Underperformance bolsters case for CalPERS’ timber portfolio review

The $323bn pension fund last year proposed expanding its forestland program, which has consistently missed its benchmark since inception, to include agricultural products.

The latest performance update available from the California Public Employees’ Retirement System show its forestland program undershooting its return objectives across all time horizons.

A summary released in anticipation of next Monday’s investment committee notes that the $323.5 billion pension fund posted timberland returns of 1 percent, -3.1 percent and -0.1 percent over the year to 30 June, three years and five years respectively, missing benchmarks by 2.68 percent, 8.75 percent and 7.26 percent.

By comparison, infrastructure generated returns of 9.9 percent, 10.7 percent and 12 percent over the same periods.

The news comes amid an ongoing review of the role of CalPERS’ forestland program as part of a broader asset-liability study taking place throughout 2017. Of particular concern to the institution is the poor performance of its domestic portfolio, which it is in the process of restructuring. While the pension’s international holdings beat their benchmark since 2007 – when the program was created – they represent less than 20 percent of the overall portfolio.

As part of a strategy update released in April 2016, CalPERS proposed creating risk allocations within the program (75 percent to 100 percent earmarked for core, with up to 25 percent going to value-add or opportunistic) and specifying its geographical remit (50 percent to 100 percent allocated to the US, 0 percent to 50 percent to overseas developed market, 0 percent to 15 percent to emerging markets and 0 percent to 5 percent to frontier markets).

It also suggested expanding the program to include agricultural products and targeting a total of 10 managers (combining both forestland and agriculture). CalPERS currently invests in the asset class via two separate accounts with Lincoln Timber Company and Sylvanus, subsidiaries of the Campbell Group and Global Forest Partners respectively.

The pension had not responded to requests for comments at the time of publication, but it has previously cited low housing demand and rising inventory levels in the US’s south as reasons for the slow recovery of land pricing.

Last year, it also observed transaction volumes slightly below average, contributing to its assessment that the asset class has proven “challenging to scale”. CalPERS estimated it would take more than five years for its forestland program to reach its 1 percent target allocation, from today’s 0.6 percent, and more than 11 years to reach 2 percent.

The pension has already effected changes within the program, which it consolidated with infrastructure and real estate in April to form a single real assets portfolio. CalPERS said the move was justified because of the asset classes’ similar investment characteristics, the slow pace of deployment in infrastructure and forestland, and the desire to foster cross-sector teamwork.