Mixed Ag: A Regime-Based Analysis of Multi-Asset Agriculture Portfolios

Abstract

For some time now, the prospect that the world is entering a new epoch of elevated prices for agricultural commodities has been a focus of both policymakers concerned with the food security of their citizens and investors looking to benefit from a potential secular uptrend in the demand for food. Investors most commonly access agriculture in public markets through funds that invest in agricultural commodity futures or the common stock of companies that engage in agribusiness. In general, funds that invest in agricultural commodities are either dedicated equity or futures managers. However, there are potentially significant performance benefits to investing in agricultural commodities through a single multi-asset vehicle composed of both agricultural commodity futures and agribusiness stocks. To that end, in this article the author examines the performance of a multi-asset agriculture portfolio in periods of high and low economic growth and compares it with the performance of its individual equity and futures components, as well as the broader stock market and investment-grade bonds. The author finds that in terms of return generation, risk mitigation, and diversification potential relative to core stocks and bonds, the multi-asset agriculture strategy makes a compelling case for inclusion alongside traditional strategies within institutional investors’ portfolios.

TOPICS: Portfolio management/multi-asset allocation, performance measurement

Key Findings

• • Global population and economic development trends support an increase in demand for agricultural commodities in the coming years.

• • A dedicated multi-asset agricultural strategy composed of agribusiness stocks and agricultural commodity futures can serve as a diversifying strategy in portfolios containing broad exposure to stocks and investment-grade bonds in regimes of both high and low economic growth.

• • A multi-asset agricultural strategy is also found to produce an attractive upside/downside return profile relative to broad equity and its agricultural equity and futures components across high and low growth regimes. It also exhibits a significantly higher mean upside return relative to investment-grade bonds across both regimes.