Have I Got A Deal For You On Romanian Timber


Bloomberg metaphorically set fire to the offices of the Harvard Management Company or HMC (the school's endowment) writing about what turned out to be lousy investments in various types of farms. I have poked fun at HMC recently including for its short volatility bet.

This paragraph from the article is a good set up;

But perhaps no bet damaged Harvard more than its foray into natural resources. The university invested in central California vineyards, Central American teak forests, a cotton farm in Australia, a eucalyptus plantation in Uruguay, and timberland in Romania. Harvard has been reevaluating and selling some of those investments, such as part of the Uruguayan plantation it sold to insurer Liberty Mutual last year.

All in, Bloomberg said HMC lost $1 billion on the exposure. Farming as a possible portfolio exposure offering a low to negative correlation to stocks has always intrigued me. This made my radar in the 1990's when I read about HMC's then CEO Jack Meyer. Since he left the endowment has struggled mightily. In terms of public market exposure to a farm proxy, there are a few of them but they never seem to do well except for maybe Cresud (CRESY) which is an Argentinian company trading as an ADR. I owned the name once a long time ago, was lucky enough to take a gain but it was long enough ago that I don't remember the details. Here's a chart comparing it to the S&P 500 for the last five years.

At the very least, it makes an argument for no correlation, CRESY seems to do its own thing more often than not. Does that mean it can go up in a bear market for US equities, remember low to negative correlation is the objective. I think it's best shot would be if US equities wallowed and emerging did well like in the 2000's. If everything went down, like in 2008 I wouldn't expect it to soften the blow to the portfolio. In 2008 it went down much more than the S&P 500.

No one reading this is HMC, for just the average advisor or investor looking for an alternative, you need to have some reason to think it can zig when the market zags. As much as I find the farming plays interesting, they appear to be bets on farming and resources, which is not bad, but it is not necessarily a source of portfolio protection.

Let's say though that you draw a different conclusion, you do think farming can work in the manner I am talking about, how much do you put in? Piecing it together from the Bloomberg article, it looks like HMC started out at $2.9 billion in the farm investments which is almost 8% of the endowment. It wrote down $1.1 billion against the investments which equates to a loss for the endowment or portfolio drag of 300 basis points.

As a reminder, equities are the thing that have gone up the most, most of the time. The further you stray from equities the more long term drags you are putting on the portfolio. Not that you shouldn't diversify but if you have a 20 year time horizon (actually you have a longer one than that) and you believe that 20 years from now equities will be up the most, then diversifying away from equities should arguably be limited to what you need to be able to avoid panicking. If you disagree with the idea that equities will be the best performing asset class over your long term, you may not want to own them at all.

With that in mind, I doubt you ever want more than 10% in alternatives, I would consider farming as an alternative but would not put my entire alternative sleeve into farming or any single alternative. HMC has of course gotten a lot of attention for owning alternatives and personally I have learned a lot from their use of them but HMC appears to have evolved into a portfolio of diversifiers (alternatives) hedged with a little bit of equity exposure and their returns prove the point. In its last reported year it was up 4.4%, trailing as Bloomberg says a simple, indexed 60/40 portfolio. Ouch.

The picture is from this morning, we were dispatched to a small electrical fire at 4am.