CalPERS to consider new structure for timberland, real assets division

The California Public Employees’ Retirement System (CalPERS) investment commitee will review its real assets investment strategy, which includes $2.2 billion in forestland investments alongside commitments to real estate and infrastructure.

The pension could also be eyeing increased exposure to agriculture. In the proposed plan, the definition of the sector is expanded from “forestland” to “forestland/agriculture”. In 2012, CalPERS had just $50 million invested in farmland, according to the non-profit group GRAIN.

The proposed plan would standardise the risk profile of each sub-sector under four main headings. The allocation would focus on core, or low-risk, investments, with progressively lower allocations to “value add”, “opportunistic” and “development”. For forestland, the plan establishes benchmark allocations by risk profile and geography, and sets the debt service coverage ratio at 1.25.

The new plan does not radically change the benchmark allocations. For example, in the proposal, forestland allocation in the US is set between 50 percent and 100 percent, while the pension’s current US allocation is 82 percent. Other developed markets can constitute up to 50 percent of the portfolio with “emerging and frontier economies” allocated at up to 15 percent and 5 percent respectively. Examples of frontier economies are given as Vietnam, Argentina and Nigeria.

It is not clear how the current portfolio is currently allocated outside the US, as its holdings are categorised by geographic region. Latin America accounts for 12 percent of CalPERS’ forestland holdings, with Asia hosting the remaining 6 percent.

The forestland portfolio has underperformed the National Council for Real Estate Investment Fiduciaries index benchmark across all investment periods, leading to a restructuring of the pension’s domestic portfolio. The international forestland portfolio has outperformed the benchmark since 2007.

The investment committee plans to evaluate the forestland programme as part of the asset liability management process for 2017. The difficulties of achieving scale, as well as that poor domestic performance, are challenging the portfolio.

CalPERS’ $2.2 billion current forestland holdings accounts for 7 percent of its real assets portfolio, and less than one percent of its total investments. The pension estimates that it would take more than five years to reach its target allocation of 1 percent and more than 11 years to reach the upper limit of its target range at 2 percent. At that level, CalPERS would comprise 6.7 percent of the global timberland market.

CalPERS’ pension consultant, Wilshire and Associates cited real assets as a diversifier to equity risk.

“Much of CalPERS’ volatility is driven by equity risk (both public and private) and the corresponding link to global economic growth,” a review written by Wilshire and Associates reads. “Having real sssets continue to serve as a diversifier to equity risk helps provide some balance to the more dominant equity risk in the portfolio.”