After almost 30 years in the investment industry, all of it spent in equities, I recently joined AGinvest Properties Canada, focused on helping clients invest in premium Ontario farmland. As I have done in the past, I hope to share my investment ideas and perspective in a periodic email and blog posts.
The more immediate objective is to explain the benefits of investing in farmland as an asset class and why it can be such an effective part of a truly diversified investment portfolio. Why I am focusing on Ontario farmland will be the subject of a future post but it should be noted that not all farmland is created equal. We believe that Ontario farmland has some of the best characteristics that make it among the most valuable in all of North America.
While most investment portfolios are made up only of stocks and bonds, most sophisticated investors understand that it’s important to diversify into other asset classes. Many believe that private equity and hedge funds specializing in credit or equity strategies offer them that diversification. I would argue that almost all of these “alternative assets” are just a derivative of the same bet. I’ve gone back and looked at almost 100 years of returns from farmland and compared it to the returns from equities. I will detail the results in a future post that compare very favourably over that period and with far less volatility. With the exception of a couple of decades within that century, Ontario farmland has dramatically out-performed equities over most time periods. Besides those periods of outperformance, there was almost no correlation of returns, suggesting it makes a perfect addition to a properly diversified portfolio.
If history is any guide, paper assets might be challenged in a world where central banks are printing unlimited amounts of money to deal with the end of a global debt bubble. When it comes to hard assets, I believe the fundamentals of farmland are the best of any asset class. It is an asset that we all rely on regardless of technological changes, and is not made obsolete by technology. In fact, it benefits from innovation as the efficiencies and improvements accrue to the landowner through increased yields per acre.
It is an asset class that hasn’t seen valuations distorted by central bank policies and it is an asset class that is relatively undiscovered when it comes to investable assets. A very small percentage of farmland globally is owned by financial players. As a result, the operators have driven the valuations: in this case farmers. Those operators haven’t used debt or any financial engineering to help drive prices higher, in part, because farmers don’t buy farmland to sell it. They buy it to operate it. That commitment to owning and operating a farm has allowed many of them to accumulate material amounts of wealth over the years as they surfaced value from improving the yields from their land. After a decade of watching corporate executives lever up balance sheets in order to buy back their company’s stock (and in particular, the exercise of their own options), that should sound refreshing. Or at least it does to me.
As the world increasingly migrates to large urban centres and away from rural life, it feels like the perfect contrarian call. Over the next several weeks I will be sharing my thoughts with you on this topic. Until then, stay well and take care.
I welcome your feedback and can be reached at [email protected]
Written By Anthony Faiella, Senior Vice President, Business Development