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Before balking at the diets of your gluten-free friends, check the returns on their gluten-free portfolios.

An emerging sector, sometimes described as natural, organic and better-for-you foods (of which gluten-free is a subset), is climbing many times faster than the overall food market. Advisors have been eyeing the outsized growth of smaller producers of organic, “clean label” and “free from” foods.

The U.S. Organic Trade Association says organic food sales increased 8.4% from 2015 to 2016, with an average gain of about 10% per year since 2007. Gluten-free sales similarly surged 10.8% in the U.S. in 2016 from 2015, and 7.5% in Canada, according to Euromonitor data.

Healthy demand

Driving demand is growing concern about industrial agriculture and increased reports of food allergies. Intolerances are pushing more people to eschew nuts, eggs, dairy, corn and gluten.

“It really is, primarily, a consciousness that people developed about what they’re putting in their bodies,” says Nick Cherney, head of ETFs at Janus Henderson Investors in Denver, Colo., whose firm launched The Organics ETF (Nasdaq:ORG) last year. “It’s tied to increased concern about the general environmental health of the planet, and what we’re doing to it.”

Michael Detlefsen, managing director of Pomegranate Capital Advisors in Toronto, says he’s been helping clients invest in gluten-free food manufacturers after receiving inquiries from investors. “We kind of fell into it,” he says. “You’ve got this push for yield driving more people to look for these natural, organic, and good-for-you alternatives.”

Detlefsen estimates about 40% of his clients have an allergy or personal interest in the foods they’re buying into. Most are just looking for growth.

Getting in

Capturing growth requires going to companies at the manufacturer or supplier level, given that even Walmart and Costco are big retailers of organics and gluten-free foods. Detlefsen has been seeking out private opportunities.

The public market has narrowed with consolidation: Amazon (NASDAQ:AMZN) reached a deal to buy Whole Foods Market in June 2017, and Hain Food Group and Celestial Seasonings merged in 2000, forming Hain Celestial (NYSE:HAIN). Other big players like United Natural Foods (NASDAQ:UNFI) have grown with acquisitions, shrinking the field for investment. Detlefsen says investors have “had to go from large cap to mid cap and into small cap, and even micro cap, in order to find these opportunities.”

Shorting wheat futures?

That said, there are opportunities. Clients don’t necessarily have to be multi-millionaires or skilled in shorting wheat futures.

Detlefsen suggests advisors bundle investments from a group of clients to meet the minimum private investment threshold, which is typically $250,000 to $500,000. The deals require an exempt market licence in most provinces and include equity and private debt opportunities. (Detlefsen declined to say which companies he’s invested in.)

In this market, smaller is usually better. Smaller companies tend have stronger brands, Detlefsen adds, because their independent, do-it-yourself approaches resonate with consumers. “Big corporates, when they enter these sectors, tend not to do very well because there’s an association with mass-
produced, low-cost, low-quality,” he says.

Basic investing principles continue to apply: perform due diligence and don’t invest based on fads. After all, if a pharmaceutical solution is found for food allergies, free-from foods may become obsolete. Such a solution may not be far off: California’s Alvine Pharmaceuticals is developing ALV003, a product that contains proteases that degrade gluten and make it safe for celiacs.

Feel-better foods

Yet experts say the consumer taste for healthy foods isn’t just a fad. Charles Taerk, chief executive of Faircourt Asset Management in Toronto, whose firm advises the UIT Alternative Health Fund, says industrial farming increases unwanted compounds in food. He says consumers are educating themselves about healthier eating and personally experiencing the benefits.

“It’s antibiotics, the steroids, or the chemical products that go into the grains that we feed our animals that ultimately come into our bodies,” Taerk says, whose fund holds Canadian organic food producer SunOpta Inc. (TSX:SOY).

Taerk says he decided to try organic eating after he couldn’t solve his blood pressure and cholesterol issues with a dietician-recommended food plan.

“We decided to go organic and, within three months, we saw dramatic changes,” he says of his family. “People have remarked about skin tone, energy level. It’s those types of things that drive people to try these alternatives.”

Even international agrifood company Cargill, the largest private company in the U.S., has created a line called “Non-GMO Solutions,” offering corn and soy products that manufacturers can use in foods with a non-GMO label. Non-GMO, Cargill acknowledges, “is one of the fastest-growing claims in the U.S. food industry.”

Demand for non-GMO foods parallels the rise in food allergies—Detlefsen says he’s developed a couple. He says more people live in the “big chemical soups” of big cities, while parents raise their children in sterile, disinfected environments, weakening immune systems. “The propensity of people who have allergies is going to grow—and the good-for-you food and the better-for-you food, that’s still growing,” he says.

by Simon Doyle, an Ottawa-based financial writer.

Originally published in Advisor's Edge

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