Peter Sharkey continues his look at world food production and the opportunities for investors…

I mentioned last week that many fund managers believe that instead of investing in 'pure' agricultural plays, there is greater merit in acquiring shares in agricultural service firms.

Whereas farming can be extremely volatile, companies supplying the sector, most of whom diversify into other areas and are, therefore, less at the mercy of the weather, are considerably less exposed. For example, as agricultural commodity prices rise, so farming becomes more profitable, enabling farmers to invest in better equipment and improved technology designed to aid increased productivity.

Conversely, when prices fall, the collective performance of another group of agriculture-related businesses improves as food manufacturers and livestock producers benefit from lower costs.

Ideally, investors would sit both sides of this particular equation, which is what a well-managed fund allows them to do. Furthermore, fund managers will also take account of currency, trade and political risks, to 'smooth' the impact of any single factor upon the fund's performance.

While investors would expect this to happen – after all, that's what they're paying for – it's worth remembering that a seemingly well-diversified agriculture fund cannot completely mitigate volatility. Indeed, some of the firms in which a fund manager may invest could be even more exposed to economic volatility, so compounding matters if agricultural commodity markets are adversely affected.

However, as the specialist agriculture fund sector is comparatively small, investors have the opportunity to investigate where most funds are invested and compare their performance.

Take, for example, the Sarisin Agri Sar fund, launched in March 2008. At the time of writing, this �116m fund has grown by more than 16pc in the past 12 months against a sector average of 13pc. One of its principal attractions for investors unsure about the sector is the opportunity it affords for monthly investments from just �100.

Sarisin's fund managers have an impressively diversified set of holdings, assembled to fit with one or more of their five investment 'themes'.

Their 'security of supply' investment theme, defined as making investments in low-risk opportunities, resulted in them investing almost 4pc of their fund in Potash Corporation, one of the world's main owners of potassium reserves for use in fertiliser.

In August, Potash Corp attracted a $39bn bid from BHP Billiton, an offer which had a predictably beneficial impact upon AgriSar's unit price.

Aside from Potash Corp, the Sarasin fund also holds investments in Yara International, one of the world's leading providers of mineral fertilizers. It also has investments in food manufacturers and others that specialise in irrigation systems, which gives some idea of the extent to which professional fund managers will spread risk.

As I highlighted last week, there are other, equally impressive, managed funds, such as the First State Global Agribusiness fund, or the BGF World Agriculture fund and for those who expect the sector to be a fruitful, long-term source of profits, these too are worthy of further investigation.