Transcription
Hello and welcome to the Ver Paath introduction series. The topic I want to cover today is how can a Ver Paath allocation improve your Investment Portfolio.
So when you think about an asset allocation and when you think about any investment, it's a single, it's a single allocation in an entire portfolio. And so you have, in addition to how the, the individual investment may behave, you have to actually also think about how the individual investment may impact the behavior of your Investment Portfolio in totality.
And so one of the things that we like about Farmland is that we believe that there are portfolio benefits over and above Farmland's absolute return profile and its absolute risk profile. There are portfolio benefits of including an allocation of Farmland in a traditional 60/40 portfolio mix. And that's actually one of the reasons why the Farmland strategy has attracted a lot of institutional capital interest, is because of these unique portfolio benefits that Farmland can add. And I think that where institutional investors are considering making an allocation, it makes sense for retail investors to also go through the same, you know, analytical process and and and follow along with what institutional investors are doing.
What are those benefits? So first of all, it's the consistency of the return profile. Farmland, if you look in the Canadian market or actually in the developed world in general, you see that Farmland generates consistent, non-volatile returns. And then in addition, when you're making an allocation of Ver Paath securities into your portfolio, there's the overlay of the outperformance that we have generated because of our unique investment screening tools and portfolio construction tools. The consistency of return is useful to the overall behavior of your portfolio.
Then there's diversification. Farmland has a very low correlation to traditional 60/40 bond, public equity investments. There's capital preservation. Farmland has a very non-volatile appreciation profile. There are very few down years, and the down years are very small. So you don't suffer particularly large losses, and you can recover quickly from them. And that, that characteristic improves the capital preserving qualities of your to of your portfolio in totality.
Farmland tends to outperform during recessions and inflations. And that during periods of inflation, that's actually quite unique. There's a, there's a small universe of investment strategies that outperform in the recession/inflation world, meaning the stagnation world. And it's because food demand is highly inelastic. And that can also, um, benefit your entire portfolio because the other investments may not hedge this risk. Farmland adds returns but reduces volatility, meaning it, it'll improve your risk-adjusted returns.
So let's talk about the consistency of the returns, particularly in the case of if you're considering Ver Paath for inclusion in your portfolio. So we have generated annual returns, net of fees, um, of well over 10% um since inception without leverage. That's stripping out the effective leverage. Um, so that's a, now a 17-year track record. We've never had a down quarter, um, and we've outperformed the Canadian Farmland Index since 2007. So Farmland is consistent, and Ver Paath is consistent. And we believe our strong performance is due to our data and factor-driven approach to the strategy and and the way we screen investments and build portfolios. And that's probably a discussion that's a bit more detailed for today, but there's a reason for our outperformance.
And so when I say consistent returns, I can demonstrate that to you. The F, the, this is land appreciation only. The benchmark Canada-wide farmland appreciation over that period, at 17 years, generated a 9% return. We generated an 11.3% annual rate of return with very low volatility, meaning our returns are very consistent. And of course, once again, we didn't have one down quarter in that entire period. So this consistency of returns is something to consider when you're adding adding it into your overall portfolio because it'll incrementally improve the consistency of the portfolio's returns.
Diversification. Now, this is a really big, uh, driver for why people consider alternative investments for inclusion into their traditional 60/40 stock bond, um, allocations. Um, then the thing about Farmland is that it demonstrates a very low correlation to those 60/40 asset classes, stocks and bonds. But much more importantly, Farmland doesn't lose that lack of correlation during financial events. You know, if the stock market has a big crash, you won't see that Farmland's long-term or short-term cross-correlation changes. Meaning Farmland is a genuine portfolio diversifier, and it diversifies your portfolio when you need it most during a financial event. You don't lose the correlation benefits. That's really important because there are asset classes that look good over over the long term, but during market events, they become just as correlated as all the other sort of traditional investments. Farmland is a genuine portfolio diversifier, and its divers, its correlation doesn't change.
I'm just going to give you a graphic example of what I mean by diversifying you during market events when you need it most. So during the Dot-com crisis, Farmland went up 2%, the S&P went down 12%. In 2001, during the mortgage crisis, Farmland went up 13%. The S&P 500 in 2008 went down 37%. During in the first year of COVID, 2020, Farmland went went up around 6%, and the S&P went up 19% because obviously there was a massive expansion in the money supply which had an impact on the price of publicly traded equities. But the most important thing to take away here is that you didn't lose, Farmland didn't suddenly become correlated to public equity returns. So you genuinely, you had the diversification, and you maintained it when you need it most, when the other things in your portfolio were down materially.
Farmland outperforms in recessions and inflation. And the reason for that is obvious. Farmland's a real asset. It produces a product which is food, and food has one of the most inelastic demand curves of anything that's produced. And so when there's a recession, people don't stop eating, they don't change their dietary behavior. So you can see in this is a chart of the 1970s. It's this last period of stagflation, which is a, basically just another way of saying a recession with inflation. And you can see that stocks, bonds, and real estate actually did very poorly. And it's a bit of a misconception, um, in the financial community that public equities and commercial real estate hedge inflation. It's more nuanced. They hedge low levels of inflation very well, but high levels of inflation or volatile levels of inflation, they don't hedge effectively. And you can see that that's what happened in the 1970s. Those assets didn't hedge inflation, they didn't hedge stagflation.
Now, come to Farmland. Farmland in Western Canada actually went up 400, over 400% in nominal terms, over 250%, 275% in real terms. So you can see that it hedged stagflation extremely well. It hedged inflation extremely well. Um, and so a very small allocation to Farmland at the beginning of this period would have hedged a lot of this, or all of this downside risk. And so that's a really, that's an important quality because you can make a small allocation to Farmland in your traditional portfolio mix. You don't have to make wholesale changes, but you can hedge a lot of the risk of of stagflation or inflation if if you think that that may continue for a period of time, you know, a couple of years or five years, or like the '70s, perhaps a decade. You don't have to go out and make massive re, massively reconfigure how you've invested. A small allocation of to Farmland, based on its behavior in the 1970s, would hedge a lot of that risk. That's important. That's very useful.
I want to talk about adding returns and reducing volatility because that's really important. Ideally, as an investor, you want to add returns and reduce volatility. And the best of all worlds is if you can add returns on an absolute basis and still reduce volatility. Well, Farmland is very interesting. So more than likely, everybody who's watching this video has invested in, has a material investment into public equities, into the S&P 500 or to the TSX. Um, and this is 68 years of data. It's 1954 to '21. And you can see that the S&P had 53 up years, 15 down years. So like one in every five years, one in every four years is a down year. The average up year is large, but the average down year is very large.
Now, let's look at Farmland during that same period. Farmland had 61 up years, like 20% more up years. Very few down years, like once every decade is a down year. The average up year is still very large. It's like the average up year is about 9% over that period. But the most, more much more important thing is that the average down year was very small and very infrequent. And so if you aggregate all that data together, what you find is that Farmland's annualized returns were approximately the same as stocks over that period, but with 50% the volatility. So that's what I mean. So you can, by adding Farmland, you don't sacrifice returns, and you reduce volatility. And if as an investor, you should be seeking to do that. You, you should ideally be seeking to increase the absolute rate of return and the absolute volatility. And in the case of Farmland, you can do that. You don't sacrifice returns, and you strip out volatility. And that will improve your portfolio behavior.
So thank you, um, for listening today. Uh, once again, there's a much longer, um, presentation that deals with all these topics in much more detail, um, but hopefully you found this useful. And there are other, um, sections in this series, um, that I encourage you to watch. Thank you.