First evidence that ag, timber boost SWF long-term returns

Being more open to investing in farms and forestland could help alleviate sovereign wealth funds’ strategic asset allocation problems, according to UK-based scholars.

Many such funds have found it more difficult to invest in mainstream asset classes following the global financial crisis, which hammered equities. Sovereigns relying on energy revenues for incoming capital – a majority of state-backed vehicles – have also been impacted by the greater competitive pressures of an industry upended by the shale gas revolution.

Raul Martinez-Oviedo, now at UK consultancy Infrata, and Francesca Medda, of University College London, found that an allocation to timber and agriculture can help provide a long-term solution.

Using Norway’s $1 trillion Government Pension Fund Global – the world’s largest sovereign fund – to fashion a case study, they assessed that an oil-based institution that earmarks 15 percent of its assets to ag and timber will be 27 percent larger, at the end of a nine-year period, than a peer without such exposure.

What’s more, they find, timberland and ag assets dilute exposure to commodity risk while enhancing portfolios’ risk-return characteristics. “When we included a timber component, all performance metrics improved compared to those who don’t have it,” Oviedo told Agri Investor. “But there is a risk. These investments are not very liquid, and require a lot of capital.”

To reach their conclusion, the researchers modelled a portfolio abiding by policies defined by GPFG’s managers, assessing the performance of each asset class by using Thomson Reuters’ benchmarks over the 2007-16 period. They then substituted part of the equities component with a 15 percent timber and ag bucket, and used indexes provided by NCREIF to look at how these affect performance over the long term.

“Our results indicate that timber and farmland bring positive effects when supplanting equity investments,” their paper says. The authors state that their research is the first to directly assess the long-term performance of a SWF when natural assets are included.

Oil-based sovereigns, of course, can’t speak for the whole category, but Oviedo reckons the paper’s findings also apply to many of its peers. “I think the performance can be in general extended to other funds, but we could not prove it. Because we could not have access to their specific data.”

Sovereign funds are cautiously developing an appetite for ag and timber, he said, citing the likes of China Investment Corporation and the Fundo Soberano de Angola as trailblazers. Yet “timber and ag remain under-rated,” he added. “They deserve more attention from investors.”