Ken Slater says he was a novice at growing corn and soybeans when he asked Bank of America Corp.'s U.S. Trust unit to purchase the first of three farms for him in the past two years.
A millionaire living in Palm Beach, Fla., Mr. Slater was looking for a place to put his money that would provide income, diversify risk and offer capital appreciation. He wasn't thrilled with the re-turns of corporate and municipal bonds, so he put 5% of his portfolio in real assets such as farmland and timber.
“To be comfortable with a long-term investment, I have to have some income,” said Mr. Slater, a 61-year-old Boston native. “Somebody's going to buy that corn at a price, no matter what.”
INVESTORS' INTEREST GROWS
Mr. Slater is among a growing number of wealthy individuals who are investing in farms, timberland and funds that finance rail cars in a hunt for holdings that produce income and won't wilt as interest rates rise. An investment traditionally used by endowments, real assets are increasingly being pitched by private banks and wealth managers to affluent families who generally have at least $1 million.
The banks point to returns estimated to go from 5% to more than 10%, depending on the investment, and offer low-cost loans to leverage gains. Some firms purchase assets directly for clients, while others use funds with fees similar to hedge funds and private equity, including a cut of profits as high as 20%. Besides the illiquidity risk that usually comes with alternative investments, hazards of owning farms or forestland include summer droughts, floods and wood-eating beetles.
Unlike a bond, which is very sensitive to interest rates, the return on farmland can be set through a lease to a farmer and go up over time as it's re-priced, said John Taylor, national farm and ranch executive at U.S. Trust.
FARMLAND PURCHASES UP
High yields and the desire for an inflation hedge have fueled farmland purchases, Taylor said. Client capital allotted for acreage has tripled since 2010, and U.S. Trust has acquired about $200 million of domestic farmland in the past five years.
Institutions including pensions and endowments have bought real assets such as farms and timberland for years.
ENDOWMENTS GAIN
Harvard's natural re-sources portfolio has earned an average annual return of about 13% since inception in 1997, according to the university's fiscal 2012 report. Last year, the assets gained 2.4%. The university sees the asset class as attractive, expecting increasing de-mand for products such as timber from growing econ-omies, the report said.
Yale's endowment had 8.3% of its assets in natural resources, including timber, as of June 30, 2012, and that portfolio produced an annualized return of 16% over the past decade, according to the university's report.
The bet on real assets including timber and real estate hasn't helped returns every year. In 2009, the asset class was Yale's largest allocation, and the investments lost 34%, according to the annual report. Yale identified timberland as an attractive investment in the early 1990s, seeing it as a way to diversify, protect against inflation and potentially increase returns.
Private bankers and wealth advisers are repackaging the professionals' strategy for individual investors.
The investments don't suit everyone, even if they can afford the minimums. The assets can be hard to sell quickly and require regular decisions on issues such as equipment upgrades and harvesting. When the agricultural economy sputters, landlords can lose their tenants.
Farmland values collapsed in the 1980s, driving down rental income derived from the properties, said David Oppedahl, a business economist at the Federal Reserve Bank of Chicago. Rental revenue fell every year from 1983 through 1987 across the region including Illinois, Indiana, Iowa, Michigan and Wisconsin.
Farms returned 7.5% in this year's first half, with 5.3% appreciation on land and crops plus the income payout, according to the National Council of Real Estate Investment Fiduciaries' farmland index of 547 properties. Average income from the land increased to 1.14% in the second quarter, as interest rates began to rise, from 1.02% in the prior quarter, NCREIF data show.
U.S. farmland may be 15% overvalued because of volatile commodity prices, with Iowa acreage potentially 40% to 100% too steep, according to a June 10 report by Capital Economics Ltd.
“Both rents and land values are dangerously exposed to any further decline in corn and wheat prices,” the firm said.
