GFIA: Ag Commingled Products Suffer From Market Noise

A new GFIA research white paper analyses agriculture-related investments. Employing a unique database, GFIA found that “the performance of commingled agricultural products, relative to vanilla bond and equity indices, was universally disappointing” during the period it surveyed. The annualized volatility was above 15 percent, and the high positive correlation to equities (0.868) means that there is little diversification benefit to be achieved with such products.

The working hypothesis behind the study was that the fundamentals of agriculture-based investment products are: agricultural commodities prices and the value of farmland. Both of those fundamental plays have produced strong returns. So the question arose: has that strong return resulted in analogous returns for commingled products that offer exposure to agriculture? These products were broken down into seven baskets: REITs, ETFs, hedge funds, funds of funds, mutual funds, listed companies, and investment companies.

Method and Results

In order to test their performance, GFIA Pte Ltd. the Singapore-based advisory and research firm founded by Peter Douglas in 1998, studied the period from January 2008 to April 2012, and it used the MSCI AC World Free Net total return to compare results with those of global equities.

The best performing of the seven baskets was that containing the mutual funds. Ag-related mutual funds “did not capture as much upside during rising markets” as did the MSCI AC World Net, but they usually capped losses “below their peers during down markets” which contributed to lower volatility. As the chart below indicates, mutual funds constituted just over one third of the sample universe.

Ag based ETFs produced an annualized return of -4.45 percent over the covered period. Ag based hedge funds did even worse, an annualized return of -6.52 percent. And so forth down the list, and though MSCI AG World Net also produced negative results, they were less dauntingly so, at -2.45 percent.  All returns were converted into U.S. dollars, “using relevant spot rates.”


There has been a good deal of discussion lately, some of it here at AllAboutAlpha, about the economic fundamentals connected with agriculture. Steve Deutsch, of the AllAboutAlpha Editorial board, wrote in late May that there are many asset managers and analysts who are reviving old Malthusian notions, that the continuing increase of the human population of the globe necessarily places a strain upon the productivity of the land, causing an increase over time in the value of the latter.

Recent experience in the U.S., and Ireland, and other locales, surely indicates that real estate is not always a winner. Indeed, the illusion that it is always a winner may have helped generate a lot of losers. Still, one could make a case that the boom and bust land values in the developed world in the still-young 21st century is itself but a blip of the long-term Malthusian radar.

Leaving Malthus aside though: in 1888, another English political economist, Edwin Cannan, wrote: “[A]t any given time the population which can exist on a given extent of land, consistent with the attainment of the greatest possible productiveness of industry possible at the time, is definite.” That statement ends with something of an anti-climax … all that wind-up and we learn nothing more than that something is “definite.” A rather indefinite thing to learn! Still, one gets his point.

There is presumably some best case at any one time, given the technology available at that time and all other relevant factors, and this best case could be stated as a given number of people per square mile. Cannan’s point was that there are two different ways to go wrong. Given any optimal density, land can go undervalued both through over-population and through under-population. Malthus had only worried about one of those possibilities.

Perhaps the human race has reached or is nearing a moment at which Cannan’s critique of Malthus, though still analytically appropriate, becomes somewhat moot, because at some point the threat to the optimum really does become a one-sided one, with the demand for the fruits of the land pressing against the limiting supply of those fruits, and indeed of that land. If this is so, then one would expect that investing in commingled products offering exposure to agriculture would take part in both good investment returns and diversification benefits.

A Decoupling

Nonetheless, as noted above, GFIA found no such thing. Though “evidence shows that physical farmland was, generally, a successful investment over the time period under consideration,” that didn’t translate well into the commingled products. This disappointment “perhaps supports recent opinion” the paper says, “that performance of agriculture as an asset class has decoupled from fundamentals and is now more affected by noise spilled over from other financial markets.”

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