Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
How New Forests helped globalise an asset class
When David Brand launched New Forests in Sydney in 2005, only 10 per cent of the global forestry asset class resided outside the US and the largest investor was America’s Hancock Natural Resources Group.
Now, Hancock, a subsidiary of Manulife Investment Management, is still the largest forestry investor in the world, but Australia’s New Forests is the second largest, with total forestry, conservation and wood processing assets under management of $7.8 billion across 1.1 million hectares. Meanwhile, the proportion of global investing in forestry outside of the US has increased four-fold, to about 40 per cent.
Brand, who was born and raised in Canada, one of the biggest suppliers of timber in the world, began studying the impact of ‘acid rain’ on forests in the 1980s. He had a BSc in forestry from the University of Toronto and went on to gain a PhD in forestry specialising in eco-physiology.
He was asked by the Canadian Government to support its negotiations on climate change, biodiversity and forestry at the Earth Summit in 1992, and then an inter-governmental exchange to Australia, joining the-then State Forests of NSW in 1995, Australia’s largest forestry business, where he became deputy chief executive and worked on the first carbon transaction after the Kyoto Protocol of 1997.
He liked the investment management side of State Forests and, in 2000, accepted an offer to work for Hancock in Australia, introducing the new way of thinking about forestry as a sustainable and renewable resource.
He was director of Hancock Natural Resources Group in Sydney, overseeing the design, development and management of forestry and carbon sequestration, investment funds and projects for third-party investors.
Brand then undertook a management buyout of his business unit, including a $50 million asset in the Green Triangle of South Australia, to kickstart New Forests, in which he remains the largest shareholder. Japan’s Mitsui has a 22.5 per cent shareholding, acquired in 2016.
Hancock, which started life in the 1980s, has US$10.8 billion in timberland assets globally, including Australia and New Zealand, and about US$4.0 billion in farmland, according to the company’s website.
New Forests expanded its footprint quickly, with offices in New Zealand (Bay of Plenty) followed by the US (San Francisco) in 2007 and Southeast Asia (Singapore) in 2008. Staff, including in the Sydney office, now toal 90 across the locations.
From an investor’s point of view, forestry in Australia did not have a very good rap before New Forests provided the first real institutional-grade alternative for investing in Australasia.
In the early 2000s, around the end of the tech boom, a range of tax-effective Managed Investment Schemes (MISs) were successfully marketed to the retail sector, primarily investing in agriculture and forestry.
They drew the ire of both the conservation industry, because of the non-sustainable nature of their operations, and the more conservative majority of the advice and accounting sectors.
Within 10 years, about half of the responsible entities associated with these MISs, by market share, had gone into administration and two of the largest forestry investment promoters, Great Southern and Timbercorp, had collapsed.
New Forests distinguished itself from that market through its traditional institutional ‘real assets’ style of funding and from many larger players by its commitment to sustainability. Its then-$300 million in assets, in 2010, has mushroomed, along with the diversity of its global investor base.
Its most recent announcement, early this month, was that New Forests had taken over full management of Wenita Forest Products in New Zealand, as two of the world’s largest pension fund investors, the UK Pension Protection Fund and APG, the Dutch pension fund manager, bought the former 62 per cent holding of Sinotrans, a big Chinese shipping and logistics company.
This followed the acquisition from Macquarie Asset Managment of Lawson Grains agriculture business, a NSW and WA-grain grower, in a deal estimated to be worth slightly less than $600 million announced in September, in partnership with AIMCo of Canada. The Alberta Investment Management Corporation is the government-owned manager for several Canadian pension funds.
For New Forests, the deal marks an expansion into farmland/agriculture, which complements the earlier diversification into timber processing.
Off the back of these deals, New Forests is expected to announce a new capital raising for its Australia and New Zealand strategy in the current quarter. It is also currently raising assets for its latest Southeast Asia forestry fund.
To date, European and Canadian pension funds, followed by some of the big international defined benefit public sector funds, have shown the keenest interest in forestry as an asset class, although New Forests does have some Australian super fund investors.
Brand says that the investment structure, typically with long-term predictable cash yields which can be managed via the timing of timber harvest, is a big plus for defined benefit funds, which are few and far between in Australia.
“Forestry is unusual,” he says. “As the trees grow you get capital appreciation and then when you cut them down you get income… But forestry is still a small asset class. We think it’s worth about US$200 billion but it is expanding – in asset value and geographically with some estimates seeing it become a US$1 trillion asset class over the next several years.”
Nevertheless, forestry and agriculture have also shown similarly low-to-negative correlations with listed markets as well as infrastructure and other alternatives, which Australian super funds seem to favour.
The fund manager’s repertoire has also expanded with the development of carbon offset projects in California, along with Australia and New Zealand. These offsets can be sold to companies with greenhouse gas emissions liabilities, which provides the manager with “greater optionality” between timber and tree growth on the one hand and timber and carbon on the other, Brand says.
While the total global agricultural sector accounts for about 20 per cent of the world’s carbon emissions, sustainable forestry fits in a net-zero-target portfolio as the only carbon negative component.
“The role of forestry will morph to include portfolio decarbonisation as a risk control tool for big investors,” Brand says. “And a lot of super funds have been proactive on the issue with their net-zero commitments.”
