Council schemes use timber for inflation protection

Investment in timber has been popular among European investors for some time but recent months have seen a number of UK local authority schemes awarding forestry mandates.

In November, the £3bn Essex County Council Pension Fund made its first foray into forestry. The scheme appointed investment firm Stafford Timberland to manage a forestry mandate via an active pooled fund.

“We started with a £50m commitment but we will propose to do further commitments in the future,” said Martin Quinn, pension fund manager.

Forestry investments – as a long-term, index-linked alternative asset class – are used by schemes to reduce the dual risks of inflation and lack of diversification for schemes.

Medium-term inflation hedge

Hymans Robertson advised the Essex scheme and a number of other long-term public funds to consider timberland investments.

John Hastings, partner and senior investment consultant at the firm, said pension schemes are looking for protection for their inflationary liabilities in real assets such as infrastructure and timberland.

He warned timberland was not a perfect hedge for inflation but it tended to “keep real progress with inflation in the medium term”.

Due to the long-term nature of timberland investment, Hastings did not recommend the asset to schemes that were looking to wind down in the near future. 

The £1.5bn Suffolk County Council Pension Scheme confirmed in September it was searching for managers to handle a 2% allocation to timber. “We are likely to be making direct investments in pooled funds,” said Peter Edwards, assistant finance director at the scheme.

The push into the alternative asset will be funded from the scheme’s UK equity portfolio, which is set to decrease from 23% to 9.5% of total assets, Edwards confirmed.

Hastings said most schemes would be looking to fund timberland investments from equity portfolios as UK schemes were looking to diversify away from the underperforming asset.

Furthermore, equities usually represent the largest proportion of most schemes’ allocations.

Reducing exposure to equities

The £2.3bn Leicestershire County Council Pension Fund too is looking to make a £25m-£50m direct investment in timberland with a single manager who can provide a broad geographical spread of underlying investments.

Colin Pratt, investment manager at the scheme, said the timber investments would likely represent 1-2% of total assets and funding would automatically come out of the scheme’s equity portfolio.

“Part of the fund’s overall strategy is to reduce overall exposure to equities and when we find opportunities the money will be coming out of equities,” said Pratt.

When we find opportunities, the money will be coming out of equities

The £5.3bn Church Commissioners for England pension scheme is also looking to make a departure from its traditional equity and property allocation to include timberland investment.

The fund’s annual report released last year said the scheme was looking to “seek out more opportunities to invest in areas with attractive long-term prospects and diversify the fund further”.

The scheme is looking to invest in sustainable timberland that does not harvest from virgin rainforest.

“We plan to make an allocation to timberland over the next few years,” stated the annual report, “with a focus on the US. Our investment will be through professional timber investment managers that demand high levels of sustainability.”

Hastings said diversification was key when looking for a forestry manager.

Hymans Robertson looks for specialised managers that hold a broad range of age and species of trees as well as a wide geographical spread.

Diverse timber investments can provide income throughout the investment’s lifespan and ensure an entire fund is not wiped out by disease or natural disaster, he added.

This article first appeared on www.mandatewire.com on January 5. MandateWire is a sister publication of schemeXpert.com.