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Lack of geographic diversity stymies CalPERS’ forestry performance: consultant

A letter to CalPERS Investment Committee from forestland consultant Wilshire Consulting looks to explain recent under performance of the portfolio.

A lack of geographic diversity among the California Public Employees Retirement System’s (CalPERS) timberland investments has hampered performance, according to a letter from its investment committee’s forestland consultant.

Wilshire Consulting president Andrew Junkin wrote that the concentration of assets in the southeastern US has kept the programme from reaching its strategic goals, and that the portfolio could benefit from greater scale.

The materials show that CalPERS forestland programme has seen a negative 9.6 percent net return over the past year and negative 2.6 percent returns over both the last three and five year periods.

While timber prices in the southeast have held steady and prices in the northeast have declined, the portfolio has a lack of exposure to the uptick in timber prices in the Pacific Northwest, he noted.

Junkin proposed increasing the portfolio’s timberland allocation in the overall portfolio from 1 to 5 percent, stating that “the current size of the programme is not sufficient to meaningfully affect the performance characteristics of the total fund”

But, he added: “Increasing the scale of the programme to a meaningful size is challenging, given the recent pace of transactions and the total size of the institutionally-owned forestland market.”

As part of an effort to increase dealflow, in August the $305 billion pension raised the threshold for forestry investments that can be made without committee approval by its managing investment director and chief investment officer.

CalPERS’ $2 billion in forestland investments consists of two separate accounts. Lincoln Timber manages one, which is made up of two portfolios located in the southern US; and Sylvanus Timber Investors manages the other, made up of properties in Brazil, Guatemala and Australia.

Junkin added that the leverage in CalPERS’ forestland portfolio has magnified poor performance relative to unlevered benchmarks and forced the harvesting of assets that would otherwise have been allowed to appreciate.