The nation’s large public pension fund is looking to chop its ownership of U.S. timber.
The California Public Employees’ Retirement System, or Calpers, is seeking buyers for roughly 300,000 acres of forestry largely in Louisiana amid a broader review of its timber holdings, according to people familiar with the matter. The woodland represents about one-fifth of roughly 1.3 million U.S. acres controlled by the Sacramento-based fund.
The move with timberland is the latest retrenchment for Calpers as it re-evaluates the costs and benefits of all holdings across its $305 billion portfolio and wrestles with how much risk to take to achieve targeted returns. The fund faces tens of billions in unfunded pension liabilities.
A decision to sell the Louisiana assets follows an announcement last September that Calpers would exit from a $4 billion investment in hedge funds due to concerns about complexity, costs and whether the commitment was large enough to affect overall returns.
“We continue to look through the entire portfolio to make sure that all programs fit with our current strategic priorities and our efforts to reduce costs and complexity,” a Calpers spokesman said. He added “no decisions have been made,” and there is no deadline for completion of the pension fund’s internal review of forestry holdings.
Any move Calpers makes away from the timber industry will likely influence other investors because of its size and history as an early adopter of alternatives to stocks and bonds.
But Jack Lutz, a forest economist who consults for fund managers that invest pension money, said many institutional investors, including pension funds and sovereign-wealth funds, would be interested in buying.
“A lot of people would be kind of happy to see Calpers dump all they have. There’s probably a lot of money to go after that,” Mr. Lutz said.
Calpers in recent decades helped pioneer pension funds’ push into alternative assets such as real estate, private equity, hedge funds and commodities as it looked to boost long-term returns and close the gap between assets and future obligations to retirees. That trend accelerated after the 2008 financial crisis as pensions across the U.S. tried to recover from sizable losses.
Investments in timber were another way for pension funds and other big investors to diversify their holdings. The value of timber assets doesn’t always correspond with the movements of the global markets because investors can sit out tough economic times by simply letting the trees grow larger, said consultants and industry analysts. When conditions improve, timber is a guard against inflation because wood prices move closely with real estate and local economies, the consultants and analysts said.
Calpers’s first investments in timber happened in the mid-1980s, but much of its $2.3 billion in forests was purchased when land prices were still high before the last housing bust. Since the financial crisis, timber has been Calpers’s weakest-performing asset, according to a May filing. Forestlands lost 0.4% over the past five years, while Calpers’s overall fund rose 9.4%.
“There was a sense it was just going to be a dip and then the housing market would come back strong—but that hasn’t happened,” said Tom Harris, a University of Georgia professor of forest business management who also publishes Timber Mart-South, a not-for-profit publication charting timber prices in the South.
Large timber deals peaked at $8.4 billion in 2007, with around 4.7 million acres purchased in the U.S., according to Timberland Markets, which tracks forestry sales.
Timber hit a low point in 2012 with sales of just $1.3 billion but rebounded last year with $2 billion in sales, according to Timberland Markets.
An additional problem for Calpers was the concentration of its holdings in the U.S. Southeast, according to an Oct. 22 letter sent by Wilshire Associates Managing Director Andrew Junkin to Calpers investment committee Chairman Henry Jones. Mr. Junkin acts as a consultant to Calpers.
Calpers has an additional one million acres in east Texas it may consider selling if the Louisiana sale goes well, one of the people said. Those Louisiana assets could fetch several hundred million dollars, the people said. One of Calpers’s external timber managers, Campbell Group LLC of Portland, Ore., has hired UBS AG to run the sale.
The size of Calpers’s timber holdings is another reason the portfolio is under review. It represents only about 1% of total assets at Calpers, and Mr. Junkin added in his letter to Mr. Jones that “it could be argued” the allocation “is not large enough to have a significant impact” on overall returns.
Nearly 80% of Calpers’s timber holdings are in the U.S., with the rest in Latin America and the Asia Pacific area. One option under consideration for the U.S. timber portfolio is to leave it completely, but there are no immediate plans to sell any portion of the international forestry assets in Latin America and the Asia-Pacific region, according to people familiar with the matter.
This article was originally published by the Wall Street Journal and written by Timothy Martin. Click here to view the full article.