Investing in cattle as a diversification strategy

Investing in cattle as a diversification strategyIf the current coronavirus crisis has taught us anything it is to make sure our investments are diversified. When it comes to investing in financial assets, we ensure diversification by investing in funds that provide exposure to local and offshore equities, bonds, property, gold and cash.

What global market crisis have shown us, both now and in the credit crisis of 2008, is that this diversification is not a guarantee that your funds will not lose value – it is just that they may lose less value than an investment in a single asset class. For example, a fund that had offshore exposure benefited from the weaker rand, but its exposure to listed property would have pulled down its value significantly.

Listen to Maya and Mapalo Makhu discussing this topic in the My Money, My Lifestyle podcast.

Increasingly investors are looking to non-financial assets to provide further diversification. I have previously written about Fedgroup Impact Farming where investors can buy into farming of beehives, blueberries and even solar energy. We have also written about investing in cattle through Livestock Wealth. Cattle is especially relevant to the African market where it represents a tangible value and underpins financial agreements like lobola.

“Most financial investments are complex and hard to understand,” says Kagiso Tloubatla, co-founder of SV Capital. “People want an investment they understand and that they can touch and see.”

Buying a fraction of a cow

SV Capital was founded by Tloubatla and Ayanda Majola, both former investment bankers, to provide South African investors an opportunity to invest in cattle with low minimums, starting at R500 a month. Rather than investors requiring sufficient capital to purchase an entire cow, the herd is pooled together – like an investment fund – and investors own a fraction of a cow.

“This also reduces the risk of an investor’s cow dying as they all share the risk of a much larger herd. If one cow in 100 dies, then the risk is only 1% for the investor. They haven’t lost their entire investment,” explains Tloubatla.

However there is also insurance that covers 99% of the herd. The investment risk is that the price of beef falls or that the calves do not gain the required weight.

While the fund owns the cattle, farming is outsourced to Beefcor, a large-scale farming operation with expertise in cattle farming. “We are not farmers. Our skill is product development so we partner with Beefcor for the farming experience. They have large farming operations that can hold up to 30 000 head of cattle,” explains Tloubatla.

In terms of diversification of assets, beef prices have held up well during the lockdown. Tloubatla says cattle is a defensive investment, but they were concerned with the economic fallout if people stopped buying meat.

Fortunately, agriculture can operate throughout lockdown and meat prices have held up relatively well, only dropping a few rand per kilogram. “Prices have been affected by the closure of restaurants which are a large customer of prime cuts, but the prices have not fallen significantly, and we are still profitable”.

The fund has delivered a return of 15.58% per annum net of fees since its inception in 2017. These relatively high returns are due to the use of feedlots rather than free-range grazing. The calves are fed a high-calorie diet, reaching maturity within four months rather than the 18 months to maturity for a free-grazer.

Within a 12-month period the fund buys and sells cattle three times with the same amount of money, making a profit each time. This is not as animal or eco-friendly as free-range cattle and is probably not an appropriate investment for vegetarians!

In response to environmental concerns about cattle farming, Tloubatla says that Beefcor has a sustainability programme that uses cattle dung to generate methane to generate electricity at the Bronkhorstspruit Biogas Plant.

How the investment works

Funds are pooled together, and once there are sufficient investors, a herd is purchased. After 120 days (four months) the cattle are sold at current market prices and the money is re-invested for a further four months until the investment period is reached.

There are no upfront or ongoing investment fees, but SV Capital takes a 4.5% fee per sale cycle. Returns are net of fees.

Investment options

Build your herd for R500 per month or R2 000 lump sum

For an individual who wants to contribute R500 a month, or a once-off lump sum of R2 000, you invest as you would in any investment fund. There are no upfront or ongoing investment fees and SV Capital makes its fees by taking a 4.5% share of the profit when the calf is sold. You must invest for 12 months and you cannot exit before then.

Short-term investment

You invest a minimum of R1 000 for five months. The expected (not guaranteed) return is 8.02% for the five-month period. In other words, you could expect to receive back R1 080 at the end of the five months.

iLobola Fund

This is aimed at an investor who is specifically saving towards lobola. The monthly minimum investment is R3 000 for six months, or a lump sum of R15 000 and your funds are invested for 18 months. The expected return after 18 months is 20%. SV Capital will settle either in cash or cattle, or both.

Using section 12J

You can also invest under Section 12J. This is a tax incentive by government to encourage investment into certain sectors. Any upfront investment is fully tax deductible, however the investment must be held for at least five years and incurs capital gains tax on the full value on exit.

This has a minimum investment amount of R10 000 and you are invested for five years. There is an annual fee of 2% and a performance fee of 20%. The targeted rate of return is 20.1% per annum – this includes the tax benefit.

This article first appeared in City Press.

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