LONDON Agriculture funds which outperformed in August thanks to BHP Billiton's $39 billion bid for Potash Corp predict further strong performance as low inventories lift prices for soft commodities.
Boudewijn de Haan, who manages the Robeco Agribusiness Equities fund, and Cedric Lecamp, co-manager of the Pictet Agriculture fund said weather shocks and natural disasters in Russia and Pakistan were likely to continue to keep food prices high.
De Haan's fund was the highest ranked of the agriculture funds, returning 7.5 percent in August. Potash Corp -- which rejected BHP's initial bid -- was the largest holding in the fund at end-June, at 4.4 percent, data from Thomson Reuters fund research firm Lipper showed on Tuesday.
Lecamp's fund returned just over 5 percent, according to Lipper. It has a smaller exposure to Potash, but other fertiliser companies buoyed by M&A talk are high in the top 10 holdings, including Yara (YAR.OL), Mosaic (MOS.N) and CF Industries (CF.N).
The average equity fund registered for sale in the UK fell by 2.18 percent in August.
Lecamp said that early indications pointing to a rebound in fertiliser applications had led Pictet to increase its holdings across the fertiliser sector, including Potash Corp, prior to the takeover offer by BHP Billiton (BLT.L) (BHP.AX).
Other agriculture funds to do well in August included First State's Global Agribusiness fund and Allianz RCM's Global Agricultural Trends.
Robeco's de Haan said he expects commodity prices to stay high, as global inventories are low, so any stress caused by bad weather or protectionist activities like Russia's ban on wheat exports after a poor harvest will create uncertainty.
With farmers looking to increase yields while demand remains high, he said fertiliser and seed companies remain attractive, as do trading companies such as Bunge (BG.N) and ADM OELG.DE, which can benefit from higher volumes.
Pictet's Lecamp said he has reduced exposure to supply chain services activities such as wheat processors that may have trouble passing along price increases to their clients.
"We believe our balance of upstream farm input activities, professional farm operators and downstream supply chain services companies offer investors a natural hedge to the volatility in commodity prices while avoiding the speculation risks inherent to commodity investing," he said.
The overall top performing fund in August was Stuart Winchester's Allianz RCM Thailand fund, coming in first for the second month in three, and heading a clutch of Thai equity funds among the best performers.
In August the Bangkok stock index .SETI was up 6.7 percent, continuing a strong rally it began in June.
Winchester's fund was also the best performer over 12 months, returning 77 percent and beating the next best fund -- Fidelity's Thai portfolio -- by a startling 15 percentage points.
Another familiar face among the best-performing funds was Jayesh Manek, the chemist-turned-fund manager who switched jobs after winning a fantasy investment competition.
His Manek Growth fund was up 8.9 percent in the month, sharply outperforming fellow UK equity funds. It ranks second among direct rivals over the year-to-date.