The Institutional Investor Sponsored Guide to
Investing in Real Assets
Global Agriculture Investing:
No Currency Hedges Needed on the Farm
Co-Published by TIAA-CREF
Guide to Real Assets-TIAA Reprint.indd 1
9/16/13 11:06 AM
The Institutional Investor Sponsored Guide to Investing in Real Assets
Global Agriculture Investing:
No Currency Hedges Needed on the Farm
Jose Minaya, Managing Director,
Head of Global Natural Resources and
Infrastructure Investments and
Justin Ourso, Director and Portfolio
Manager, Global Agriculture Investments
A
recent shift by a number of
institutional investors towards
allocating to direct overseas
investments in non-traditional,
real assets raises some important questions
about how to manage currency risk in the
context of illiquid and complex structures.
Institutions are likely aware of the benefits
of directly investing in real assets, which
may include inflation hedging benefits, nontraditional sources of income and long-term
capital appreciation consistent with their investment objectives and liabilities. There is
no “one size fits all” approach to direct real
assets investing, however, and the opportunities and risks among the various sub-asset
classes may rhyme but they should be assessed independently. When directly investing in overseas farmland, for example, our
view is that there is little or no benefit to
hedging currency risk for an investor with a
long-term investment horizon.
Lost, or won, in translation
For many traditional asset classes, fluctuations in currency valuations can have a meaningful impact on returns. Over a six-week
period in early 2012, for example, US investors
who bought mutual funds or ETFs linked
to Japan’s Nikkei 225 stock index enjoyed a
strong gain – though probably not as strong
as they might have expected. Japan’s main
stock index surged 14.2 percent from February 1 through March 14 of that year. Over that
same period of time, however, the value of the
Japanese yen declined 9.9 percent compared
to the US dollar. For US investors, that currency exchange rate differential eroded a
large portion of their profit. Because of the
strength of the dollar, US investors would
only have realized a net 4.3 percent gain
over that period of time, less than a third
of what they would have netted before the
currency translation.
Of course, currency swings can also be a
boon to holdings. For instance, the Nikkei
225 declined 5.3 percent from 2009 through
2011, but investors investing US dollars
in the index realized an 11.7 percent gain
thanks to a 17 percent jump in the yen’s
value over that span.
Currencies can therefore have a dramatic
impact on returns in traditional assets, and investors must account for their fluctuating values or try to hedge against them. By contrast,
real assets, the class of alternative investments
that includes real estate, infrastructure, timberland, and farmland, among others, smooth
out changes in currency valuations because
typically they are held for the long term,
giving their prices time to adjust. In addition,
some of these assets, including many globally
traded commodities, are denominated in the
US dollar, making currency hedges less necessary and possibly distorting the underlying
investment thesis and performance.
Fertile opportunities in farmland
Investors have had ample opportunity in
recent years to explore the advantages of
real assets, flocking to these investments due
to compelling demographic trends such as
population growth and urbanization, which
are fueling demand for food, clothing, shelter
and transportation in key emerging economies. To take advantage of such trends, some
institutional investors are allocating more to
real assets, including making direct invest-
ments through private vehicles.
Farmland, in particular, appears poised
for growth in value. The world’s population
is expanding by 25 million people per year1,
roughly adding the population of Los Angeles and Paris combined to the global tally
each year. To keep up with this demand,
agricultural production will have to double
by 20502. In addition, protein consumption
in developing countries is increasing 2.6
percent per year3 as global incomes rise
and provide consumers with more buying
power. These huge increases in demand will
likely drive agricultural products and farmland prices higher at a time when arable
land is constrained due to urban sprawl,
limited expansion and low turnover.
Historical analysis shows that US farmland
produces uncorrelated, competitive returns
with less volatility than equities4. US farmland
historically has delivered an annual total
return of 11.49 percent over the last 22 years,
with stable annual income yields5. The average annual crop total return of 11.14 percent
includes income of 5.13 percent and capital
of 5.77 percent.6 What’s more, the long-term
capital appreciation of the land has increased
at a premium above inflation.7
TIAA-CREF isn’t just observing these
trends – it’s investing in them. Our $4.4 billion global farmland portfolio includes more
than 800,000 acres under management across
more than 600 properties on four continents:
North and South America, Europe and Australia. The farmland portfolio is part of our
broader $8 billion Global Natural Resources &
Infrastructure portfolio, which also includes
timber, energy and infrastructure.
Currency hedging and global farmland
Currency plays a particularly interesting
role in farmland investments, compared to
Based on UN data 2Global Harvest Initiative 2010 GAP Report estimates 3UN Food and Agricultural Organization 4Private farmland, for example had a negative correlation with the S&P 500 and MSCI EAFE
stock indices from 1970-2012, and a nearly 65% correlation with inflation as measured by the Consumer Price Index over that same time period. 5NCREIF Farmland Index returns 12/31/1990-12/31/2012.
The inception date of the NCREIF Farmland index is Q4 1990. TIAA contributes data to the index. 6NCREIF Farmland Index returns 12/31/1990-12/31/2012. The inception date of the NCREIF Farmland index
is Q4 1990. TIAA contributes data to the index. 7DiMeo Schneider & Associates, “Real Assets: The Role of Intrinsically Valuable Assets in Diversified Portfolios,” October 2011.
1
2 • Global Agriculture Investing: No Currency Hedges Needed on the Farm - Co-Published by TIAA-CREF
Guide to Real Assets-TIAA Reprint.indd 2
9/16/13 11:06 AM
Figure 1: Comparing Brazilian farmland values: Brazilian real vs. U.S. dollar
25,000
BRL/ha
20,000
6,000
n Average Brazil (BRL/Ha)
n Average Brazil (USD/Acres)
5,000
4,000
15,000
3,000
USD/Acres
traditional asset classes. Here, returns on
investment encompass both the income
stream produced by the crops as well as
the long-term return of the land. This
income feature acts as a built-in currency
hedge, as the annual cash flows results in
currency-conversion-averaging over time
that can serve as a partial hedge.
Arguably, the most significant component of the currency exposure is the
underlying asset value. In Brazil, for
example, where institutional investors
own numerous properties, a US dollar investor would buy agricultural land in the
local currency, the Brazilian real, after
converting US dollars. When selling such
investments at the end of the ownership term, the investor will reconvert the
proceeds back into dollars.
During the life of the investment, the
land is valued in the local currency, with
only unrealized land value return calculations subject to the exchange rate in a
given year. As a result, exchange rate
fluctuations from year to year can cause
perceived capital appreciation swings, but
while those swings could appear to be
material, they do not have any bearing on
the final, realized return.
History has shown that the long-term
nature of these investments typically
smooth out any short-term fluctuation in
currency valuations. Not surprisingly,
we have observed that in Brazil land
values have adjusted to changes in exchange rates in the medium term. Thus,
land in dollar prices and land in Brazilian
real prices tend to equilibrate over time,
converging after short-run cyclical deviations. Over this time, the value of land in
Brazil has increased.
This relationship exists because a
natural hedge exists for international
farmland investments. While the land
investment is made in the local currency,
most global commodities are traded and
priced in US dollars. As a result, if the
Brazilian real weakens (immediate unrealized currency loss to foreign investors), a
local farmer will have higher local currency
revenues since he is growing US dollar
10,000
2,000
5,000
1,000
0
0
1/02
1/03
1/04
1/02
1/06
1/07
1/08
1/09
1/10
1/11
1/12
1/13
Source: Agra Informa and Brazilian Central Bank, as of January 2013.
commodities, resulting in higher profitability and values in the local currency.
Conversely, if the real surges in value, the
investor would benefit from strong realized
returns once the farm is sold and the dollar investment is repatriated. Conversely,
a strong real would weaken the export
position and profitability of the Brazilian
farmer, offsetting the unrealized currency
gains over time.
One less risk to monitor
Because an investment in farmland
contains two disparate components – the
long-term appreciation potential of the land
and the annual income return on the commodity it produces – currency hedging loses
the appeal it enjoys with more traditional assets such as fixed income or stocks. While an
investor must be willing to accept unrealized
currency volatility in the short term and during the hold period, sound asset selection,
positive macroeconomic fundamentals, and
diversified exposure are expected to support
attractive long-term risk-adjusted returns.
Furthermore, an investor can gain confidence
knowing that the value of their farmland investments would be expected to adjust over
time in response to currency factors outside
of their control. n
Please note that investments in real assets
may involve illiquidity, higher expenses than
traditional investment vehicles, political and
regulatory risks.
The material is for informational
purposes only and should not be regarded
as a recommendation or an offer to buy
or sell any product or service to which this
information may relate. Certain products
and services may not be available to all
entities or persons. Past performance does
not guarantee future results.
TIAA-CREF Asset Management provides
investment advice and portfolio management
services to the TIAA-CREF group of companies through the following entities: Teachers Advisors, Inc., TIAA-CREF Investment
Management, LLC, TIAA-CREF Alternatives
Advisors, LLC, and Teachers Insurance and
Annuity Association. Teachers Advisors, Inc.,
TIAA-CREF Investment Management, LLC,
and TIAA-CREF Alternatives Advisors, LLC
are registered investment advisers and wholly
owned subsidiary of Teachers Insurance and
Annuity Associations (TIAA).
C11996
Contact Information
Kevin Maxwell (East Coast)
Managing Director, TIAA-CREF Asset Management
730 Third Avenue
New York, NY 10017
212 916-4812
[email protected]
www.tiaa-cref.org/assetmanagement
Deborah Ulian (West Coast)
Senior Director, TIAA-CREF Asset Management
560 Mission Street, San Francisco, CA 94105
415 882-3507
[email protected]
www.tiaa-cref.org/assetmanagement
Co-Published by TIAA-CREF - Global Agriculture Investing: No Currency Hedges Needed on the Farm • 7
Guide to Real Assets-TIAA Reprint.indd 3
9/16/13 11:06 AM
The Institutional Investor Sponsored Guide to
Investing in Real Assets
Co-Publisher Contact Information
Kevin Maxwell (East Coast)
Managing Director
TIAA-CREF Asset Management
730 Third Avenue
New York, NY 10017
212 916-4812
[email protected]
www.tiaa-cref.org/assetmanagement
Editor-in-Chief & Publisher
Custom Media
Ernest S. McCrary
Publisher
Institutional Investor Guides
Douglas Campbell
Deborah Ulian (West Coast)
Senior Director
TIAA-CREF Asset Management
560 Mission Street, San Francisco, CA 94105
415 882-3507
[email protected]
www.tiaa-cref.org/assetmanagement
Art Director
Custom Media
Francis Klaess
The information in this guide is intended only for use by financial professionals and is not meant to substitute for their own detailed knowledge of
market conditions. An Institutional Investor Sponsored Guide reprinted from the September 2013 issue of Institutional Investor.
Guide to Real Assets-TIAA Reprint.indd 4
9/16/13 11:06 AM