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Special Report: Real Assets

Real assets growing as investors look to diversify, hedge against inflation

Mercury Capital Advisors’ Alan A. Pardee

Infrastructure and energy are attracting much of the capital flowing to real assets now, but the broader asset class has been growing as investors seek diversification.

Dollars invested in real assets grew 92% to $34.1 billion as of Sept. 30 from $17.8 billion as of Sept. 30, 2009, according to Pensions & Investments data. However, real assets (excluding real estate) in terms of the percentage of total assets has had its ups and downs, growing to a high of 2.38% in 2012 from 1.97% in 2009 back down to 1.97% as of Sept. 30, according to data from P&I's annual survey of the largest U.S. retirement funds. Including real estate, U.S. investors' real asset exposure has increased to 7.64% of total assets as of Sept. 30, from 5.68% as of Sept. 30, 2009.

There was a strong focus on timber and agriculture six or so years ago when investors were more focused on inflation than they are today, said Alan A. Pardee, New York-based co-founder and managing partner of placement agent Mercury Capital Advisors Group LP. According to data from the U.S. Department of Labor Statistics, inflation reached 3.2% in 2011 and then began to fall. Last year, inflation began ticking up and was 2.5% for the 12 months ended April 30.

Timber and agriculture are niche areas, with a shortlist of managers in each category, Mr. Pardee said. "I wouldn't say it's a booming area for capital raising," he said.

Northern Trust Corp. invests more in natural resources — which includes energy, metals, water and timber — than in infrastructure or real estate, said Jim McDonald, Chicago-based chief investment strategist.

Natural resources have a better correlation to protect against inflation than real estate or infrastructure, Mr. McDonald said.

In the first five months of 2018, two timberland funds closed with a combined $600 million, compared to seven funds with $1.7 billion in all of 2017 and $1.3 billion by five funds in 2016, according to London-based alternative investment research firm Preqin Ltd. The high point for timberland fundraising was in 2008, when eight funds raised $3.1 billion.

Agriculture funds have raised a bit more capital this year than timber, with a combined $1 billion by four funds, compared with $1.5 billion by 12 funds in all of last year and $3.5 billion by 15 funds in 2016, Preqin data show. The peak of fundraising for agriculture funds over the past decade was in 2015 when 15 funds raised $5.6 billion.

"Timber as an asset class has always been cyclical and it's something that investors are always aware of when investing in timberland," said Bob Ratliffe, president and portfolio manager at Silver Creek Capital Management LLC, Seattle.

For instance, much of the timber for U.S. consumption is grown in the South, Mr. Ratliffe said. "There were predictions of recovery in the South that didn't come to pass," he said.

"Housing recovery has been very slow and steady as opposed to several years ago when some people thought there might be fast recovery."

Still, commingled funds are not investors' only route to investing in timber and agriculture.

For example, CalPERS has a $2 billion timber portfolio, all in two separate accounts, according to the $352.8 billion California Public Employees' Retirement System's latest annual real asset report provided to the investment committee in November.

In October, Sacramento-based CalSTRS committed $250 million to Twin Creeks Timber, a 2-year-old joint venture formed by Silver Creek Capital investing in timber assets alongside timberland operator Green Diamond Resource Co. The $224.8 billion California State Teachers' Retirement System, West Sacramento, joins other investors in the joint venture, including the $128.8 billion Washington State Investment Board, Olympia; $76.6 billion Oregon Public Employees Retirement Fund, Tigard; $65.4 billion Alaska Permanent Fund Corp., Juneau; and the $14.3 billion Maine Public Employees Retirement System, Augusta.