NZ Super’s lofty timber and agri ambitions

Despite focusing its energies on investing directly into timber and agriculture assets at home, the NZ$27.1 billion ($23.1 billion; €17.1 billion) New Zealand Superannuation Fund (NZ Super), the country’s sovereign wealth fund, has lofty ambitions for its timber and agri portfolio and is currently searching for more overseas assets.

The fund has just over 5 percent of total assets allocated to timber and 1 percent to rural agri; the timber portfolio includes global funds whereas the rural portfolio consists entirely of domestic direct investments.

But without a pre-determined target asset allocation across any of its portfolio, NZ Super is always on the lookout for new opportunities. And it will consider investing with external managers overseas if they provide the right opportunity, Michael Gleissner, head of NZ direct investment, told Agri Investor.

“We could potentially work with an external manager if we found one that really fits our strategy and gives us scalable exposure in a cost effective way,” said Gleissner. “But we have learnt that once you get the experience of investing directly, you become more comfortable with it very quickly. Of course there are managers that could give us exposure overseas that we could not get ourselves.”

The super fund first started investing in timber in 2005 – with GMO Renewable Resources in New Zealand (NZ$7 million) and Hancock Natural Resource Group in the US (NZ$32 million) – as a source of good risk-adjusted returns, an inflation hedge with low volatility, good cash flows and a low correlation to other asset classes. But there was more to the sector than previously thought, argued Gleissner.

“Over the years we realised that we had not factored in a much more positive aspect of forestry investing: China’s growing global demand for timber,” he said, adding that timber had surpassed his expectations as an investment and overall had raised the Sharpe ratio of the fund.

NZ Super is also invested with Global Forest Partners into its eighth and ninth global funds and its Australian timber investment vehicle AIF Properties. Directly it owns a significant stake in Kaingaroa Forest, one of New Zealand’s largest forests. It sold 2.5 percent of the forest to six North Island iwi (Maori tribal organisations) earlier this year.

But the fund now prefers to invest directly although this does present some challenges, argued Gleissner.

“The biggest challenge that we, and other timber investors out there face, is ensuring health and safety at our plantations,” he said. “For us this is the number one priority across our whole portfolio and forestry as an industry has had a chequered past so we are really involved in the day-to-day operations – the safety of people in our forests is paramount.”

“As we move directly, we have to be comfortable that people managing our assets adhere to our high standards of health and safety,” he added.

And for these reasons around 90 percent of NZ Super’s forestry assets are mechanised.

When pursuing a rural agriculture portfolio in 2010, Gleissner and his colleagues decided to bypass asset management firms and went directly to operational manager FarmRight to manage the fund’s portfolio of 12 dairy farms worth NZ$171 million. 

“Investing in funds first seems to be a typical approach [among other institutional investors] although we didn’t do that in rural agriculture,” said Gleissner. “Instead we found a good operational manager and then went out looking for opportunities. It really depends on how you construct your overall portfolio, where you see opportunities and where the access points are as to whether a fund or direct investment makes sense.”

NZ Super sponsored the Innovation and Business Sustainability Award for FarmRight staff as part of its wider sponsorship scheme to “support activities or events which are consistent with, and which positively raise awareness of, our role and responsibilities in managing the Fund”, according to the latest annual report.

The dairy farm investments have been very successful for NZ Super due to a boom in land prices in New Zealand and a strongly performing dairy market. Although Gleissner is not convinced that this bull run will last. 

“I think the next few years will be tougher for participants in the New Zealand dairy market because there has been such strong growth until now and dairy prices are forecast to be subdued over the next year or so,” he said.

The fund is actively looking at opportunities offshore in Australia, Latin America and elsewhere. It expects mid to high single digit returns before tax and fees although it has seen better in recent years, said Gleissner.