CalPERS’ forestland portfolio continues to be under evaluation following years of underperformance, but a decision on whether to keep investing in the asset class will have to wait until an asset allocation review is completed next year.
The $1.9 billion forestland portfolio remained the worst-performing asset class in the latest fiscal year, showed a review of the program, with a -9.6% return in the 12 months ended June 30, and -2.6% in both the three- and five-year periods.
Those results for one of CalPERS’ newest investment sectors are below the pension fund’s forestland benchmark of 2.9% for the one-year period, 7.7% for the three-year period and 6.6% for the five-year period.
Whether the program could get the boot from the $299.5 billion California Public Employees’ Retirement System, Sacramento, similar to what happened with the system’s $4 billion hedge fund portfolio in 2014, is under study.
Paul Mouchakkaa, CalPERS managing director, real assets, would only say to the investment committee on Monday that the program’s role would be explored during an asset allocation review of CalPERS entire portfolio, which is scheduled to take place throughout 2017. He did not go into details.
But Andrew Junkin, president of Wilshire Consulting, told the investment committee that the current size of the program is not “sufficient” to meaningfully affect the performance characteristics of the total fund.
He said increasing the scale of the program to a meaningful size is challenging, given the total size of the institutionally owned forestland market.
“Moving to a 5% target, which would be meaningful, would require tens of billions of dollars of transactions and would likely take years to accomplish,” Mr. Junkin said.
He said CalPERS’ real assets investment staff continues to “assess the efficacy of the program in light of these constraints.”
Wilshire serves as CalPERS general investment consultant and specifically as the consultant to the forestland program.
In deciding to end the hedge fund program in September 2014, CalPERS officials also made a scale argument, arguing that the $4 billion program was too small to make a difference, and that expansion would be unwise, given the difficulty of developing a large, high-return program.
The Wilshire forestland review found the program has underperformed because it is highly levered and that much of the forestland is in the Southeast U.S. instead of being diversified to include the Northeast and the Pacific Northwest.