David Huggins | BlackRock’s BGF Nutrition Fund
The portfolio manager of the BGF Nutrition Fund at BlackRock hints at the trends steering future investments and the disruptive technology that could transform the nutrition space over the next decade
On a summer day in August 2014, David Huggins joined BlackRock’s graduate programme in London. Working as an analyst in the natural resources team, Huggins developed a sharp eye for equity investments in nutrition, food and agriculture. Little did he know that six years later, and at the age of 27, he would be the portfolio manager of the company’s BGF Nutrition Fund, managing a pool of $63 million in assets. The fund invests globally in companies engaged in the food and agriculture value chain, from seeds to end-products.
The fund, co-managed today by Huggins and Tom Holl, had been launched in 2010 as part of BlackRock’s sustainable thematic fund range to focus primarily on investing in companies linked to the production or processing of agricultural commodities. “This meant low returns, low growth, and uncertain outlooks due to a heavy reliance on commodity prices,” says Huggins.
Huggins explains that repositioning the fund in March last year from being the BGF World Agriculture Fund to becoming the BGF Nutrition Fund broadened its mandate to a thematic focus on the nutrition universe. “We scour the world for the very best companies operating in this universe, and which contribute to the ongoing evolution of what we’re eating, how we’re buying it, and the way we’re growing it.”
At the time of writing, there were 38 holdings in the BGF Nutrition Fund. Swiss food giant Nestlé, Irish food group Kerry, Germany’s flavour company Symrise, Canada’s supplements maker Jamieson, and US-based retail giants Costco and Grocery Outlets are among the top 10 companies in the fund.
“We scour the world for the very best companies operating in this universe, and which contribute to the ongoing evolution of what we’re eating, how we’re buying it, and the way we’re growing it”David Huggins
Over the years, the BGF Nutrition Fund has also broadened its sustainability commitment. Huggins says the fund’s holdings contribute towards a more sustainable food chain by investing in companies that improve resource intensity at the grower level, reduce waste through the supply chain, and provide consumers with healthier and more sustainable food choices.
“Every company we consider investing in is first assessed for its alignment with the United Nations’ Sustainable Development Goals,” says Huggins. “We are committed to ensuring that at least 70% of the fund’s holdings align with these objectives.”
BGF Nutrition Fund and Covid-19
For Huggins, the Covid-19 pandemic has been the biggest shock to global and financial markets since the global financial crisis, and it has had a profound impact on investment decisions, as much as on consumers’ behaviour.
“Within the nutrition universe, we are seeing a number of consumer behaviour changes, which might persist for longer than most presume,” he says.
Huggins argues that demand levels in the independent restaurant space may recover to 2019 levels, but this is likely to happen over the course of many years and not in the next 12 months. He also believes that the same slow recovery is true for the ‘food-to-go’ category.
“We have looked to divest from companies that are exposed to these themes which, prior to Covid-19, were seen as areas of strong growth,” he says.
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Huggins believes that in the near term, companies benefiting from consumer behaviour changes due to Covid-19 are likely to do well. “Consumers don’t want to spend their time going to supermarkets or eating in packed restaurants. Hence, we think grocery, takeout and meal kit delivery companies are ideally positioned, as Covid-19 accelerates adoption.”
For Huggins, new customers are coming at lower customer acquisition costs than in the past, and so food companies are experiencing a rapid truncation in their growth outlooks.
“We believe every stock held in the fund has an above-average chance of outperforming global markets,” says Huggins. “If holdings deviate from the investment case for whatever reason, we divest,” he adds.
The wave of venture capital and private equity investments in food and drink companies this year is also flowing through into larger capital pools. Huggins says this trend is cropping up in public equity markets for nutrition companies and is reflected in a company’s valuation.
“If a firm is able to demonstrate strong sustainability credentials, the market is willing to give them a premium valuation for it,” says Huggins. “The BGF Nutrition Fund is a sustainable thematic fund, and therefore, our mandate is to prioritise growth, while respecting the latest sustainability standards investors expect.”
From sourcing ingredients to the end-product, there are many areas where companies can take action on their sustainability commitments. The packaging of end-products is perhaps the most challenging one, not to mention the most visible to the consumers’ eyes.
Nestlé, for example, announced last week that three of its US-based water brands, Ozarka, Deer Park and Zephyrhills, have started to convert their packaging to 100% recycled plastic.
For Huggins, the upgrade of packaging is driven by changing consumers’ behaviour, and something to which investors are paying close attention beyond the gimmick. After all, the European Parliament approved in March 2019 a law to ban single-use plastic by 2021.
“We strongly advocate government regulation that forces out unnecessary single-use plastic, and increasingly, that is what consumers want,” says Huggins, arguing that the ‘David Attenborough effect’ – the raising awareness of plastic pollution – is real. “Like any big shift, there will be winners and losers, and it is our job to find the former and avoid the latter,” he says.
Huggins explains that some plastic packaging producers will see lower demand for their products due to this change. “It’s a sector we have already been negative on, so these changes would not result in changes to any portfolio holdings for us,” he notes.
To the point
What’s your view on challenger brands eroding the market share of big food corporations?
I always remind people that true brand equity isn’t created in a year or even a few years. It’s built over decades.
More often than not, big brands win out. New entrants have their place, and they bite at the heels of the big companies, and they are almost always a force for good. Young, small brands that do gather success do so because they have correctly identified an unmet consumer trend, whether it’s sugar-free ketchup or plastic-free packaging, or no artificial flavours.
Big brands realise the trend and respond. Occasionally, big brands fail to do it, and small brands can win. However, more often than not, big brands’ advantages in large marketing budgets, greater consumer awareness, and strong human talent together ensure their survival and their market share in the long run.
That’s not to say challenger brands all fail – that’s absolutely not the case. We are just willing to weight their probability of success quite low as a base assumption.
What disruptive technology do you see that could transform the nutrition space over the next decade?
I am extremely interested in microbial fermentation technology, which involves the use of programmed micro-organisms such as yeast to transform sugar into protein.
This technology is rapidly achieving cost-parity with animal protein, and with that approaching parity, we will see increasing consumer adoption.
We think this could take the baton from plant-based meats and become the major disruptor to the traditional animal protein markets over the next decade.
Cell-based meat is a similar disruptive technology which, if it can reduce its cost of production like microbial fermentation technology, then it too will be a very important contender.
What healthy food and drink trends are on your radar?
We still see strong growth trends for natural, plant-based, functional, convenience or protein-rich products.
Young brands are firmly aware of these, but larger consumer packaged goods (CPG) companies are still reworking their ingredient lists and reworking their brand portfolios to reposition themselves into these fast rivers.
These trends create opportunities for ingredient solutions companies which are able to help those global CPG companies with that clean labelling process. But these trends are very powerful for mid-sized brands in our space, which continue to benefit from being already strongly aligned with these ongoing consumer trends.