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February : Forestry sector attractive as alternate investments slow

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23 February, 2016

Forestry sector attractive as alternate investments slow


Institutional investors are heading for the trees as they desperately seek alternative sources of income. The forestry and timberland markets are ripe for picking, writes Christopher O'Dea.

If money really does not grow on trees, someone forgot to tell the global pension fund community. Around the world, institutional investors' appetite for timberland is rising, consultants are advising pension funds on how to add more timberland to their portfolios - and how to identify suitable strategies and managers - and the timber industry is adapting to the ESG and stewarding requirements of institutional capital.

The growth in the market reflects underlying demand for wood and forest products around the world, in particular from China, where consumption of a wide range of timber and products continued to increase despite the country's economic slowdown. Industry participants say there was perhaps $1bn (€0.9bn) of institutional capital allocated to timber about a decade ago. While the next few years are likely to see smaller investment managers offering a wider range of timber and forest-product strategies, timber remains a fairly concentrated market where scale matters.

The top 30 timber investment management organisations (TIMOs) have approximately $57bn of assets under management between them, not including real estate investment trusts (REITs), according to RISI, a forestland research and consulting firm based in Boston. The five largest companies account for more than 54% of that total, and the 10 largest TIMOs account for roughly 76% of total assets.

Most timberland investment is focused on a handful of developed markets, with between 80% and 90% of capital targeting the US, Canada, Australia and New Zealand, according to the 2015-2019 Timberland Investment Outlook from New Forest, a Sydney-based forest investment firm. But investors are increasingly looking at emerging and semi-mature forestland in Latin America, Asia, Africa and Europe, says New Forest.

Pension funds are flocking to the forest sector as a source of income to replace scant bond interest, as well as inflation protection. One of the most innovative approaches is under way at the State Investment Council of New Mexico, where deputy state investment officer Robert Smith has steered the $19.5bn portfolio ever deeper into the forest since joining the Council in 2010 to lead a revamp of the investment policy and team.

At the time, the portfolio was heavily exposed to equity risk, with about 80% or more of assets in publicly traded stocks and equity-like real estate. Following an asset allocation study, the portfolio has been steadily diversified towards a classic endowment structure, and now includes a real-return sleeve of financial assets, such as TIPS and bank loans, and real assets allocated between energy, infrastructure and timber.

More than half of the assets in timber are invested in the US, with Brazil being the largest non-US allocation, Smith says. As of the second-quarter 2015 SIC performance report, the fund had committed just over 14% of the real assets allocation to three timber strategies, with a committed value of $250m. Timber can comprise as much as 40% of SIC's real-assets allocation. Smith says SIC will target IRRs from 7% to 11% for timber investments. With the objective to generate cash flow, "we like good old timber harvests", he says.

Source
: Friday Offcuts

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