Rest: Super fund cultivates 25-year-old agriculture portfolio

From an acorn grows an oak tree. For Rest, an initial investment of just A$13m has spawned an agricultural portfolio worth a shade under A$1bn, or €608m, according to the Top 50 ranking.

It was in 1997, during the infancy of Australia’s universal superannuation industry and as the Asian financial crisis cast a shadow over the Australian economy, that the then nine-year-old Rest made its first foray into agriculture.

The allocation went to Warakirri Asset Management, a young up-and-coming agricultural asset manager, which set up a vehicle, Warakirri Cropping, for the super fund. Rest remains invested with the manager to this day.

In 2023, the €45.6bn superannuation fund is now the sole investor in Warakirri Cropping, which owns 155,000 hectares with a production capacity of about 400,000 tonnes of grain per year. Warakirri is now one of the largest grain growers in Australia, with assets located across the northern, southern and western grain production zones of Australia.

“Agriculture was our best-performing asset class in 2022 and the second-best in 2023,” says Simon Esposito, Rest’s deputy CIO. The agriculture portfolio generated returns of 23% and 15%, respectively, for those financial years.

“When other asset classes underperform, outperform or deliver flat returns, returns from agriculture are uncorrelated to them,” he says. “In our view, when certain other asset classes move hand-in-hand with equities – which is our largest allocation – agriculture remains unaffected.”

Rest looks to agriculture to contribute returns in line with the consumer price index plus three percentage points, reflecting the fund’s objective return target for its primary investment option, the Core Strategy.

“The recent experience in agriculture is one of the reasons we are attracted to the asset class,” says Esposito. “Agriculture commodities reprice on an annual basis. In the last two years, when inflation has been high, we have seen two of our highest-performing years.

“So we are certainly on the lookout for additional opportunities to grow our holdings in cropping assets or in other forms of agriculture, such as horticulture. We are also keen to invest broadly in natural solutions. 

“We will continue to look at the risk-and-return benefits as well as the impact we might have in some of these investments. That would mean from time to time considering opportunities in horticulture and timberland.”

Sustainability is central to Rest’s investment decisions. “When we consider investing in an area, whether it is agriculture or another opportunity, we look for sustainability as we integrate ESG factors into the investment,” Esposito says.

“We want to make sure that we always consider our members’ best financial interests in the long term to be aligned with the society that our members live in. Rest has 1m members under the age of 30 and, as such, we are looking for sustainable long-term investment that will stand the test of time and always meet members’ financial interests.”

Warakirri adopts sustainable approaches to agriculture, including practices that help build ground cover and boost soil moisture retention. It also conducts research to limit the release of nitrous oxide – a potent greenhouse gas – from fertiliser. This includes a trial of ‘green’ urea fertiliser at one of the farms, which Warakirri’s research has suggested could cut nitrogen release by up to 80%. Other farms are using precision sprayers with camera equipment to identify weeds and reduce herbicide use by up to 90%.  

Agriculture is the largest allocation within Rest’s alternatives portfolio. Esposito says Rest has continually built up its original investment through new commitments and by reinvesting returns. “We have increased our commitment for separate expansion periods, most notably to expand into the west coast of Australia,” he says. 

Warakirri Cropping had been concentrated on the east coast of the continent and the shift has provided further diversification. Today, Rest owns four farms in Western Australia, with the remaining seven in New South Wales, Queensland and Victoria on the Eastern seaboard.

“What we are trying to do is to increase our coverage of different geographical areas with different weather patterns, so if one part of Australia is experiencing drought we might have a bumper crop, high prices and high rainfall in another region,” Esposito says.

Warakirri Cropping runs a partially integrated production system, marketing its grain production. It also works with partners in terms of logistics and currency hedging to manage fluctuations and protect its export earnings.

Esposito says there is no current plan to expand into agriculture investment outside Australia. “But we will consider opportunities if they present themselves. If they are compelling, we will certainly explore them on behalf of our members.” 

One reason agriculture has remained a poor cousin of timberland is that institutional investor exposure is considerably lower in agriculture than in forestry. The main reasons often cited for reluctance to enter the sector are the vagaries of weather and fluctuations in grain prices globally, hence unpredictable incomes.

“Prices are influenced by weather, and the conditions for growing. But we get capital appreciation from the underlying land,” says Esposito. 

“Over the past 26 years, Rest has received steady returns with some volatility from the operating returns of the investments but, overall, it has been a positive long-term inflation-adjusted return. It has benefitted our overall investment portfolio while also delivering substantial grain production to Australia.”