Role of farm real estate in a globally diversified asset portfolio

Abstract

Purpose - The paper examines the benefits of further diversifying a global portfolio of financial assets with New Zealand farm real estate (FRE). ----------
Design/methodology/approach - We compare efficient sets generated with and without farm real estate using portfolio theory. ----------
Findings - The results show that given the predominantly negative correlation between FRE and financial assets, the risk-return tradeoffs of portfolios of financial assets can be improved significantly. The diversification benefits measured in terms of risk reduction, return enhancement, and improvement in the Sharpe performance ratios are robust under a number of FRE risk-return scenarios as well as under high and low inflationary periods. Using 5- and 10-year rolling periods we also find that FRE is a consistent part of risk efficient portfolios. Consistent with the results reported in Lee and Stevenson (2006) for UK real estate the risk reduction benefits of diversifying with FRE are larger than the risk enhancement benefits. ----------
Practical implication - The results suggest that FRE takes on a consistent role of risk-reducer rather than a return-enhancer in a globally diversified portfolio. FRE appears to deserve more serious consideration by investment practitioners that it has been accorded in the past.
Originality/value – The study examines the role of direct real estate in a globally diversified portfolio of financial assets.