Two large public pension funds are searching for timberland managers, spurred by turnover at their current manager and changes in the industry.
The portfolios of the two funds -- the State Teachers Retirement System of Ohio, Columbus, and the California Public Employees' Retirement System, Sacramento -- are now managed by Hancock Timber Resource Group, Boston.
While Hancock has been the primary manager for Ohio Teachers' $400 million timber portfolio and the sole manager for CalPERS' $1.2 billion portfolio, the firm experienced heavy turnover last year.
Seven senior managers left, which resulted in a realignment of responsibilities, and Hancock also changed its support teams in the field, said Herbert L. Dyer, executive director of the $44 billion Ohio fund.
"The RFPs also offer us a chance to see what else is going on," Mr. Dyer said. "We hear that some people are moving toward securitization for more liquidity, and if that becomes a significant factor in how timber is being bought and sold, we may want to participate in it."
Ohio's RFPs went out to Timberland Investment Services LLC, Woodstock, Ga.; Prudential Timber Investments Inc., Boston; Forest Investment Associates, Atlanta; Wachovia Timberland Investment Management, Atlanta; and Hancock, Mr. Dyer said.
Seventeen timber management firms got RFPs for CalPERS' $1.2 billion portfolio for reasons in addition to the turnover at Hancock, said Brad Pacheco, spokesman for the $145 billion fund.
When David Gilbert, director of real estate investments, joined the pension fund two years ago, he restructured the core real estate portfolio and then began to restructure the special portfolio, which is where timber is held. Mr. Gilbert since has left CalPERS, but the restructuring is still in progress.
Hancock had managed the timber portfolio since the fund began investing in the asset class in 1987, yet CalPERS hadn't issued an RFP on its timberland investment for 10 years.
"There are other ways of investing in timber now that we want to look at," Mr. Pacheco said, adding Hancock is reapplying. He declined to list the other managers who received RFPs. The RFPs were sent out Aug. 18; responses are due Sept. 21. Officials at Wachovia and Timberland Investment Services each said they were responding to the CalPERS RFP.
Dan Christensen, managing director at Hancock Timber, conceded turnover at Hancock has been high in the past two years. Seven top-ranking managers left to join other timberland specialists -- Potlatch, a Portland, Ore., firm that is trying to put together a timber REIT; as well as a competitor, Forest Systems, Boston.
"When you're an attractive company, your employees are coveted by other entities, and a number did leave for such opportunities, but they have all been replaced," Mr. Christensen said.
Meanwhile, timber has done very well for the Ohio Teachers fund, Mr. Dyer said, reaping double-digit returns over 15 years.
"We started with a twig, or around $100,000, which has grown into a $400 million investment," he said. "We like it as an investment and expect to continue with it, but we won't aggressively add to it."
When the stock market plummeted last month, he said, the fund's timber investment didn't fall at all.
And CalPERS, which owns 1.2 million acres of timberland throughout the West and Southeast, has realized an 18.3% annualized return since the inception of the program, Mr. Pacheco said.
"Long-term, the fundamentals are favorable. Our main reason for owning timberland is diversification," he said.
The correlation between timber and other asset classes is low, turning it into a good diversification opportunity, said Jon Caulfield, professor of forest economics at the University of Georgia, Atlanta. Currently $6 billion is invested in timberland, he estimated, and the bulk it is institutional.
Going back to 1981, the risk-adjusted annualized 12% that timber has returned makes it a better investment than most in terms of total return, Mr. Caulfield said. While that's lower than the annualized 15.5% returned by the Standard & Poor's 500 for the same period, the risk of timberland is less than half that of the S&P, he said.
Over the long haul, timber has outperformed the long bond and commercial real estate, and the returns tend to be consistent.
Hancock is the largest timber investment management company, with 34 accounts and $3 billion under management. It invests in commercial-grade, industrial-quality timberland and attempts to grow the most timber possible for the highest yield by retaining forest managers in each region, Mr. Christensen said.
The firm has been adding $200 million to $400 million in new assets every year. Other timber managers report similar growth.
The interest in timber has been picking up in the past year, said Jim Webb, senior vice president client servicing, Wachovia, which has $550 million under management.
"We have been managing timberland assets since 1981, but in the last few years, it's just started to be accepted as an investment," he said. "It's gotten a track record. The returns have been positive. Investors committed an additional $250 million to us last year."
The New York fund approved its first timberland investment last October, committing a total of $100 million, with $40 million going to Wachovia, $40 million to Forest Investment Associates and up to $20 million to Xylem Fund II, said spokesman Dave Daly.
Wachovia uses a "balanced approach," investing in a variety of timber that ranges from young new growth to mature woods, but it's more weighted toward younger wood, which is less than 15 years old, Mr. Webb said.
Timberland Investment Services targets Appalachian hardwood and Southern pines, said Robert Chambers, president. The company was formed nearly four years ago and has $310 million under management -- all from one unidentified client.
He, too, remarked on the increasing interest from pension funds. "It has a negative correlation with real estate and international investments," Mr. Chambers said. "Most funds we talk to are increasing their real estate allocations, and as they do that, they need more timber in their portfolios to offset it."