Value rotation drives returns for Rize Sustainable Food ETF
The Rize Sustainable Future of Food UCITS ETF (FOOD) has enjoyed returns of 7.64 per cent for the first quarter of 2021 and 18.8 per cent since inception last August.
While sustainable food is central to ESG, and a key area that will drive returns in sustainable portfolios as we transition to more sustainable food production and consumption, Rize ETF co-founder Stuart Forbes (pictured) believes that the ETF’s recent performance has also benefited from its broad diversification across a number of sub-themes – nine in total, he says.
These sub-themes represent the key areas of innovation across the sustainable food ecosystem, and they cut across traditional sectors in a powerful way, according to Forbes.
“The value rotation we have seen has driven performance for not just cyclical value sectors such as financials and energy but also defensive value sectors like consumer staples, materials and industrials,” he says. “Because of its careful curation and selection of the most innovative companies in the latter and other sectors, our FOOD ETF has benefited from the general broadening of the bull market to traditional and overlooked areas that are also witnessing system-wide disruption today.”
Forbes believes that examples exist in companies such as John Deere and AGCO, which are key innovators in Precision Farming Technologies, and Lindsay Corp and Valmont Industries, which are key innovators in Water Technologies. “A traditional lens would cast these companies into the industrials bucket, which would discount the investments they are making into the future,” he says.
“These companies and others are extremely well positioned to benefit from the growth associated with the transition to more sustainable food,” Forbes comments. “They will be the ones that offer the enabling technologies that are going to increase the quantity and quality of crops produced on the same amount of land, improve efficiencies in the use of input resources such as water, crop protection products, fertilisers and fuel, and reduce the carbon/environmental footprint of agriculture.”
He likens the sustainable food transition to the clean energy transition: “We are not there yet, we have a long way to go, and it is important that we weaponise our capital to back the technologies and solutions that will help get us there.”
FOOD is comprised of nine sub-themes that are aligned to the Sustainable Future of Food investment theme and, as part of that, avoids exposure to Beef and other Land-Reared Meats, Fishing and Sea-Based Fish Farming as well as Plastic Packaging.
FOOD also focuses on Revenue Purity as a metric for inclusion and weighting in its index. The theme took 10 months of development for Rize, who normally works with thematic partners to develop each of the themes and indices underlying its ETFs. For this theme, they worked with Tematica Research to research and develop the taxonomy for the theme before wrapping the resulting universe into an investable index.
The ETF also has exposure to companies creating logistics and processing technologies throughout the food value chain to reduce the amount of food wasted, thus helping to reduce food prices and carbon emissions, and to companies addressing the single-use plastic crisis by creating food packaging options that are both sustainable and either reusable, recyclable, or compostable such as fibre-based options and solutions derived from recycled organic matter.
“One of the biggest most glaring things we noticed was the high prevalence of meat exposure in existing food-themed funds which claim to have a sustainable angle,” Forbes says. “Some 14.5 per cent of all human-made greenhouse gas emissions comes from meat production. This is staggering. Cutting out meat is the single biggest lever that everyday consumers can pull to reduce their impact on emissions and things like tropical deforestation,”he says.
“People think that the emissions in the food system come from the transportation side, but in terms of transportation, the emissions are negligible in comparison to the emission from meat production.”
Many ESG activists would switch to buying local but even here, Forbes argues that it is better to buy fruit and vegetables from across the world, than to buy local steak. “Like for like, it’s about what you are eating rather than where it comes from, in terms of your emissions profile and your impact on things like deforestation in the Amazon.”
Forbes credits Netflix and the BBC for having the single biggest impact in terms of raising awareness amongst the broader public through their compelling documentaries. “Their documentaries have created a broad-based level of public awareness that has never been seen before,” Forbes says. “Environmentalists and conservationists have been talking about the issues and potential solutions for decades but they have not had a platform big enough to represent this in a compelling enough way to the broader public. Until now.”
Consumers will ultimately control the outcome with respect to the future sustainability of our future food systems as companies will simply adapt to and produce whatever consumers demand. Presently, the two biggest drivers of change in consumptions patters are concerns for the environment and health respectively. As Forbes puts it, people are starting to realise that, biologically speaking: “Humans are not tigers, and we don’t need to be eating meat every single day. If each of us simply reduced how much meat we were eating, it would have a monumental impact on the environment and public health.”
Future areas of innovation and growth include alternative sources of protein such as plant-based protein, cellular meats and even insect protein. “Insect protein is a very interesting area,” Forbes says. “It has the potential to be produced at a rapid rate and used in all sorts of applications such as fertiliser, fish food and even food or supplements for humans.”
Rize has now reached nearly USD340 million in assets in its four thematic ETFs and is in the process of developing two new funds for launch in the next couple of months, while there are more products in the pipeline for the rest of the year.