CalPERS was among the first pension funds to invest in timber, and now is one of the largest timber owners in the country.
But the asset class has performed poorly in recent years, and performance (2.5 percent) came in below benchmarks again in fiscal year 2013-14.
As a result, the pension fund is reviewing its commitment to timber.
From the Wall Street Journal:
The California Public Employees Retirement System is reviewing its timber holdings following a period of poor performance and questions about whether the investments are large enough to impact overall returns for the nation’s largest public pension fund.
Top investment officers and consultants to the system known by its abbreviation Calpers discussed the $2.3 billion commitment at a board meeting Monday. One consultant, Wilshire Associates managing director Andrew Junkin, hinted at the review in an Oct. 22 letter to Calpers investment committee chair Henry Jones that cited the portfolio’s “structural weaknesses” and an evaluation of its “efficacy.”
A Calpers spokesman said no decisions have been made about the future of the timber portfolio. “This process has just begun,” he said via email.
Forests valued for their timber are Calpers’ worst-performing asset since the financial crisis, with returns down .8% over the last five years and 1% over the past three years. The portfolio gained 2.5% during the 2014 fiscal year but that was well below internal goals and industry averages.
Calpers is one of the largest holders of timber in the U.S. and owns 1.46 million acres, according to Forisk Consulting LLC. But one problem identified by Mr. Junkin is that these holdings are entirely concentrated in one part of the country — the U.S. Southeast. Outside the U.S. Calpers also owns properties in Brazil, Guatemala and Australia. The forests are also struggling due to the “timing of the original purchases,” according to the letter.
Chief among the CalPERS’ concerns are that its timber allocation isn’t large enough to make an impact on its portfolio. If that sounds familiar, it’s because CalPERS used the same logic as part of the rationale for exiting hedge funds. More details from the Wall Street Journal:
The size of the program presents another challenge. The holdings represent roughly 1% of total assets at Calpers…
“It could be argued” the current allocation “is not large enough to have a significant impact,” Mr. Junkin said in his letter. At the same time, “it would be massive challenge” to increase the size of the timberland holdings “to something more impactful, say 5%.”
Any decisions about those holdings will be closely watched within the industry, said Tom Harris, a University of Georgia professor of forest business management. “When they first got involved there was a lot of ‘wow, Calpers is in, we have come of age, this is a big deal,’” said Mr. Harris, who also publishes Timber Mart-South, a not for profit publication charting timber prices for 11 Southeastern states.
CalPERS is the country’s largest pension fund.
Photo by Rick Payette via Flickr CC License