Delivering Alpha 2021

Nuveen has an unusual multibillion-dollar inflation hedge. CEO Jose Minaya explains

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Nuveen CEO Jose Minaya's multi-billion dollar bet on farmland

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There are traditional ways to hedge against inflation — things like gold and TIPS (Treasury inflation-protected securities). There are newer approaches; crypto advocates say bitcoin falls into that camp. But perhaps an unexpected way to hedge against inflation and volatility is investing in farmland. 

Jose Minaya is the CEO of Nuveen, a division of TIAA, and he's hoping to harvest gains from investing in agriculture assets. Here he is, in conversation with Leslie Picker. 

(The content below has been edited for length & clarity)

Leslie Picker: We've seen some pretty scary inflation readings lately. How does farmland play into that?

Jose Minaya: You know, this is kind of part of the key reason we invested in the asset class. I think when we started looking at natural resources, the idea was, well, how do we provide better diversification for our own portfolio, looking to get better exposure to volatility or protect ourselves against volatility, and then inflation was a key part of just assuming, at some point in the future, we will be experiencing higher levels of inflation. How is our portfolio protected against that? And farmland is an asset class that we felt does both on the volatility side and the inflation side, because what attracted us to farmland and what drives the correlation characteristics is that both demand side is inelastic in terms of people need to eat and the supply side is inelastic in that they're not making any more land around the world. And if anything, we have a reduction in land given what's happening from an environmental perspective. And it's a commodity that is producing at the end of the day, which is highly correlated to inflation.

Picker: Taking a look at the returns on a risk-return basis, farmland has outperformed many other asset classes, most other asset classes really, including indexes like the S&P and gold and Treasurys over the last 50 years or so. If that's the case, why aren't there more funds and more assets behind this? It's my understanding that only about 80% of farmland has been institutionalized at this point. What do you think are some of the key hurdles?

Minaya: Well, if you think about farmland on a worldwide basis, I would say well over 90% of it is still in the hands of individuals and families. So it's an asset class that is still very nascent in terms of its access to capital markets. I always compare it to real estate - we're a large real estate investor as well - you go back 100 years, it was largely in the hands of private investors, right? And you built a building or you built real estate because you need to put people in it. Today, it's got a lot more access to capital markets, you can get public exposure to real estate. This is kind of where I believe the path is going for farmland. That institutional ownership has increased, I think significantly over the last decade, yet it is still pretty much in private hands. So a much more inefficient market from a capital markets perspective, but again, in there lies a lot of alpha for us. It's why we like asset classes that are not as efficient and we can drive excess returns given the risk we're taking.

Picker: You mentioned briefly that the footprint of farmland itself is shrinking due to climate change. I mean, we hear every day on the news fires, destroying vineyards, floods, destroying farms, hot temperatures, strong storms, droughts. I mean, doesn't all of that concern you as you put so much money behind this asset class? I mean, this asset class is changing dramatically by the year.

Minaya: I think it's the No. 1 risk factor that we look at in farmland. One of the things for us when we decided, well, we're investing in farmland, where are we investing it? The first one was [from a food] security perspective. We wanted to invest in the major grain exporting regions around the world - the U.S., Brazil, Australia, parts of central Eastern Europe. Again, we don't want to deal with food security issues, we want to deal with the regions that are producing to feed the entire planet. The other piece that really ties into farmland is water and there's different risk profiles. You can go to places that have a well-established profile for having water. Those returns are going to be a lot lower. You can have other places that are more exposed to floods at times, to droughts, to fires. Those are going to potentially be higher return for lower risk. For us, we play in that area where we know the infrastructure is in place, we have excess water, we pay for that, which is why our returns are probably more in the high single digits, mid-single digits, yet very stable with lower risks as it relates to climate change. 

Picker: Are there specific areas within farmland that you see opportunity right now more than other specific crops or regions or, or things that you're looking at that you think provide the best risk-return profile?

Minaya: I think through growing our portfolio we found different areas of farmland - and it's interesting -  there's different levels of risk and return, right? Your most traditional one is, I buy land in the Midwest in Champaign, Illinois. And there is kind of the lowest risk profile ... it's where some of the best land in the world lies. What's great about this asset class is there's no vacancies. We don't have to worry about, "Can this be rented?" We get paid at the beginning of the season so there are no rent defaults. So it's a very, very low risk asset. Now, as we looked into other parts of agriculture, like vineyards, and went to places like California and said, "OK, there is no more acreage to be built here. It's not allowed." The demand for wine consumption is going up and what we're seeing in the demographics. Our ability, then to look at things like vineyards then took us from a mid-single-digit return to a low double-digit return. Little bit more risk, because now you've got a little bit more capex to invest, but things like vineyards became very attractive. Almonds was another one where we said, "OK, here's an end crop that is growing in demand, because the demand is from Asia." So we can be in a place like California, where I think we're the third-largest almond grower in the world, the demand is coming from Asia, so we can tie to that exposure of a growing demand, growing markets in emerging markets in places like China, in India, yet we're doing it through a very safe investment in the U.S. Those are the kind of things that we found really attractive.

Picker: As an institutional investor in farmland, you are able to obtain basically a coupon or a yield from rent from the farmers who lease from you. And then you also are able to generate returns through capital appreciation. What about [the] average investor? Is there a way for anyone who's watching this to get involved in this asset class, especially as a diversifier and inflation hedge that you talked about earlier?

Minaya: Yes, I think the first way that investors get exposure to it and it's a very boring way, if you think about our balance sheet which offers guaranteed income through annuities, a lot of this is embedded in the diversification of that asset class. We've seen what's happened now with the Secure Act and the idea that you'll see more guaranteed income or secured income in 401(k)s - very boring - but this is the diversification that plays into, gives you access to these types of asset classes. That being said, Leslie, yes, this is still very much in institutional hands. We just launched last year our first open-ended fund that provides more liquidity. It's now available in more retail channels and especially in the U.S. and U.S. retail, U.S. high net worth channels. So again, if you go back to real estate, that's how it started, private hands, more institutional hands, you started seeing it more in the wealth channels. Ultimately, you saw REITs, public REITs. You're starting to see that happen in agriculture. Again, that's part of what we love - the fact that it's broadly available, more inefficient, gives us more returns. That liquidity is coming and the different vehicles are coming behind it.

— Ritika Shah contributed to this article

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