Rapid evolution in the world of agri would have you think that timber remains as immutable as a decades-old, sturdy oak tree. To be sure, agri news, these days, are filling our plates; it is tempting to see the more mature forestry sector as part of the furniture.
Yet a string of recent developments suggests this would be a mistake.
Last week, it emerged that the Massachusetts Pension Reserves Investment Management Board had endorsed a significant shift in its timber strategy, allowing for a greater proportion of non-US woodland in the portfolio (30 percent, up from 10 percent), a possible expansion to Chile and the monitoring of new risk criteria. Proving it can put its money where its mouth is, MassPRIM also invested $214 million in OneFortyOne Plantations, an Australian forestry consortium managed by Oregon-based Campbell Global.
The California Public Employees’ Retirement System’s timberland revamp came earlier, when it designed a new real assets policy that came into effect at the beginning of 2017. For the first time, the pension set new parameters such as risk classifications and geographic ranges for each of the program’s constituents. For example, CalPERS now has a 75-100 percent allocation to “core” investments, with up to 25 percent allowed for “value-add”. US holdings can vary within a 50-100 percent band, and emerging markets are allowed to represent a maximum 15 percent.
The rationale for these changes was underlined last month, when both consultancy Forisk and the National Council of Real Estate Investment Fiduciaries’ Timberland Property Index showed diverging fortunes for returns across major US timberland regions. Nationally, states in the Northwest and South performed much better than peers, in particular the Lake States. But even within the South, significant disparitiesexist, with the South-East pulling ahead while inventories pile up in the Gulf. Such gaps are expected to persist for at least a decade.
Cast under this light, MassPRIM and CalPERS’ moves suggest a will to diversify geographically, so as to mitigate risk. Timberland continues to be seen as a diversifier in itself: the Los Angeles County Employees Retirement Association is considering such a program to achieve just that. But long-time investors in the asset class are seeking to hedge concentrated exposures, perhaps as a result of being burnt in the past (CalPERS’ domestic timber portfolio has long posted sluggish performance).
But the time it takes for boards to make decisions and for programs to take a turn are not always on the same scale. Core holdings still represent just under half of CalPERS’ forestry assets; value-add investments continue to account for a chunky 39 percent. “Given the illiquid nature of the real assets portfolio, staff anticipate a lag time to make the asset shifts required to bring the portfolio in line with the new strategic plan and policy,” the pension admitted in a recent update. “The timing of any resolution remains uncertain.”
Another form of innovation may help. Some investors are prompting fund managers – or the reverse – to combine timberland and agriculture in the same bucket, with a single return benchmark. This week, it emerged that the Hancock Natural Resources Group had raised more than $706 million for a vehicle devoted to both. Earlier reports suggest the fund targets return of between 9 percent and 11 percent. “A bit of a new path,” as a source told us. For the old boys of timber, perhaps one worth considering.
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