Buying The Farm
About ten years ago I wrote a post called Farmland Project. The commodity boom was alive and well back then as prices were going up and fund providers were rolling out ETPs to meet demand. I have always been a big believer in having a small allocation to commodities in hopes of capturing a low or even negative correlation to equities.
Equities go up the most, most of the time. A point I will make here very frequently is that I don’t think it makes sense to have a huge allocation to diversifiers (alternatives) because they generally don’t do as well in the long run as equities, but the correlation effect captured with a small allocation can help smooth out the ride which I think is very important.
In the farmland post I did just a little bit of looking into a whole bunch of names from many countries and essentially generated a list. The Malthusian argument put forward by Jeremy Grantham back then was compelling, so I wanted to try to learn more. The result in the last ten years from those names has been terrible. I did not go forward on this for clients. At some point I owned Cresud (CRESY) personally for a short time but could not get comfortable enough to buy it for clients. I don’t remember whether it was a profitable or losing trade but if I don’t remember it then the result good or bad was probably negligible.
Since that post I have mentioned the space a couple of times when I caught wind of IPOs, notably Adecoagro (AGRO) and Farmland Partners (FPI), both have also faired poorly.
What reminded me of all this was an article in Barron’s this week about diversifying emerging market exposure. There were a lot of names listed including the iShares MSCI Global Agriculture Producers ETF (VEGI). The link in the VEGI symbol takes you to the iShares info page for the fund. VEGI has 40% in materials, 32% in consumer staples and 24% in industrials plus one or two other tiny sector exposures. The largest four holdings are Monsanto (MON) 13%, Deere (DE) 10% while Archer Daniels Midland (ADM) and Kubota (KUBTY) each get about 5%. A narrow fund having 33% in four names is not unusual but anyone owning the fund needs to know that.
I ran VEGI through ETFreplay’s correlation tool (this is a must for anyone using narrow funds in a portfolio, I was not paid to say that) and it doesn’t really correlate highly to anything. I compared it to iShares Materials (IYM), SPDRs Industrial (XLI) and SPDRs S&P 500 (SPY) and the correlation ranges from 0.50-0.75 spending more time closer to 0.50. Year to date VEGI is up almost 15% versus about 18% for SPY.
The chart is interesting. Over the year it tracks SPY but with all the little turns in the market it seems to go the other way. VEGI listed in 2012 and has underperformed the S&P 500 by a lot but then, the materials sector as measured by IYM has underperformed by a lot, yes VEGI has a low correlation to IYM but is 40% in the sector. Historically, materials tend to be an earlier cycle outperformer. Looking deeper at the holdings there are some purer farm stocks included but with very small weightings. This fund interests me, I will update the blog if I ever buy it.
One other aspect of this entire theme that is important at a higher level is the belief that a part of portfolio management has to include the willingness to devote time to learning about different themes even if you don’t end up buying in.