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Nick Cherney Janus Henderson

The Growing Organics Market Presents a Natural Investment Opportunity

By Nick Cherney, CFA, Senior VP, Janus Henderson

As Americans become more aware of the environmental and health benefits of organics, we are presented with an opportunity to align our investments with our lifestyle choices – by investing in the companies and agricultural operations that are driving organic innovation and bringing natural products to the marketplace.

“More and more, we’re seeing that people want to put their money into things they know and are passionate about,” says Nick Cherney, Senior Vice President and Head of Exchange Traded Products at Janus Henderson.

Through thematic investing, investors are able to take part in transformative forces that could permanently alter our lives and behaviors, creating opportunities shaped by meaningful change. Janus Henderson’s The Organics ETF provides investors with the opportunity to invest in organic farming operations and companies globally that provide the organic food, beverages and cosmetics we use in our everyday lives.

Organic Goods are a Sustainable Global Trend

With many Americans focused on living healthier and more natural lifestyles, organic foods and products are moving into the mainstream. By 2014, 85 percent of Americans were already buyers of organic products, according to a Consumer Reports survey, with nearly half (45 percent) doing so at least once per month.[1] As a result, the U.S. organics industry increased nearly thirteen-fold, from $3.6 billion in 1997 to more than $45 billion in 2017.[2]

Demand for organics is growing internationally as well. The U.S. exported roughly $550 million worth of organics in 2016, up from $412 million in 2011, and the global organic food market is projected to achieve a compound annual growth rate of 16 percent through 2020.[3]

But the organics market isn’t limited to food – it also includes personal care goods, including cosmetics, hair and skin care products. The global organic personal care industry is expected to reach almost $16 billion in revenue by 2020. Skin care alone may see a compound annual growth rate of 9.8 percent from 2014 to 2020.[4]

The Market is Booming for Organic Farmers

The increasing global demand for organic products is creating a noticeable shift in supply, offering a clear opportunity to invest in organic farming.

Certified organic farming has been expanding in the United States for years, particularly for fruits, vegetables, dairy and poultry. Farmers with certified organic operations use production practices with environmental benefits such as water management practices, no-till, habitat maintenance for beneficial insects and biological pest control. Generally, organic operations are required to consistently demonstrate that they are protecting natural resources, conserving biodiversity and using only approved substances.[5]

The environmental benefits of organic agriculture have become increasingly apparent to consumers and farmers alike. As of April 2017, there were more than 24,000 certified organic farming operations in the United States and over 3,000 farms transitioning to organic products.[6] As organic agriculture continues to grow exponentially, it is clear that we’ve only just begun to scratch the surface of organic farming and markets.

An Industry Coming of Age

The growth of the organics marketplace and the opportunity it represents has not gone unnoticed. The evolution from niche to mainstream is illustrated by the growing interest of major consumer goods companies in gaining a foothold in this potentially lucrative market. One barometer of this interest is merger and acquisition (M&A) activity. Developing winning products and identifying attractive market segments can be a painstaking endeavor, often undertaken by nimble first movers who have spent years honing their offerings. Given the rise in demand for organic products, established food and consumer products companies realize they can no longer ignore this segment. Rather than take the trial-and-error path of product development, established companies are instead buying their way into the organics space. This was the impetus behind France’s Danone 2016 acquisition of WhiteWave Foods, a maker of organic dairy, plant-based and other agricultural products. In addition to the $12.3 billion price tag, Danone’s appetite for increasing its organics offerings is also evidenced by the 23% premium it paid for WhiteWave, based on the company’s pre-deal stock price.

Distributors are also seeking to make inroads with organics-focused consumers. Amazon’s $13.6 billion purchase of Whole Foods Market in 2017 caught the retail food sector by surprise, not only due to the e-commerce giant moving aggressively into the brick-and-mortar segment, but also by expanding the potential organics market to Amazon Prime members, which numbered 80 million at the time of the deal. Similar to Danone’s WhiteWave acquisition, Amazon was willing to pay nearly a 20% premium for Whole Foods stock.

While these deals grabbed headlines, smaller M&A activity continues as the industry consolidates and legacy consumer products companies take steps to defend their overall market share. The increasing consumption of organic products alone can make a compelling investment thesis. The likelihood of M&A activity continuing as the industry matures, however, may serve as an additional catalyst for investment returns, if one uses the premiums paid for recent deals as a metric.

Investing in a Natural Future

As consumer and investor interest in natural products continues to grow, more companies may be willing to focus on organics, expanding the marketplace and the impact these goods can have on people’s wellness and investment portfolios. Organic farming operations and companies that advance these causes by bringing naturally derived foods and products to the marketplace should continue to benefit, as consumers’ affinity toward these products shows no signs of waning.

For impact investing enthusiasts interested in aligning their investments with their values, The Organics ETF represents an opportunity to put their money where their mouth is.

 

Article by Nick Cherney, CFA, Senior Vice President, Head of Exchange Traded Products at Janus Henderson Investors. Mr. Cherney was the chief investment officer and co-founder at VelocityShares from 2009 until Janus’ acquisition of the company in 2014. Prior to VelocityShares, he worked at Barclays Capital in New York and had product development and management responsibilities for iPath ETNs. Previous to this role, Mr. Cherney was a portfolio manager for iShares at Barclays Global Investors in San Francisco, where he managed more than $25 billion of ETF assets across asset classes. Earlier, he was an index research analyst at Barclays Global Investors. Mr. Cherney is frequently sought out by leading financial publications and news agencies including CNBC, Bloomberg TV, the Financial Times, The Wall Street Journal, Reuters and Barron’s, among others.

Mr. Cherney received a bachelor of arts degree in economics from the University of California – Berkeley, where he graduated with highest honors. He holds the Chartered Financial Analyst designation and has 13 years of financial industry experience.

 

Please consider the charges, risks, expenses and investment objectives carefully before investing. For a prospectus or, if available, a summary prospectus containing this and other information, please call Janus Henderson at 800.668.0434 or download the file from https://janushenderson.com/info. Read it carefully before you invest or send money.

ETF shares are not individually redeemable and owners of the shares may acquire those shares from the Fund and tender those shares for redemption to the Fund in Creation Units only.

OBJECTIVE: The Organics ETF (ORG) seeks investment results that correspond generally to the performance, before fees and expenses, of an index which is designed to track the performance of companies globally that are positioned to profit from increasing demand for organic products, including companies which service, produce, distribute, market or sell organic food, beverage, cosmetics, supplements, or packaging.

Investing involves risk, including the possible loss of principal and fluctuation of value. There is no assurance the stated objective(s) will be met.

RISKS: ORG focuses its investments in organic products companies. Because of this, companies in the Fund may share common characteristics and may be more sensitive to factors such as consumer demand, consumer confidence and spending, environmental factors and production costs. As a result, the Fund may be subject to greater risks and the value of its investments may fluctuate more than a fund that does not focus its investments.

The opinions are as of 4/26/19 and are subject to change without notice. Janus Henderson may have a business relationship with certain entities discussed. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes.

As of 4/26/19, the top 10 portfolio holdings of The Organics ETF are: Chr Hansen Holding A/S (20.68%), Sprouts Farmers Market Inc (10.74%), Hain Celestial Group Inc (8.17%), Green Organic Dutchman Holdings Ltd (5.43%), Wessanen (5.37%), Bellamy’s Australia Ltd (4.92%), John B Sanfilippo & Son Inc (4.69%), Ariake Japan Co Ltd (4.58%), L’Occitane International SA (4.47%) and United Natural Foods Inc (3.52%). There are no assurances that any portfolio currently holds these securities or other securities mentioned.

Holdings are subject to change without notice. For a complete list of holdings as of the most recent publicly available disclosure period, visit https://janushenderson.com/info

Janus Capital Management LLC is the investment adviser and ALPS Distributors, Inc. is the distributor. ALPS is not affiliated with Janus Henderson or any of its subsidiaries.

JNS788 / C-0419-23797 05-30-20

Article Footnotes:
[1] Consumer Reports. As of March 2014.
[2] Organic Trade Association, National Restaurant Association. As of April 2017.
[3] TechSci Research, Organic Trade Association. As of April 2017.
[4] Grand View Research. As of August 2015.
[5] Organic Farming Research Foundation. As of January 2018.
[6] Organic Trade Association. As of May 2018.

Featured Articles, Food & Farming, Impact Investing, Sustainable Business

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