A push for sustainability and desire for stable returns are piquing interest among some defined benefit plans for real assets such as timber, agriculture and farmland.
Though the total dollar amount allocated toward timber fell 3.2% to $9.4 billion in the year ended Sept. 30 among the largest 200 defined benefit plans reporting allocations in Pensions & Investments' latest survey, pension plans have made recent decisions that suggest a trend toward such real asset allocations.
"One reason definitely is that there is a 2050 zero-carbon emission initiative for many institutional investors including many pension funds, insurance groups," said Christoph Schumacher, Manulife Investment Management's global head of real assets, private markets and CEO of timberland and agriculture.
"So with this initiative, you see more attention to how these institutions can get there, so that means they look especially into timberland as a carbon sink, carbon sequestration as one solution to reach that."
According to the NCREIF Farmland Property index, at the end of the fourth quarter of 2022, U.S. farmland had a total market value of more than $15.3 billion, with a 2022 annual return of 9.64%. NCREIF's Timberland index had a total market value of nearly $24.5 billion in the U.S. and 2022 annual return of 12.9%.
All of the properties in the indexes are held on behalf of institutional investors, many of which are pension funds, according to NCREIF's website.
"Real assets is obviously a fantastic tool that delivers attractive risk-return characteristics, and it also allows you to diversify your portfolio," Mr. Schumacher said. "If you look purely into returns, investors might say, well, in fixed income I get more at the moment, but … it's not only the highest return, it's also having a stable contributor to the portfolio."
Manulife has $47.6 billion in AUM for real assets, including $10.4 billion in timber and $4.2 billion in agriculture, according to a spokesman.