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, Random Roger (151 clicks)
Portfolio strategy, ETF investing, foreign companies
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A long-time reader left the following question yesterday;

Suppose that you have a history in farming, and you recognize that food supply will be a bigger and bigger issue in the future. Suppose you believe Jeremy Grantham is right that this will be a massive issue, but you can't really execute his idea of buying land.
Are there "types" of investments that could act as a proxy for agriculture beyond grain futures ETFs or agriculture equipment manufacturers?

This is obviously a theme I have been writing about and investing in for a while. It is also one I have spent a lot of time exploring ways to invest in (do a search for Random Roger farmland and you should get quite a few results). We have always maintained at least a small exposure to the theme. Currently we own the PowerShares Water Portfolio (NYSEARCA:PHO) and the Global X Fertilizer ETF (NYSEARCA:SOIL) in "large" separate accounts and RRGR.

As important as I believe thematic investing is I typically only allocate a small percentage to any theme. The Malthusian theme gets about 5% weight in our portfolios.

What I think the reader is asking is whether or not things like PHO, SOIL or any other ETPs can be effective proxies for the theme. A little over four years ago I posted a list of farmland stocks from various countries and added a little bit of color to the names listed. The nature of the stocks has been to be very volatile, to trade at times like they are going out of business very soon to occasionally looking like Apple (NASDAQ:AAPL).

To zoom out a little, this theme is based on the population expanding meaningfully over the next few decades which, the theory goes, will strain the planet's ability to produce enough food and water for everyone. This is more of a problem for the future and even Grantham says it will be unlikely to meaningfully effect wealthy nations like the U.S.

If the real problem is a couple of decades away then the most that could be hoped for is some general out performance here and there as opposed to going up 100% every year while the broad market goes up 5% (or whatever). As a microcosm, in the last the three months we've all read and heard a lot about the drought and in that three months SOIL is up almost 14% while the S&P 500 is up a little over 6%. This might be related fundamentally to the drought but it could also be a simple beta benefit; SOIL has a higher beta than the broad market so when the broad market goes up a lot then SOIL could be expected to go up a lot more.

If it is the case that the recent lift in SOIL is all about beta then the theme means very little right now. The reality is for the most part unknowable so part of thematic investing is to believe in the long-term dynamics. With a small nod to Karl Popper, the experience of last three months doesn't disprove the validity of the theme.

As to the future effectiveness of any proxy chosen for this theme (or any other theme) we are a long way from things getting very serious on a global scale. For now the related stocks seem to be more closely tied to the stock market cycle. Based on past cycles, I would expect that in the next bear market (2013, 2014 or 2015?) that related stocks will get pasted. In the face of the next bear phase the long-term prospects will be the same as they are now but the cycle will matter more than the long-term prospects, IMO.

As far as buying actual farm land and either leasing it or otherwise working the land I would say that for now the various equities that would seem to be related will not really capture owning a farm directly. I think that can change as/if the world moves closer to the extreme outcome Grantham envisions (I agree with Grantham directionally but not to the same magnitude) and the related equities would start to capture the effect. But to be clear that is not where I think the world is right now.

I do believe in having exposure but the expectation is for slight out performance for the time being as opposed to up 100% in an up 5% world as noted above.

Another reader left his opinion to the original question, which included the warning that you could invest in some Malthusian proxy but then the thesis turns out to be incorrect. That can be true of any kind of holding, not just one that is part of a theme. This then becomes about position sizing. What is the consequence for being totally wrong about something with 20% of your portfolio versus 5%? Can you live with either? How you answer that question will help in figuring a suitable position size for any type of exposure.

One last bit on this is that anyone who is remotely interested in this theme, either investing in or just learning about it, should think about it on a global scale not just a domestic scale.

Source: Malthusian Investing