Some investors are starting to think about farmland as an alternative to real estate.Jeff McIntosh/The Canadian Press
Investors with waning appetites for broad indexes dominated by big tech and the growing debt loads of firms driving the artificial intelligence boom may find tasty long-term returns in natural assets such as farmland.
“Agricultural assets are a good diversifier from some of the more hectic things in your portfolio, such as tech and precious metals,” says Sadiq Adatia, chief investment officer at BMO Global Asset Management.
“Agricultural products are a key theme into the future as food demand increases in China and India, among other economies. It’s a nice, boring way to invest money over the long term.”
With public markets increasingly volatile amid geopolitical instability and rich valuations, shifting to non-correlated private assets looks prudent, says Eric Menzer, senior managing director, head of advisory solutions, Manulife Investment Management, and lead portfolio manager of Manulife Real Asset Investment Fund.
“Agricultural assets tend to be less correlated to public equities and fixed income, so that’s a primary reason to include them in portfolio construction,” he says.
Some investors are starting to think about farmland as an alternative to real estate, he adds. “It’s a natural progression from investing in multi-family and industrial buildings over to hard assets like farmland that offer a similar balance of income and capital appreciation.”
Inflation protection is another benefit of agricultural investments. Over long periods, inflation erodes purchasing power, as anyone shopping for groceries can attest.
“Being an owner of farmland, you participate in those price fluctuations and, ultimately, your portfolio will benefit over time,” Mr. Menzer says.
The recent planned reduction of Chinese tariffs on Canadian agriculture and seafood products is a modest tailwind, Mr. Adatia adds, but investors should conduct a yearly health check on their agricultural exposure to determine tactical allocation based on their financial goals.
Investing in agricultural assets comes with unique headwinds, too. In addition to tariff policies, supply and demand imbalances, and production, investors must contend with the weather.
“Fire, flooding, excess water, insufficient water – these are the big natural risks that come in the agricultural space,” Mr. Menzer says. “It’s not easy to manage direct risks like natural disasters, but you can diversify across different crop types: from luxury goods like almonds, pistachios and wine grapes to everyday row crops like corn, soybeans and potatoes. Having a diversified portfolio across farmland will help mitigate those potential headwinds.”
Public and private options
Canadians already have exposure to natural assets through the Canada Pension Plan and potentially through employer-sponsored pension plans. However, unlike institutional investors with long investment horizons, individuals must consider the pros and cons of whether to invest in agriculture through public or private markets.
Manulife Investment Management offers several multi-asset strategy funds – both private funds for institutional investors and hybrid funds for retail investors – that invest in commercial real estate, timber, farmland and commodities, among other asset classes, including the aforementioned Manulife Real Asset Investment Fund.
Exchange-traded funds such as BMO Global Agriculture ETF ZEAT-T, iShares Global Agriculture Index ETF COW-T and iShares MSCI Agriculture Producers ETF VEGI-A offer exposure to global companies involved in farming, agricultural chemicals, machinery and food production.
Publicly traded securities tend to be more volatile than private agriculture assets, Mr. Menzer says. While private funds provide access to hard assets, such as farmland, which would be difficult for an average investor to obtain, they come with higher costs and lower liquidity.
“Liquidity tends to get underestimated,” he adds. “Even in semi-liquid or evergreen-type structures, these are not for short-term investors but should be part of a strategic asset allocation.”
Still, depending on a retail investor’s liquidity needs, Mr. Adatia and Mr. Menzer recommend an allocation of 5 to 10 per cent toward hard assets, generally.
“It’s a balance between having a material impact on the overall portfolio, but not being so large that you sacrifice your needs for liquidity,” Mr. Adatia says.