Super’s biggest problem likely lies within funds themselves, with many using legacy operational infrastructure ill-suited to the needs of the major financial organisations they’ve become.
The race to the bottom on low cost, benchmark aware solutions for a post-YFYS world has pretty much been run. But while the perception of value currently sits on price, that might not be where it ends up, according to Fidelity’s Simon Glazier.
‘Trees don’t read the Wall Street Journal’: Forestry’s big strength
Forestry isn’t for everybody. It’s a long-term asset for long-term investors, and has a somewhat steeper learning curve for those investors than the asset classes that have for decades been at the foundation of portfolios.
But it does have one thing that works very well in its favour, according to David Gardner, CIO of natural capital manager Gresham House.
“Over a 20 year period the NCREIF Timberland Index has outperformed nearly every asset class,” Gardner tells ISN. “Which really wakes investors up when they hear it.”
That’s in part because forestry has a unique characteristic: you don’t have to sell inventory into a downturn and trees tend to keep growing – and keep growing in value – regardless of the macroeconomic backdrop.
“Trees don’t read the Wall Street Journal,” Gardner says. “Real assets have become a very important part of most investors’ portfolios and when you look at real assets, forestry rises to the top in terms of diversification and inflation protection – and as we go towards an inflationary environment, forestry becomes much more important than it was beforehand. And then there’s all the tailwinds of climate change, ESG and sustainability (as themes) – they’re all flowing in and pushing forestry. “
Twenty years ago most of the return from forestry assets came from selling timber into saw and pulp mills, but investors were soon looking into what Gardner calls the “non-core forestry space” by selling higher biodiversity sites as conservation easements, as well as pursuing “highest and best” use of land: historically that was through the sale of lifestyle blocks, but has also been extended into leasing the land beneath and around wind turbine towers and other renewable power assets.
“That’s the way we go forward,” Gardener says. “As we look at natural capital and the emerging market in biodiversity net credits, water and water quality, flood control, a much, much higher percentage of the return will come from non-core forestry assets.”
Meanwhile, the conservation side of the market continues to grow and embrace biodiversity net gain. In the UK, legislation has been passed where developers must measure the biodiversity of land they’re going to develop, essentially establishing a baseline for any changes that might occur, and reassess it once it’s developed, with any resultant biodiversity loss made up for by a biodiversity credit.
“Gresham has an investment in a company which is developing these biodiversity land banks and producing these credits for developers,” Gardner says. “That’s still fairly small and in a localised market, but that sort of thing is quite big in the US and is going to grow quite quickly in the UK.”
Then there’s peatland credits – awarded for protecting peatland from erosion and degradation
– and the growing carbon markets, an area where Gresham is “well-established”.
“I’ve been in carbon since about 2010 and I’ve seen a lot of policy variation and there is quite a lot of policy risk. We take quite a cautious approach in the way we build carbon into the portfolios and it’s seen much more as an additional piece on top of a very core forestry return.”
