Valuation uplift drives CalPERS forestry recovery

The California Public Employees’ Retirement System has issued an annual update on its real assets strategy that suggests the performance of its forestry holdings is on the path to recovery.

While the $393bn pension continues to underperform its benchmark by a wide margin, the total one-year return on its $1.98 billion forestland portfolio is finally back in the black, with a net performance of 1 percent in the 12 months to November 2017.

Returns over longer horizons, at -3.1 percent, -0.1 percent and -0.4 percent for three-year, five-year and since-inception tenures respectively, were less impressive, especially when compared with the National Council of Real Estate Investment Fiduciaries Timberland Index, which CalPERS uses as a benchmark.

On a one-year basis, forestland net return was 2.7 percent below the index, though that underperformance was mild compared with the 8.8 percent shortfall posted on a three-year horizon.

Portfolio rebalancing

This late recovery of sorts owes much to an uplift in the value of CalPERS’ timber assets, which are held through two separate accounts with Lincoln Timber Company and Sylvanus, subsidiaries of the Campbell Group and Global Forest Partners respectively. While one-year net income return dropped 1.2 percent on the previous period, the portfolio received a 2.2 percent valuation bump.

“US housing starts continue to recover, but remain below the long-term average,” CalPERS said. “Domestic forestland investment values reflect continuing recovery in log prices and housing starts.”

Though positive about the broad outlook, the pension remains unhappy about its current exposure. For a start, at 0.6 percent of total AUM, it remains short of its 1 percent target allocation to the asset class, something a $10 million NAV increase over the period did not do much to address.

But CalPERS’ forestland program also remains overly tilted towards value-add, which represents 39.1 percent of the pension’s timber holdings – well outside its 0-25 percent target range. Opportunistic, at 16 percent, is on target but the combination of both segments means core holdings are well short of their 75 percent minimum target allocation.

Geographical exposure is less of a concern: at 11 percent, emerging markets are within their 0-15 percent target range; US holdings, at 76.9 percent, are pretty much in the middle of their allocated 50-100 percent band.