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Role of farm real estate in a globally diversified asset portfolio: Robustness and consistency

Role of farm real estate in a globally diversified asset portfolio: Robustness and consistency. Gilbert Nartea Lincoln University Chris Eves Queensland University of Technology. Introduction. New Zealand rural economy Farm number and farm use trends Current issues Farm investment.

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Role of farm real estate in a globally diversified asset portfolio: Robustness and consistency

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  1. Role of farm real estate in a globally diversified asset portfolio: Robustness and consistency Gilbert Nartea Lincoln University Chris Eves Queensland University of Technology

  2. Introduction • New Zealand rural economy • Farm number and farm use trends • Current issues • Farm investment

  3. Farm real estate as an investment class • High capital return • Land use and geographic diversification • Increasing corporate involvement • Portfolio benefits

  4. Research Objectives • Confirm the investment performance of New Zealand farm real estate. • Compare farm real estate to other New Zealand and international investment assets • Assess the role of NZ farm real estate in a globally diversified portfolio. • Test the robustness of the portfolio benefits of farm real estate

  5. Research methodology • Investment assets • NZ T-bills and bonds (RB NZ) • International shares (ordinary shares –datastream) • NZ direct farm real estate (beef and sheep= NZ meat and wool board) • Analysis • Comparative risk and return measures • Correlation analysis • Risk reduction • Return enhancement • Robustness tests • bb

  6. Results

  7. Conclusions • The results show that given the predominantly negative correlation between FRE and financial assets, the risk-return tradeoffs of such portfolios can be improved significantly • The diversification benefits measured in terms of risk reduction, return enhancement, and improvement in the Sharpe ratio are robust under a number of FRE risk-return scenarios as well as under high and low inflationary periods. Using 5- and 10-year rolling periods, FRE was found to be a consistent part of efficient portfolios.

  8. Conclusion Cont • The results also show that risk reduction benefits of diversifying with FRE are larger than the risk enhancement benefits. This suggests a role for FRE in mixed asset portfolios that typify more of a risk-reducer rather than a return-enhancer. • Investors can significantly enhance their portfolio risk-return tradeoffs, particularly by reducing risk, through diversification into FRE.

  9. Conclusion Cont • FRE therefore appears to deserve more serious consideration by investment practitioners than it has been accorded in the past. We conjecture that such is the result of limited avenues by which they can invest in FRE. Therefore, it is also important to explore ways of making it easier for investment practitioners to invest in FRE probably through the wider introduction and development of unit trusts investing in direct FRE.

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