Danish pension fund branches out into forests
The €19 billion Sampension group is looking to double uts forestry exposure over the coming years, says CIO Henrik Olejasz Larsen.
by Atholl Simpson on Feb 18, 2013 at 07:01
Investing in the world’s forests may at first appear to be another eco investor fad but for Sampension’s Henrik Olejasz Larsen it is far more than a fleeting green trend.
The €19 billion Danish pension fund’s CIO says his group has been increasing its exposure to the forestry sector over the past few years as it offers long-term protection in a recession-hit global market.
‘The advantage is that forest investments’ special properties help with our monitoring of macroeconomic developments and also spread the risk in our portfolio,’ he says.
‘These characteristics have become particularly clear at a time when the rest of the world is beset by economic turbulence and low nominal interest rates.
‘So we have taken a closer look at this slightly overlooked type of investment, which both in returns and risks is completely different from traditional assets such as listed equities, bonds and real estate.’
The forestry sector now accounts for roughly 2.5% of the firm’s overall portfolio, around €150 million.
Olejasz Larsen’s goal is to double this allocation in the next few years as the company aims to compensate for an increased risk profile in its current pension product.
Customers are being steered towards a new scheme which has a slightly higher exposure to risk and forestry therefore acts as a good stabilising investment and also offers inflation protection.
The valuation of forestry varies and the price of wood is cyclical depending on the activity in the sector and the consumption of paper.
However, one of the main benefits is that only 30% of the sector’s return potential is dependent on external macroeconomic factors and the illiquid nature of investing in forests also lends itself to long-term investors, says Olejasz Larsen.
‘When timber prices have been declining during periods of recession, we simply let trees stand and grow larger. Larger trees provide a significantly better price per volume and have several uses.
‘That way we kill two birds with one stone: we avoid losing out in times when returns may be down in a trough, while the underlying asset – trees – gains in value.’
Cultivating forests can also have a number of added benefits and many are leased for recreational purposes such as hunting.
‘For the unit of risk you take you get fairly good returns that are consistent over time,’ says Olejasz Larsen.
The asset can also be a good substitute for fixed income instruments and tends not to suffer greatly from short-term fluctuations unlike other assets, he says.
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The pension invests in forestry mainly through mutual funds that have investments in South America, southern states of the US, Australia and New Zealand.
Included in its portfolio are funds run by groups such as Hancock Timber Resource Group and Global Forest Partners.
A crucial factor for the yield of forest investments is that trees grow as quickly as possible, and these countries’ warm climate contributes to this. This is why at present, Olejasz Larsen says he has not found many interesting opportunities within nearby countries like Germany and Sweden.
In recent weeks, southeast Australia has been hit by fierce forest fires which have in some cases and led to the evacuation of national parks in Victoria.
The risk of forest fires is high in many of the countries Sampension invests in but Olejasz Larsen says his portfolio has not been affected as steps are taken to counter this risk.
‘Several of Sampension forests are insured against such events and it is part of our risk assessment that these almost uncontrollable forest fires rarely occur in cultivated forests where the layout is designed to limit fire outbreaks.’
Historically, there is also a clear link between demographics and demand for wood. This means that the price of wood over a longer period, ie the structural investment case, is intact, although timber prices can still drop temporarily for various reasons.
Sampension is a Danish pension fund that manages industry-wide pension schemes for workers in municipalities and central government. The company is organised as a life insurance limited company, but is essentially non-profit. It’s strategy is to deliver efficient management of labour market pension funds and its investment portfolios have low administration costs.
This article originally appeared in the February issue of Citywire Global magazine
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by Matthew Goodburn on May 20, 2013 at 14:14