Aon Hewitt, the investment consultant for the $44.9 billion Colorado Public Employees’ Retirement Association (Colorado PERA), has recommended a $1.6 billion increase in the fund’s opportunity fund, which includes timber.
The opportunity fund, which is managed in full by external asset managers, also invests in other alternative assets including commodities, risk parity, private equity, broad real estate and high-yield bonds.
Timber accounts for 40 percent of the $1.1 billion opportunity fund, according to Katie Kaufmanis, public information officer at Colorado PERA.
“The potential impact of an increased allocation to the opportunity fund on timber investments is unknown at this time,” she said.
The proposed target increase would take the opportunity fund to 6 percent of the portfolio, or $2.7 billion, from current exposure of just 2.4 percent; the opportunity fund is already 2.6 percent under target.
As of March 2014, Colorado PERA held 14 timber properties in Australia, Canada, New Zealand and the US, all of which are handled by external managers.
In its 2013 annual report, Colorado PERA was bullish on the US timber market in particular, based on falling supply in Canada and growing demand from Asia.
“Global timber markets showed improving trends for both supply and demand during 2013,” reads the report. “Domestic demand increased as the US housing market continued to show signs of strength and timber mills reopened. International demand for timber, particularly from Asia, remained strong, which aided properties located in the western US and New Zealand. The mountain pine beetle infestation in western Canada is beginning to impact the supply of available timber. The US imports one-third of its timber needs from Canada and the reduction in supply will result in greater demand from US timberlands.”
In 2013, PERA’s opportunity fund portfolio returned 0 percent compared to its custom benchmark return of 5.4 percent. The underperformance was due to the negative performance of the risk parity strategies, according to the report.
The recommendation to increase the size of the opportunity fund is part of a wider decision to increase the fund’s overall exposure to alternatives at the expense of equities and fixed income.