Investment Articles

Investment Performance of Niche Property Investments

Again, it is difficult to define the investment performance of the property sector as a whole within the context of this document, due to the wide variety of sub-sectors and regions which must be considered. In the UK for example, residential real estate has delivered markedly different performance for each Investor that has participated depending on their strategy (buy to let/distressed assets/development etc), and residential property as a whole has delivered a different performance to commercial property or student accommodation. The same can be said for every combination of sector, strategy and region, therefore the context of this document does not allow for a detailed analysis of the investment performance of the sector as a whole.

Residential – The UK market offers some interesting opportunities, as depressed prices combine with a lack of buyer financing to create a viable rental market that can deliver yields of between 4% and 8% after costs. In other more distressed markets, properties can be acquired with heavy discounts, and rental yields can reach as high as 15% to 20%, although in many cases the quality (and therefore ability to dispose of) such property assets can be questionable, and Investors in these markets might better take advantage of current market dynamics by acquiring properties to refurbish and resell very quickly, capturing the discount as a capital profit and eliminating the long-term liability. Emerging markets also offer opportunities to invest in residential property, and the upside capital growth potential is often attractive, although the location risk associated with acquiring and owning physical property in many countries can be significant. Again, the cash-flow dynamics of direct investments in real estate are often very different from those of securitized investments such as property funds.

Commercial- Office space, shopping centres and industrial space have long been the focus of large Institutional Investors seeking stable income and long-term growth prospects. In developed markets where infrastructure is well established, commercial property is viewed as a stable income investment with some growth potential, and in less developed markets potential for growth is higher but so too is the level of risk to capital in terms of location and counterparty risk. The investment performance of commercial property varies from region to region, and across the varying sub-sectors such as office or industrial. One good point of reference for the global performance of commercial property investments is the FTSE UK Commercial Property Indices series encompassing the Retail, Office and industrial Indices; the All Property Index delivered 1.88% in the 12 months to March 2012.

Student accommodation – This is a growing sector, driven by demand for reasonable accommodation from University students; as the global population grows, so too will the volume of students attending University who will in turn require suitable accommodation in close proximity to their campus. Investors can purchase units in student blocks, effectively becoming the landlord of the unit themselves, or more often than not entering into an agreement with a management company who will manage the property on their behalf. Direct property investments in the UK student accommodation sector have delivered yields upwards of 10% p.a. There are also a number of funds investing in student accommodation which tend to acquire whole blocks, which investors taking a stake in the fund. The Brandeaux Student Accommodation Fund has delivered an average annual yield of 9.71% p.a., and the Mansion Student Accommodation Sterling Fund delivered an annual performance of 12.14% in 2011.

Care homes – Another niche sector that is gaining popularity amongst both institutional and private Investors is care homes, as both seek to correlate the performance of their investments with trends in socio-economic fundamentals such as an ageing global population, and capture financial gains from increasing demand for assisted living accommodation. Investors may purchase units within custom care accommodation and assign day to day management to an operator, or they may choose to invest in a fund specialising in such assets. Direct investments in care homes offer the potential for capital growth and in many cases a “guaranteed” rental income of around 8% p.a., although most opportunities for private Investors tend to be pre-construction projects, adding significant counterparty and strategy risk. Access to investment funds specialising in care homes is severely limited for retail investors, and therefore there is no credible performance data.

This is an excerpt from DGC Asset Management’s Alternative Investments Guide. Free to download at the DGC Asset Management website.

The $32 billion Harvard University Endowment Fund, which generated a return of 21.4% in the fiscal year 2011, has 23% of its investments held in real-assets, which according the CEO of Harvard Management Company; Jane Mendillo, has been a significant contributor to the fund outperforming its benchmark over the last decade by 270 basis points per year, adding roughly $15 billion of value versus what would have been earned by a more traditional portfolio. The University of Notre Dame also holds a significant proportion of its portfolio in real-assets (17.5%), and delivered a return of 21.5% in 2011. The Yale University Endowment Fund delivered a return of 21.9% in 2011, and holds 29% of its portfolio in real-assets, including real estate and natural resources.

This article seeks to review the investment performance of a range of real-assets, compare that performance to the performance of UK equities, and establish the effect of real-assets on the performance of investment portfolios. In particular, this report focuses on the investment performance and impact of farmland, forestry, gold and fine wine. The following analysis suggests that the low correlation of real-assets with other asset classes means that such investments, whilst potentially illiquid, offer an opportunity to reduce risk and volatility whilst also carrying significant potential to generate superior returns.

The following chart demonstrates the compound annual growth rate associated with a range of asset classes over a range of timeframes assuming a single investment made at the beginning of each measured period and ending at the end of 2011. In the case of the IPD UK Forestry Index and IPD Rural investment Index, data was only available until the end of 2010, however anecdotal evidence suggests that performance throughout 2011 has continued at a similar pace and therefore we feel this still offers a true and fair comparison with the equity indices.

Compound Annual Growth Rate (CAGR)

FTSE 100

Gold
UK Farmland
UK Forestry
US Farmland
US Forestry
Fine Wine

FTSE All Share

Cash

5 year

-2.2%
19.4%
12.0%
17.7%
11.9%
4.7%
10.7%
-2.4%
3.8%

10 year
0.7%
18.7%
10.0%
10.4%
14.7%
7.5%
11.7%
1.3%
4.1%
15 year
6.2%
9.9%
-
-
11.9%
7.2%
-
2.4%
4.4%
20 year
6.2%
7.6%
-
6.3%
11.0%
10.1%
-
4.5%
4.8%

This chart tells us that, broadly speaking, real-assets have outperformed UK equity indices and cash over every period considered. Interestingly, equities is the only asset class examined that generates a financial loss over any given period, indicating a higher degree of volatility than its real-asset counterparts. The timing of this analysis plays some part in forming that conclusion due the impact of the recent financial crisis being included in the 5-year performance data. It is likely then that holding real-asset investment alternatives such as farmland, forestry investments, gold and fine wine throughout a range of timelines will have improved portfolio performance without dramatically altering – and in some cases improving – the overall risk profile.

It should be noted that, in the case of the FTSE 100 and FTSE All Share Indices, these numbers offer only a broad view of the performance of an investment in an index-linked investment vehicle, and do not take into account the upside and downside potential of managing a basket of equities and relying to an extent on picking specific stocks in the hope of ‘beating the market’. Nor does it take into account dividend income which could be re-invested, effectively compounding returns and losses. Investment Managers and Investors might feel they are able to outperform the Index through careful stock-picking and active trading/management, although many studies have shown that, over the long-term, professionally managed equities perform only marginally better than the Index in general, and Investors remain exposed to the likelihood or otherwise that individual investment managers will perform consistently throughout the entire term of an investment.

In this report we have compared the investment performance of a range of asset classes including UK equities, farmland, forestry, fine wine and gold bullion. We have also analysed the effect of portfolio diversification through reducing equity exposure and acquiring real-assets. This report has shown:

Real-assets may contribute substantially to traditional stock portfolios
Real-assets have outperformed UK equities by some considerable margin over every timeframe measured
Exposure to real-assets adds meaningful risk reduction, especially during periods of underperformance or volatility in traditional financial assets

It is clear then that diversification achieved through reducing equity exposure and allocating capital to real-assets has, in the cases reviewed in the this report, improved the overall performance of investment portfolios and reduced risk (considered as volatility) between 2001 and 2011, effectively optimising portfolio performance.

One issue with this basic analysis would be a lack of access to investable projects or assets that give smaller Investors direct exposure to the fundamental characteristics that drive returns in the real asset space. Often, farms and woodlands are too large and expensive for single Investors to purchase, and the specific expertise required to improve, develop and operate those assets is also expensive and hard to come by. It is therefore difficult for Investors to allocate smaller sums of capital to these assets outside of restrictive and often expensive and opaque collective funds. Whilst some funds do offer limited access to certain assets, the structure of such arrangements often hamper asset selection, development and management to such an extent as to deliver much smaller returns than direct investments, as revenue is often absorbed into the cost of the structure and on-going management.

Thios article is an excerpt from a report by David Garner is Partner, Investment Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors. To download the full report, please visit the DGC Asset Management website.

This article addresses some of the risks associated with real-asset investment alternatives in general.

As with any potential transaction, all investments carry risk, and in the case of alternatives those risks are often very specific to the asset class, here we address some of the general risks associated with moveable and immoveable properties considered as alternative investments. This risk-set can be broadly defined and categorised as:

Sector Risk
Location Risk
Asset Specific Risk
Counterparty Risk

Sector Specific Risk

As is the case with traditional financial investments, hard-assets carry risks specific to their sector. For example, in the case of agricultural land, Investors must be aware that a variety of exogenous variables can affect the investment performance of the property. Weather, commodity prices, the cost of farming, and agricultural inputs all factor in the revenue potential and profit margins of a farm. As farmland values are dictated primarily by the income producing potential of the asset, poor on-farm performance can adversely affect capital values. The same can be said for gold; during period of growth in equity markets, gold values may fall as confident investors sell their gold and buy into equities in order to capture returns from raising markets. Subsequently gold values may fall as a result. In the case of timber properties, poor house building figures result in a fall in demand for construction timber, and in these circumstances Investor may not be able to secure the price they require for their timber, and may ultimately leave their trees to continue to grow throughout the downturn, choosing instead to harvest when prices are more buoyant and capturing the extra physical growth that has occurred in the interim.

Location Risk

In many cases, especially in the example of real-estate related investments, Investors may choose to acquire assets in countries other than their own domicile. Asset values in emerging markets are often lower, along with the price of labour, and demand in those markets might also be higher, so acquiring assets that form party of the emerging market supply chain is often a strategy to capture superior returns. Whilst man overseas locations offer security of ownership and a transparent business environment, any overseas investment carries risks specific to the country of operation, and developing economies often carry a much greater risk of political interference or security of ownership issues. This extra risk must be factored into the due diligence process, and the potential returns on offer weighed against this inherent risk to capital.

Asset Specific Risk

When acquiring a tangible asset, it is imperative that the investor has access to the requisite skill-set in order to properly identify any issues with the asset itself. This kind of due diligence is essential in order to establish value of money, and avoid costly investments into otherwise useless assets. In the case real estate based investment alternatives, there may be issue with title, access, planning or even financial issue like outstanding tax bills. In the case of niche property like farmland or forestry, there may be specific issues relating to soil quality or water supply which may ultimately cause the property to be less productive and profitable. In the case of other niche sectors like fine wine or collectibles, very specific experience is required in order to identify genuine investment opportunities, and Investors without access to quality, experienced advice may end up purchasing valueless assets for unscrupulous sellers out to make a quick buck.

Counterparty Risk

When investing in niche products, Investor will usually require the services of a professional to advise on the transaction, but also to operate or manage the assets as is the case with real estate or other assets that require ‘trading’ in order to capitalise on opportunities and minimise risk. In these cases, the investor is exposed to the professional capabilities and honesty of their partners, be they forest managers, fine wine investment managers or collectibles experts. Poor advice at the point of investment and bad or incapable on-going management can ultimately destroy the investment potential of any asset. Proper due diligence is required in order to establish the track record of all partners in their respective fields.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

This article focuses primarily on real-asset investments, and this section is designed to highlight some of portfolio planning characteristics of physical assets when considered as part of a well-diversified and balanced portfolio of investments, as well as some of the inherent risks to be considered when allocating investment capital to specific, niche investment sectors or projects.

Whilst real or hard-assets offer a number of significant benefits including reduced volatility, tangible asset values and the potential for superior investment performance that is not reliant on the performance of traditional financial investments, potential investors must give equal consideration to the potential for relative illiquidity, operational or management risks specific to the asset class, and of course counterparty risk exposure when investing in assets that require on-going expert management in order to maximise returns and minimise downside potential.

Portfolio Planning Advantages

Every asset class exhibits different characteristics when considered from the point of view of an Investor or Financial Planner, and Investors invariable choose to invest in specific assets in order to achieve specific goals such as risk mitigation, portfolio insurance, superior returns and a hedge against inflation or some other potential economic impact on the value and performance of their portfolio.

Here we look at some of the broad portfolio planning characteristics associated with a range of physical assets considered as alternative investments.

Capital Values

By their very nature, physical assets retain a disposal value throughout most economic circumstances, and whilst asset values will fluctuate from time to time, Investors allocate capital to hard-assets in order to underwrite the value of their portfolio and insure against the possibility of the values of listed financial assets falling sharply at any given moment. In fact, certain assets such as gold hold a ’safe-haven’ appeal, often rising in value when stock markets falls as Investors sell equities and buy gold.

Non-Correlated Returns

The fundamentals that support value growth and income associated with real-assets are often far removed from the fundamentals that support traditional investments. Often, alternatives share a direct negative correlation with the performance of equities and bonds, affording investors the opportunity to balance their portfolios and make gains when other portfolio components lose value or underperform. This strategy is sometimes referred to as portfolio insurance.

Diversification

Key to risk-mitigation in financial planning, diversification simply means spreading ones investment risk across abroad selection of holdings, reducing the likelihood that too many eggs are held in one proverbial basket. Diversifying an investment portfolio into a range of holding across different sectors and assets reduces the risk that poor performance in any one asset will have too big an impact on the portfolio as a whole.

Inflation Hedge

A number of alternative investment assets share a strong positive correlation with inflation, rising in value faster than the prevailing rate of inflation. This effectively mitigates the impact of inflation on the real value of investment portfolios. Pension funds and university endowments, along with insurance companies and other institutional investors buy into long-term investment assets such as farmland and forestry for this very reason.

Superior Returns

As detailed in the chart overleaf, many alternative investment assets have outperformed traditional investment assets over the long-term by some considerable margin. Whilst all sectors and strategies carry inherent risk, carefully selected and well-managed real-assets have been shown to generate superior investment returns for the Investor capable of tolerating short term price fluctuations and long-term investment horizons. Operational asset like property also generate income useful when other income assets like cash deposits underperform.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

Ask any experienced investor over the age of 50 what type of real-asset they wish they’d invested in when they were young, and the vast majority will most likely give one or more of two answers; gold and/or real-estate, and those who pay more of an interest in such matters might even whittle their selection down to niche agricultural real estate including farmland and timberlands. Why so then would anyone with 30 years of investing experience behind them, having seen rise and fall of many fads, bubbles, booms and busts, consider physical, tangible and useful assets in precisely the same light as the wealthy of centuries gone by, when value was literally only stored in land and precious items like gold and jewels?

OK, so put aside for a second that the recorded investment performance of farmland and forestry investments has outperformed the vast majority of traditional assets like equities for decades, it is now becoming ever-more apparent that the sensible investor, especially those who have been party to the consistent volatility in financial markets over the years, is choosing to acquire assets that retain a use and essential function, and where demand is growing and availability of suitable resources falling. These assets will always be in pretty high demand, as growing populations shift to a higher protein, more resource-intensive diet, and general population growth requires increased output of agricultural commodities for food and biofuel markets. It is likely then that these assets, especially those that produce essential food commodities will continue to grow in value over the long-term, and that the income derived from them also rises as competition in the grain markets intensifies at an international level.

Timber is a great example of an asset class which, if well-funded and expertly managed, continues to grow in size physically regardless of growth in financial markets or the economy at large. It is primarily this fact that makes forestry investments so popular amongst long-term investor like pension funds, university endoements and insurance companies. Demand for sustainable sourced timber is growing exponentially, and curbs on the illegal logging trade along with international legislation to protect natural forests will continue to push up the value of any timber grown, so not only does the asset grow bigger, it also grow more valuable per weighted measure, creating a double-pronged growth strategy to combat otherwise volatile market-linked portfolios.

However, it should be noted that there is no such thing as the perfect investment, and real-assets in niche markets carry very specific risks of which potential investor must make themselves aware. Education is key to wealth preservation, and whilst risk cannot be eliminated, it can be identified and in most cases mitigated through proper structuring and management of a property or investment. Investor are encouraged to seek advice of an experienced advisor able to demonstrate a track record of identifying and delivering successful project, and who is capable of providing the investor with up to date, credible and factual asset class analysis in order to properly acknowledge and understand the asset specific risks that may eventually impact the investment performance of the asset or project.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

There are a number of reasons that seasoned investors chose to invest in alternative assets; mainly of course to diversify in to assets where investment performance is not driven by the performance of financial markets in general; but also in order to capture capital gains and income to replace ailing and volatile equities.

The appeal of real assets like farmland, timberlands, real estate and other, more esoteric assets like fine wine and collectibles, lies in the fact that these assets are all tangible properties, that are likely to retain the majority of their value, and continue to generate income, regardless of whether stock are up or down. The general consensus is that an investment portfolio consisting entirely of stock, bonds and cash is grossly over-exposed to the day to day vagaries of ‘the markets’.

Choosing a good stock has become less about the basic underlying fundamentals of the company, and more about market sentiment related to the sector or markets as a whole, and it is this investing environment that pushes investors to seek returns elsewhere, whilst underwriting the value of a portion of their portfolio with capital assets like land or property.

Another good reason that interest in investment alternatives seems to be peaking, is the poor annuity rates offered to new pensioners by insurance companies. In every case, new pensioners are being forced to fix their incomes at a much lower rate than they had previously been able to do, causing many to readdress their future lifestyle choices and standard of living. This alone is motivation enough to seek out assets that retain their value whilst also generating an income to beat that of their deflated pension plans.

Pension Funds, University Endowments and Insurance Companies are mostly increasing their exposure to real asset alternative investments, with many making large purchases of farmland and forestry investment properties, and now Financial Advisors seem to be coming on board too, searching for secure and transparent alternatives for their Clients.

Making the most out of an investment portfolio is not just about picking the best stocks, but about investing in a range of assets to ensure that a blip in the market does not completely destroy the intrinsic value at a time when the investor may not have sufficient time on order to recover their losses before retirement. But investors should remain aware the real assets carry sector, asset, location and counterparty risk, and these risks must be properly acknowledged and understood in order that the investor does not expose themselves to risky assets that might be badly managed, which ultimately defeats the whole object of alternative investments diversification.

Investor and Financial Advisors are encouraged to seek the assistance of a professional Advisor with experience of identifying, measuring and delivering alternative investment projects, and who should be happy to provide references from happy Clients, and proof of their successful track record.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

So you’ve set up your online share dealing account, and understand all the associated risks and benefits of such a venture. If you’re looking into injecting a bit of added excitement into your online investment portfolio and investing in international equities looks very tempting indeed.

Trading in international equities may look like a glamorous option to leap into feet first, but there are a number of things that you will need to think about before deciding whether investing abroad is the right option for you.

Trading on the international stage, some key considerations.

1) Fluctuations in currency exchange rates may affect the value of returns or the capital value of your investment

2) Investment performance could be impacted by political and overall stability of the country, as well as local markets.

3) Your investment ventures are likely to be subject to the taxation rules of the country you are invested in.

If you think that investing on the international stage may be the right option for you the best place to start is by do some research of your own, in addition to any information provided to you by you online share dealing account provider. Information could prove invaluable especially if you are treading unfamiliar territory.

If you choose an execution only online share dealing account option you will retain sole responsibility for managing your investments. However, if you are unsure about the risks and potential of any investment venture you may want to speak to an independent investment advisor before proceeding.

Investing in international equities could bring the opportunity to invest on any one of up to 16 stock exchanges world-wide- so there is certainly a good scope for diversification potentially reducing overall risk to your investment portfolio. However, you should be aware that there is no guarantee that you will see a return on your investment or that you will get back all of what you put in. As with other investment options it is important that you consider all the risks involved, in order to ensure that your investment choices are well suited to your own circumstances and investment objectives.

Trading on a non-UK stock exchange can be complex for the novice. Nevertheless, trading in international equities does present the chance to diversify and add a little colour to your portfolio. Treated with due care and backed up with a good deal of research you may yet find the exciting opportunity that you were looking for.

About this Author
John T Hughes writes for Share Dealing Account, a leading online source of information on share dealing accounts in the UK.

Should you hold Alternative Investments in your portfolio?

So you’ve decided to reduce your exposure to equities in order to avoid the price volatility that seems to be driven by the latest piece of political rhetoric about national debt or economic growth. You’re no longer seeing the value of your investments rise and fall by considerable margins on a daily basis, and you’re sitting on a nice pile of ’safe’ cash. But you probably also need to find a home for your capital where it will grow at least in line with inflation, hopefully generate some income, whilst sharing little correlation with the performance of equities, bonds and other traded financial instruments.

So now is the time you start to consider alternative investments. but where do you start? Do you buy fine wine, rare stamps, farmland, timber or any other of the plethora of emerging alternative investment asset classes currently being touted as the ‘perfect’ investment?

I suggest that the first place one should look should be to their requirements, really establish the end goals you wish to achieve, and the limits you have in terms of liquidity, asset allocation for your alternative investments (as a % your total portfolio) and risk. From there you can, with enough research, discover which asset class might be the right alternative investment for you.

Let’s look at a case study, and see if we can match the Investor to an alternative investment asset class that offer the performance e and characteristics he or she is searching for.

John has a total pension portfolio of £250,000, held in a flexible Self Invested pension Plan wrapper (SIPP). John chose to move his assets into a SIPP some time ago in order to take more control over decisions affecting his investments, rather than be reliant on a Financial Advisor who can only advise on a couple of asset classes – equities and bonds.

John pulled 50% of his portfolio into cash 12 months ago, with the remainder held in defensive stocks and bonds. He has decided to allocate 10% of his overall pension to non-financial, real-asset alternative investments. He does not need income, and he is prepared to hold an asset for up to 10 years, aiming to capture capital growth. John has self-certified as a Sophisticated Investor, but does not wants to invest in funds, he wants tangible assets.

Taking into account John’s position and requirements, it might be suggested that the following alternatives may be a good starting point for Johns research process:

Fine Wine
Land – Particularly productive agricultural land
Timber Properties
Collectibles

All of these assets display certain characteristics that John might find particularly appealing. Fine wine – when selected and managed by an expert – has been shown to deliver returns of up to 20 per cent per annum. The forward looking story looks good too, as increasing demand from Asia, particularly a growing wealthy class in China is demanding more fine wines that the world can currently produce, and they are prepared to pay increasingly large sums of money as wines get older and rarer as more of a particular year is consumed. This increase in demand for a finite asset is what drives capital growth, and a good wine investment manager might help John to pick and choose a suitable portfolio, or cellar’ of wine and also advise, perhaps on a discretionary basis, when to buy and sell to maximise profit and minimise risk. Also, the performance equities has absolutely no bearing on the investment performance of fine wines, allowing John to collect long-term capital appreciation.

Much the same thing can be said for collectible such as rare stamps, where again demand is driven by increasing rarity and increasing demand from wealthy overseas and domestic collectors and investors.

Agricultural land also benefits from increasing demand, as populations in developing economies grow and incomes rise, they demand more protein (meat), which requires many more resources to produce than their traditional grain-based diets. It takes about 3kg of grain to produce 1 kg of beef, so this adds considerable pressure to current agricultural productivity. At the same time we lose millions of hectares of arable land every year to urbanisation, degradation and climate change, so it is likely that farmland will continue to become more valuable over time, again giving John the long-term capital appreciation, as well as separation from financial markets that he requires. This would also generate income from farm rents, or perhaps even through a joint venture farming agreement that would allow John to share in the profits from harvesting.

Forestry investment may also offer John a potentials alternative. Essentially, purchasing a timber-producing property, through leasehold or freehold, and simply sitting back and watching the trees grow bigger and more valuable each year, a biological process that cannot be interrupted by an economic crisis. The actual price of timber also moves every year, having risen by an annual average of 6% for the past 100 years. This means John capture true growth in its truest sense. A huge number of institutional investors are investing in forestry, including pension funds, university endowments (Harvard and Yale to name but two) and hedge funds, all of which are investing in forestry for long-term capital growth. Again, the same principles of supply and demand hold true for forestry. We require more timber as the enormous populations of China and India enter into their most aggressive and resource-intensive phase of growth, requiring more timber for paper, biomass and construction, whilst at the same time natural forests are now protected, creating huge demand for sustainable sourced plantation timber.

In summary, there are a range of alternative investments for John to consider, and really the best thing for him to do would be to conduct his own research in to each subject, and speak to a range of Advisors with specific experience of each individual asset class and choose to work with a professional that can substitute a good track record of investment selection/management for the options he chooses. So, speak to a few fine wine brokers and measure their pitch against the knowledge gained from researching the asset class. Speak to a forestry investment advisor and agriculture investment advisor, and choose to work with someone that knows their sector, and has delivered success for Clients previously. Heck, why not ask to speak to any potential investment partner’s previous clients; I’m sure that any Advisor worth his salt would be proud to have a Client sing their praises.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

The primary measure of farmland investment performance in the United States is the National Council of Real Estate Investment Fiduciaries (NCREIF) Farmland Returns Index. The index provides investors with a measure of the investment performance of a large pool of individual agricultural properties acquired in the private market for investment purposes. According to the index, US farmland returned 8.6% in 2010, and 5.85% to quarter 3 in 2011.

Regional U.S. farmland growth figures vary from state to state. A new report by the Federal Reserve Bank of Kansas City showed a 12.6% increase in mountain states farmland values over 2011.

The Minneapolis Federal Reserve Bank District reported farmland values as of second quarter 2011 up 17% from the same period a year ago, while the Kansas City District reports farmland prices up 20%.

Nebraska has seen one of the largest increases, with non-irrigated land up 30%. Oklahoma ranchland, suffering from a prolonged drought, saw values up just 6.4%, with what increase there was driven by oil and gas exploration.

There has been some concern amongst the agricultural community in the United States that land values have spiralled out of control, with demand for assets fuelled almost entirely by Investors seeking to diversify out of the stock market and into tangible assets. Don McCabe, an accredited farm manager with Soy Capital Ag Services said recently at an investment forum that, about 60% of all farmland is being purchased by active operators, with 15% purchased by nonlocal investors, 13% by local area investors, 7% by institutions and investment groups and 5% by other entities.

In Canada, Farm Credit Canada (FCC) monitors the value of a basket of 245 benchmark farm properties every six months. On average, Canadian farmland increased 7.4% in the first six months of 2011, and 9.5% for the year ending June 2011. Saskatchewan farmland led the nation in farmland price increases, up 11.6% in the six months ending in June, and up 14.3% year on year.

New York-based TIAA-CREF, the largest U.S. pension manager for teachers and academic researchers with $469 billion of assets said in October 2011 that farmland investments may return 8% to 12% per year as global food demand increases. The company has $2.5 billion in farmland investment assets and owns about 600,000 hectares.

Investors considering farmland investment should consult with an experienced Advisor in order to plan the most relevant and effective farmland investment strategy, identify suitable opportunities and identify and mitigate risk.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

The investment performance of the agriculture sector can be monitored via a number of devices and measures that track the performance of traditional investment assets such as quoted equities, as well as a range of measures that reflect price movements in alternative investment assets within the agriculture space such as farmland.

In reality, the agriculture sector as a whole relies on a combination of demand for its products, weighed against agricultural productivity. When demand for food, livestock feed and biofuels is high then soft-commodity prices rise, as is also the case when poor productivity creates the same widening of the gap between supply and demand. On the other hand, if demand falls back, or bumper harvests create an oversupply of produce, prices fall.

If one is able to gain an understanding of current productivity and demand dynamics, then one is best able to predict the true performance of the sector as a whole.

The performance of agricultural equities alone – as measured by agricultural indices – does not truly reflect the state of fundamentals that support the sector. In many cases, individual issues that affect specific companies can either boost or lessen demand for the stock resulting in movement in the stock price regardless of the performance of the sector as a whole.

Indeed, many consider that the most efficient method of capturing financial gains resultant of the boom in demand for commodities from a population that is growing exponentially is to acquire farmland as an investment. The value of farmland is driven at the most fundamental level by the net revenue earning capability of the individual asset in question. As an example; a one hectare lot capable of generating a net annual income after costs of £1,000, will be worth more to a Farmer than a similar plot capable of earning only £500.

Farmland values are recorded by different indices in different regions. In the U.S. the National Council of Real Estate Investment Fiduciaries (NCREIF) records the quarterly investment performance of farmland. In the UK the Land Registry offers the most accurate picture, although anecdotal evidence from estate agents such as Knight Frank offer some insight, although on a very broad, national basis.

Agricultural equity indices include Standard and Poors GSCI Agriculture Index; S-Network ITG Agriculture Index; Dow Jones-UBS Commodity Index and Société Générale Index Global Agriculture, all of which provide a different viewpoint as they measure a different set of equities or commodities and use different weightings.

Overall, agriculture investments can best be assessed individually, and conclusions drawn as to the potential for each project as a standalone entity, be it an equity investments or acquisition of tangible assets. Investing in any business should not be simply because it operates in a particular sector, farmland should not just be bought simply for its agricultural status, and alternative investments are not going to be profitable just because they are alternative.

DGC Asset Management are an alternative investment consultancy providing Investors with research, due diligence and select opportunities to participate in the acquisition and development of productive, income producing agricultural property and renewable energy assets.