Role of farm real estate in a globally diversified asset portfolio

Abstract

PurposeThis paper seeks to examine the benefits of further diversifying a global portfolio of financial assets with New Zealand farm real estate (FRE).Design/methodology/approachThe paper compares efficient sets generated with and without FRE using portfolio theory.FindingsThe 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 five and ten‐year rolling periods it also finds that FRE is a consistent part of risk efficient portfolios. Consistent with the results reported in Lee and Stevenson, for the UK real estate the risk reduction benefits of diversifying with FRE are larger than the risk enhancement benefits.Practical implicationsThe 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/valueThe study examines the role of direct real estate in a globally diversified portfolio of financial assets.