacting poorer economies.
Following years of poor performance, commodities rebounded in 2016 and pension funds have started returning to the asset class. But many are now looking at investing in commodities by stripping out exposure to agricultural futures.
“Commodities are being considered by investors again, but an increasing number of pension funds are now looking to invest in this asset class by excluding agricultural futures,” said Dominque Grandchamp, Head of Investment Consulting at Aon Hewitt Switzerland.
Grandchamp said that worries about price speculation impacting prices in poorer nations had led to several Swiss public pension funds excluding exposure to “problematic” agricultural futures.
“There is some academic research that has argued that investments in these type of futures trigger speculation in agricultural products, resulting in higher prices,” he added.
Product providers are also seeing strong interest from pension funds for commodity products that exclude agriculture. To tap into demand, ETF provider Source launched a new commodity ex-agriculture ETF at the end of May, and said it had already raised $40 million from investors.
“There is definitely a push from pension funds in Continental Europe who are concerned about the impact of financial speculation affecting prices in poorer nations, and this is why we have launched this product which aims at providing high-quality exposure at lower costs,” said Christopher Mellor, Head of Equity Product Management at Source. Source’s ETF tracks the Bloomberg Commodity ex-Agriculture and Livestock Capped Index.
However, pension funds like the Dutch pension fund for the metal industry, the €114bn PME, have decided to stop all investments into commodities. The fund, which allocated some 2% of its assets to commodities previously, cut its exposure to 0% in 2014.
A spokeswoman said: “Elements in the field of socially responsible investing have played a part in this decision. PME does not want to facilitate speculators on the commodity market because this is often at the expense of the local population.”
The €162 billion Dutch pension fund for the healthcare sector, PGGM, has also ended investing in agricultural futures in 2015. A spokesman for PGGM said the decision was part of a plan to simplify the overall portfolio. The pension fund had ended all its hedge fund investments a year earlier.The spokesman said the decision to stop investing in agricultural futures was taken because it provided “insufficient added value” and was a relatively small part of a larger commodities portfolio, and was not taken due to ethical concerns.
“PGGM has put a lot of effort to evaluate whether agricultural futures contribute to price peaks on the world’s food market, but came to the conclusion that it wasn’t possible to determine such effects with certainty,” he added.
At the end of the first quarter of 2017, PFZW, the asset management arm of PGGM, had €7.6 bn in commodities.
A joint report by the UN and OECD published in 2011 said that “most researchers agree that high levels of speculative activity in futures markets may amplify price movements in the short term”. The anti poverty campaign group Global Justice Now has estimated that at least £1.5bn of pension savings are used to speculate on food prices – £180 for every person in the UK contributing to a pension.
Another pension fund that has rethought its exposure to these investments is the Danish pension fund giant ATP, which closed its alternative risk premia (ARP) strategies within the soft commodity universe at the end of 2016.
An ATP spokesman said the decision was taken owing to the “combination of complexity and small scale.” Allocation to the ARP strategies was less than 0.9 % of ATP’s commodity exposure.
However, €402bn Dutch pension fund APG said it had decided to keep its allocation to agricultural futures as “based on extensive external research we believe there is no causality between our investments in the commodities futures markets and the consumer price for food”.
APG’s allocation to agricultural futures is 18.8% of its liquid commodities exposure.
After years of poor performance, commodities bounced back strongly in 2016 on the back of the sector seeing reduced supply and strong demand from China. The S&P Goldman Sachs Commodity Index (GSCI) rose 10.1% on the year.
According to research firm Morningstar, net inflows to commodities picked up in 2016, swelling to €2.5bn in July 2016, compared to estimated net outflows of €861m in July 2015. Inflows so far this year until April have been €5.8bn.
Total net assets in July 2015 were at €44.4bn, rising to €60bn in July 2016 and growing to a further € 67bn in April 2017.