timberland investments in an institutional portfolio - Iwc.dk

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TIMBERLAND INVESTMENTS IN AN INSTITUTIONAL PORTFOLIO 12Table 2. Asset classes and respective benchmarks used in the asset allocation study.Asset classBenchmarkTimberlandGlobal stocksLarge Cap American StocksSmall Cap American StockEmerging Markets StocksGlobal BondsReal estateCPIRisk-free rate* Including reinvested dividends** Data only dates back to 1988NCREIF Timberland IndexMSCI World Total return *SP 500 *Russell 2000 **, **MSCI EM Total ReturnJPM GBI Broad **NCREIF Property IndexUS CPILIBOR USD 3 MonthMeasuring timberland performance is complicated due to the fact that there is nocentralized auction market which continuously prices timberland assets, not to saymonitors the returns. Consequently, several analysts have designed models of what thepast performance of timberland might have been, had it been possible to observe andrecord the data. 22Based on actual returns, two indices have historically reported quarterly and annualreturns: the Timberland Performance Index (TPI) and the NCREIF Timberland Index. Theformer was discontinued in 1999; hence, the present study will apply the NCREIFTimberland Index which is denominated in US dollars.3.1 The NCREIF Timberland IndexThe NCREIF Timberland Index has been published since 1994 and includes returnsdating back to 1987. It is a property-based index reporting returns for three regions in theUSA. The index is based on generally accepted measures of asset valuation. Additionally,the reported income and appreciation return series conforms to theoretically appropriateconcepts of asset returns. 23The index accounts for 12.8 million acres of forestland, and the total value of the 305properties is about USD 23.9 billion, a substantial share of institutional timberlandinvestments in the United States. 24However, there are four limitations to the NCREIF Timberland Index 25 :1. The number of contributing TIMOs has historically been limited and currentlythe index has eight contributing members.2. The index series only dates back to 1987, which is a relatively short period. Thiswill be of less concern over time as more years are added.———————————————————————————————22Binkley et al., 199623Hancock Timber Resource Group, 2003b24NCREIF, 2008; and Washburn, 200325Lutz, 1999
TIMBERLAND INVESTMENTS IN AN INSTITUTIONAL PORTFOLIO 133. The index covers only timberland investments in the United States, which as itwill be shown later, is not the only market for timberland investments.4. Only quarterly appreciation returns are reported by the NCREIF. In quarterswhen properties are not appraised, the appreciation is reported as zero. As aresult, the return series shows a higher volatility than there actually is.In spite of these limitations, the index is the best available measure of historicalperformance and it provides some indication of expected return characteristics fortimberland investments. The annual returns for the NCREIF Timberland Index since 1987are displayed in Figure 8 below.40%Annual retur30%20%10%0%-10%19871989199119931995199719992001200320052007Income ReturnCapital AppreciationTotal ReturnMeanMedianFigure 8. Annual reported return (%/year) since 1987 for the NCREIF Timberland Index.As it can be seen from Figure 8, timberland investments have had good historicalperformance. The decomposition show a steady income return, while capitalappreciation is more volatile and even experienced depreciation in 2001 and 2002predominantly due to falling stumpage prices in the USA. Timberland investments havehistorically yielded an annual nominal return of 15.1% since 1987. The median of thereturns is 13.8%, indicating a positive skewness in the annual returns.8Frequenc6420(10%) - (5%)(5%) - 0%0% - 5%5% - 10%10% - 15%15% - 20%20% - 25%25% - 30%30% - 35%35% - 40%40% - 45%45% - 50%50% - 55%Annual returnFigure 9. Histogram of reported return (%/year) since 1971 for John Hancock Timberland Index(1971-1986) and the NCREIF Timberland Index (1987-2008).
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