Concerns raised by clients about timber investments may provide an excellent opportunity for advisors to review investment policy and whether a client’s board has concerns over long-term liabilities or profit projections for retirement accounts.
Recently, many institutional investors showed signs of tiring from the non-traditional investments that seemed to mark the last five years. The biggest trend for institutional investors was to invest in timber in place of diversified real estate. Two of the larger institutional investors who both entered and withdrew from this diversification plan were the California Public Employees Retirement Program (“CalPERS”) and Harvard University. At one point CalPERS was reported to have $2 billion in its timber portfolio that it sold at a loss. Timber was a strong alternative investment choice; between 1993 and 2017, US Timber delivered an average return of 8% or more. That amount outperforms hedge funds, bonds and bills. Timber also seems to be more insulated from market shocks and shifts than stocks or bonds.
Why the change? As to timber specifically, it may not have been the uncomplicated growth opportunity that some thought. The majority of timber investments are located in Brazil, which since 2015 has seen a rise in political turmoil some of which is related to property rights. Some also site the changes in the print newspaper business as driving the decreased need for timber. Additionally, it was initially thought that a rise in global temperatures through climate change would have a positive impact on the timber markets by increasing supply. However, increased global temperatures may also be increasing the number of major storms and natural disasters, which could have a disruptive effect on markets and supply lines. Overall, poor returns are driving investors out of the timber market and into traditional real estate.
How the investments were held, say some advisors, may also show a change in how institutional investors are thinking. By only holding timber REITs or EFTs, rather than holding investments in the companies themselves, may change performance.
Adding to how the investments were held, and potentially more importantly, is that long-term liability of institutional investors may be shifting. Some advisors note that timber investments, as a long-term real estate investment, may seem like less of a positive method of diversifying as the balance of an institutional investor’s long-term liability shifts.
So too have the regulations surrounding loss reserves for some institutional investors. As the requirements have increased in strength, many institutional investors have moved towards more traditional securities or securitized versions of timber and real estate investments.
For advisors working with clients who may have followed CalPERS’ or Harvard’s steps in diversifying through non-traditional investments a key to addressing client’s questions and concerns may be to focus on the long-term liability shifts. In other words, did the timber market totally blow up? Or is the story of the two major institutional investors a little more nuanced? In the case of CalPERS, California passed new legislation in 2010 that required more reporting on how unfunded amortized liabilities were reported as well as any changes to the assumed projected rate of return. In other words, CalPERS had a shift in how long term liabilities were carried.
For advisors with clients who may be invested in timber or real estate EFTs and REITs as a method of diversifying their portfolios, CalPERs and Harvard’s recent departures from the market may be less to fret about than it might originally appear. But, concerns raised by clients about timber investments may provide an excellent opportunity for advisors to review investment policy and whether a client’s board has concerns over long-term liabilities or profit projections for retirement accounts. This focus can help clients prepare for any potential questions from the board or from employees.
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