CalPERS is selling nearly 1 million acres of timberland. Managers in the asset class are assessing the likely fallout.

CalPERS is selling nearly 1 million acres of timberland. Managers in the asset class are assessing the likely fallout.

By Steven Brull
January 2003
Institutional Investor Magazine

This month the giant California Public Employees’ Retirement System is expected to begin unloading its $1.1 billion portfolio of timberland assets. That’s a lot of wood.

CalPERS’s divestiture, announced in October, prompted many to worry that timberland prices, down 9 percent in the past year, might fall even further. Now market participants appear for a couple of reasons to be more sanguine. In the first place, sources say, CalPERS hasn’t put all of its land on the market at once but is quietly negotiating to unload its assets to a handful of investors. Then, too, the growing appetite among institutional investors for this off-the-beaten-path asset class should also help prop up market prices.

The two managers of CalPERS’s domestic holdings -- Campbell Group of Portland, Oregon, and Hancock Timber Resource Group of Boston -- are expected to transfer CalPERS’s portfolio to other institutions looking for a hard asset that offers a hedge against inflation and has historically tended not to correlate to equities, long-term bonds or commercial real estate. About two thirds of CalPERS’s assets are currently with HTRG; one third are with Campbell.

“The impact on the market will be very minimal,” predicts L. Richard Doelling, director of client relations at Forest Investment Associates, an Atlanta-based firm that manages timberland portfolios for institutional investors. “That’s because [the sale] will be transacted very quickly and in very large pieces, and CalPERS won’t be on the market very long.”

CalPERS, with total assets of some $136 billion, has done well over the years with its timber investments. Since 1987, when the fund made its pioneering move into the asset class, its timber holdings have delivered annual average returns of 13.6 percent.

CalPERS’s portfolio comprises some 900,000 acres -- an area about 30 percent larger than Rhode Island. The land’s value, roughly $1.1 billion, represents about one tenth of all timberland assets held by institutional investors.

Big holders of timber that might be interested in a piece of the CalPERS properties include the $26.2 billion Massachusetts Pension Reserves Investment Management Board, which has yet to reach the 2 percent timberland allocation it targeted in 2001. Harvard Management Co., which already holds more than $1 billion in timberland, might also be seeking to expand its holdings, analysts say. Another possible buyer is the $68 billion Ontario Teachers’ Pension Plan, which hopes to add timberland to its portfolio for the first time.

“We see a good deal of interest across the market, not only from public and private pension funds that have historically been in the asset class but also from family offices, endowments, foundations and taxable institutions,” says Clark Binkley, HTRG’s chief investment officer.

Some industry analysts believe that timberland values are poised for a modest rise. Citing the 9 percent decline in timberland values over the past year -- it’s a 5.78 percent drop over a two-year period -- Keith Balter, who studies timber economics for Resource Information Systems, a Bedford, Massachusetts, consulting firm, argues that timberland has “probably already made the majority of its downward correction.”