Unique by nature, Danish pension scheme ATP has made its maiden investment in forestry.
The €50bn pension fund is now a direct owner of a New York forest covering 38,000 hectares in the North East. The pension fund may invest up to €400m in forestry in the coming years, says CIO Beta Henrik Gade Jepsen. ATP opted to own the forest rather than invest via a fund to ensure that the operation is conducted in accordance with sustainable investment guidelines which are gaining ground in Nordic countries.

Jepsen, however, also has his eyes on returns as the scheme’s relative out-performance in 2008 demonstrates. ATP posted an investment loss of just 3.2% last year while the S&P tumbled 38.5% and global pension funds saw their funding ratios slide precipitously. The scheme’s liability-hedged return was plus 16.4% for the year. ATP’s long-term return expectations from forestry are in the range of inflation plus 4-5%. “Biological growth is an important factor when investing in timber. The inventory of trees grows between 4-8% a year even during years when lumber prices are soft, so you have the option to wait until prices recover,” says Jepsen.

The defining trait that best defines timberland as an investment class is biological growth, which has historically comprised about 75% of the total return from timber investments. Equally important, biological growth is not dependant on market forces and provides significant diversification benefits, an area of key focus at ATP. The fund has been looking at timber for some time. The macro case for investing in timber has become more compelling recently as the economic downturn and global housing slump has provided a good entry point.

Timber markets

The vast majority of timber markets are still regionally focused and local market specific. Within the US, there are three specific timber regions, the Northeast, Northwest and the South, according to a study by Cogent Partners. In addition, timber parcels exist in the Lake States. ATP notes that it will also consider investments in Australia, New Zealand and the European Union. Transactions are often handled on a negotiated basis or by limited auctions.

There are high entry barriers: investment in timber requires a high level of capital. Yet a February 2009 global survey by FIA Timber Partners shows nearly two-thirds of 65 institutional and high-net respondents (12 of them domiciled in Europe) express interest in increasing their allocation to timberland. Pension funds account for 8% of the respondents.

ATP’s timber investment is part of its inflation-protected asset class, which together with real estate, infrastructure and inflation-linked bonds, accounts for 25% of its investment portfolio. In addition, the fund has 50% allocated to bonds, 12% to equities, 10% to credit and 2-3% to commodities. The portfolio is structured to do well in a variety of economic and financial scenarios. The fund was founded in 1964 and has 4.6m members, covering the overwhelming majority of Denmark’s 5.5m population. Its stellar returns last year partly reflect a prescient move to buy deep out-of-the-money put options on equity and oil indexes in addition to the implementation of a hedge portfolio which makes use of interest-rate swaps to buy insurance against falling bond yields.

Diese E-Mail-Adresse ist gegen Spam Bots geschützt, Sie müssen JavaScript aktivieren, damit Sie es sehen können