Manager expertise tops US institutions’ growing farmland, timber agenda

Nearly 20 percent of institutional investors would consider adding farmland investments to their portfolio over the next two years, and 17 percent would consider adding timber, according to a recent survey of US institutions by Greenwich Associates, the consultancy, and Cohen & Steers, the real assets manager.

Farmland and timber were most popular among the defined benefit public funds surveyed, as 36 percent and 30 percent would consider the sectors respectively.

Some 33 percent of existing farmland investors expect to increase their allocation, while the remainder plan to keep their allocation as it is. In timber, 11 percent of investors plan to increase their allocation, another 11 percent plan to reduce it, and the remainder will make no change.

The survey, which focused more generally on real assets, also revealed that institutions place a premium on management; 66 percent said that management expertise was the most important driver for investment decisions.

“When it comes to investing in real assets, institutions value the expertise of their asset managers more than any other factor,” reads the report. “In fact, manager expertise is prized by institutions in real assets to an extent rarely seen in other asset classes. The premium on expertise reflects both institutions’ unfamiliarity with real assets, and the inherent complexity associated with these investments.

“Institutions worry about their ability to accurately assess factors like the risk-return trade-off, timing of the market cycle and investment liquidity in an asset class in which objective and reliable market data can be hard to find.”

Liquidity, expenses and track record were less important. “These results suggest that institutions’ investment decision-making process in real assets differs substantially from that employed in other asset classes,” reads the report.

The report surveyed 33 public defined benefit funds, 28 corporate defined benefit funds, 16 defined contribution plans and 15 endowments and foundations about their use and opinion of real assets, which were defined as timber, private real estate, farmland, private infrastructure, physical commodities and precious metals.

About 40 percent of institutions include real assets in their alternative allocation, whereas 34 percent have distinct allocations for real assets. A large proportion, 80 percent, of endowments and foundations do the latter.

And roughly one in 10 corporate DB plans include real assets in private equity allocations while 59 percent of investment consultants surveyed recommend a separate allocation for real assets.