The Case for Alternatives in a Changing Investment Landscape

September 27, 2022
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This article was edited to meet broker-dealer compliance guidelines in April of 2023.

With the S&P 500 down over 23% year to date and the ICE BofA AAA U.S. Corporate Total Return bond index down over 19% year to date, the need for diversification from non-correlated real assets has never been more clear as investors face the realistic prospect of structurally higher inflation levels.

Here at AcreTrader, we have built our company on the belief that farmland and timber investments can enhance risk-adjusted returns for investors. While we stand behind this claim more than ever in the current environment, we thought it might be meaningful to highlight some work from unaffiliated third parties who also discuss the benefits of adding real assets and alternative assets to investors’ portfolios.

The general consensus amongst these recent studies is that while for the last two decades stocks and bonds have provided diversification from each other, higher inflation could result in the reappearance of positive stock/bond correlation, implying an increasing need for investors to further diversify by investing in alternatives.

  • AQR shows the historical positive correlation between stocks and bonds and the importance of alternatives.

"Alternatives are likely to be an important tool for navigating a changing SBC [Stock/Bond Correlation]. If the performance of stock and bond allocations becomes more correlated, a ‘third allocation’—diversifying to both traditional asset classes—may be able to make up the diversification deficit.” -The Stock/Bond Correlation: Drivers and Implications

  • KKR and Apollo also discuss the changing structural relationship between stocks and bonds and argue for adding alternative investments.

"Overall, our work shows that there is a significant opportunity to not only protect but also potentially enhance the equity sleeve of portfolio returns by adding Real Assets, including Private Real Estate and Private Infrastructure.” -Regime Change: Enhancing the ‘Traditional’ Portfolio

  • Alliance Bernstein, a global asset management firm, has drafted a white paper showing that over most of history stocks and bonds have been positively correlated. While noting that high multiples have recently been present in nearly all asset classes, the article goes on to highlight the advantages of illiquid assets such as farmland and timberland as an inflationary hedge and the lack of correlation to the overall business cycle.

“Two assets stand out as potentially very attractive on this basis: farmland and timberland. If our prognosis regarding the income/diversification trade-off for bonds and private equity is correct, of the assets shown here, these two are in very advantageous positions.” -What Happens When Diversification Disappears?

  • J.P. Morgan recently highlighted the case for real assets, in particular timber investments, in an inflationary environment.

“Timber’s historically moderate returns and low volatility make a compelling argument for a strategic allocation. It also need not be balanced by fixed income holdings, as other risk assets often are. As high volatility and recession risk may define the second half of 2022 and prompt portfolio rebalancing, adding the diversification opportunity timber offers may be a healthy move.” -Timber investment: The new branch of real assets

  • Research from Nuveen, the $1.3 trillion investment manager of TIAA, has shown that adding 2-5% of a portfolio to farmland and/or timberland can improve a portfolio's overall returns and at the same time reduce risk.

The benefits of adding farmland, timber, and other alternative assets are well documented.

The chart below demonstrates farmland’s slow and steady growth in comparison to both equities and bonds since 1991.

Historical Farmland Cumulative Returns Vs. Equities & Bonds

Source: NCREIF Farmland Index, S&P Dow Jones Indices, Federal Reserve Bank of St. Louis, and AcreTrader calculations. All returns are estimates and assume reinvestment of dividends. Data is for the period 12/31/1990–06/30/2022.

And this chart compares equities’ volatility with farmland’s relative lack thereof in the past two decades.

Annual Farmland Return Vs. Equities

Source: NCREIF Farmland Index, Bloomberg, Federal Reserve Bank of St. Louis, and AcreTrader calculations. All calculations are total returns (including dividends). Data is for the period 12/31/1999–06/30/2022.

(For more about farmland investments’ strengths in good economic times and bad, see our July webinar “Farmland Investing During Economic Uncertainty.”)

Historically there have been significant barriers to adding farmland and timber investments to an everyday investor’s portfolio. According to McKinsey, institutional investors typically invest between 30% - 50% of their assets in alternative investments, while the average retail investor had just 2% in alternatives. A primary reason for this discrepancy is that individuals historically lacked access to this asset class.

But farmland as an easy-to-access asset class is no longer just theory.

We set out with a mission to make buying and selling land common, transparent, and easy. A core tenet of our mission is to simplify land investments and provide streamlined access to this unique asset class for investors. AcreTrader has funded $270 million in equity on its platform across 108 farms since we launched our first direct investment in 2019. More importantly, four of our first farms have completed their full investment cycle with returns above expectations.

AcreTrader not only provides access, but does so in a low-cost manner by providing direct investments into farmland and timber. Create your free account today to start building a portfolio of farm and timberland alternative assets.

The above content is not intended to be a comparison between products, but is intended for general, educational and informational purposes only. Any performance noted is historical and there is no guarantee any trends will continue. All investing involves risks, including the complete loss of principal. Diversification does not guarantee a profit or protect against loss in a declining market. It is important for each investor to review their investment objectives, risk tolerance, tax liability and liquidity needs before investing. Investment vehicles have differences in fee structure, risk factors and objectives. Investments are considered speculative, involve a high degree of risk and therefore are not suitable for all investors.

**Past performance does not guarantee future results and there is no guarantee this trend will continue.** Note: AcreTrader internal analysis covers periods 12/31/1990 - 12/31/2021. All returns are estimates and assume reinvestment of dividends. Index information is provided for illustrative purposes only and is not meant to represent the results of an actual investment. Returns do not include any management fees, transaction costs or expenses. Volatility is measured as the standard deviation using the monthly total returns of each index or asset class. The historical performance of each index cited is provided to illustrate historical market trends. Risk/reward profile for each asset class varies significantly. This should not be construed as a recommendation of any specific security. You cannot invest directly in an index.

Clicking some links in this article will take you to websites independent of and unaffiliated with AcreTrader. The information and services provided on these independent sites are not reviewed, guaranteed, or endorsed by AcreTrader or its affiliates. Please keep in mind that these independent sites' terms and conditions, privacy and security policies, or other legal information may be different.

Data source: Calculated by AcreTrader using information from Bloomberg, Federal Reserve Bank of St. Louis, NCREIF and NYU Stern School of Business. "Farmland" = NCREIF Farmland Index. "Timberland" = NCREIF Timber Index. "Commercial Real Estate" = NCREIF Property Index. "S&P" = Standard & Poor 500 Index.  "REITs" = Dow Jones REIT Index.  "CD" = Bankrate Historical 1-Year CD Interest Rates. "AAA" = ICE BofA AAA US Corporate Index. "U.S. Govt. Bonds" = U.S. Treasury 10-Year Bond.

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