Ken Slater says he was a novice at growing corn and soybeans when he asked Bank of America Corp.’s U.S. Trust unit to purchase the first of three farms for him in the past two years.
A millionaire living in Palm Beach, Florida, Slater was looking for a place to put his money that would provide income, diversify risk and offer capital appreciation. He wasn’t thrilled with the returns of corporate and municipal bonds, so he put 5 percent of his portfolio in real assets such as farmland and timber.
“To be comfortable with a long-term investment, I have to have some income,” said Slater, a 61-year-old Boston native. “Somebody’s going to buy that corn at a price no matter what.”
Slater is among a growing number of wealthy individuals who are investing in farms, timberland and funds that finance rail cars in a hunt for holdings that produce income and won’t wilt as interest rates rise. An investment traditionally used by endowments, real assets are increasingly being pitched by private banks and wealth managers to affluent families who generally have at least $1 million.
The banks point to estimated returns of 5 percent to more than 10 percent, depending on the investment, and offer low-cost loans to leverage gains. Some firms purchase assets directly for clients while others use funds with fees similar to hedge funds and private equity, including a cut of profits as high as 20 percent. Besides the illiquidity risk that usually comes with alternative investments, hazards of owning farms or forestland include summer droughts, floods and wood-eating beetles.
Unlike a bond, which is very sensitive to interest rates, the return on farmland can be set through a lease to a farmer and go up over time as it’s re-priced, said John Taylor, national farm and ranch executive at U.S. Trust.
High yields and the desire for an inflation hedge have fueled farmland purchases, Taylor said. Client capital allotted for acreage has tripled since 2010, and U.S. Trust has acquired about $200 million of domestic farmland in the past five years.
Treasury yields have surged and bond prices have dropped since May, when the Federal Reserve began signaling it would scale back its stimulus. The central bank may start cutting its asset purchases this year and end them by mid-2014 if the economy meets expectations, Chairman Ben S. Bernanke told reporters in June.
Investors have yanked an estimated $109 billion from U.S.- based bond mutual funds since May, according to Investment Company Institute data as of Sept. 4. They’ve added less than a quarter of that, about $25 billion, to stock funds.