Fund looks at diversifying

Posted: Monday, February 14, 2011

Southeast Alaska's once-vibrant timber industry is now mostly gone, but state retirement officials think investing millions of dollars in pension money in the timber industry elsewhere will pay off for the state's retirees.

The Alaska Retirement Management Board got a report Thursday on relatively new timber investments it hopes will provide investment variety and protection for its more traditional stocks and bonds.

"These real assets like timber and agricultural land have some very good attributes for us, including diversification," said Martin Pihl, a member of the board.

That helps protect the value of the fund in down markets, such as recent stock markets declines that slammed the ARM Board and Alaska Permanent Fund portfolios.

The ARM Board manages $18 billion in savings that will be used to pay pension and health care benefits for the state's public employees.

In 2008 it began dipping into new asset classes, hoping to reduce the fund's volatility.

Pihl spent 34 years in the timber industry, including managing Ketchikan Pulp Company, at one time the largest mill in Alaska.

He lamented the loss of the industry that was once a mainstay of the regional economy.

"This would be a good time to have a Southeast timber industry, he said.

Now, the ARM Board is investing in the Lower 48, sometimes in the Pacific Northwest but mostly in Southeastern states from Texas to the Carolinas.

Tom Johnson from Timber Investment Resources LLC told the board the rebounding economy would likely boost timber prices.

New emphasis on using wood for power production will help as well, as more than 80 new bioenergy plants have been announced. The new facilities may drive up prices for lower value wood that has been used mostly by pulp mills.

"If only a portion of those are established, that will create significant demand," Johnson said.

The bioenergy plants are getting a boost from new legislation, such as the 24 states that have passed laws to improving the economics of using renewable fuels and limiting greenhouse gas emissions.

"As you grow wood you are sequestering carbon," Johnson said. "As you burn it you release the carbon, but overall it is carbon-neutral."

George Wilson, an outside investment advisor working for the board, praised the decision to invest in timber but said it had to be done skillfully.

"I think it's a great area to invest," he said, but he also warned that it was a very complex asset class.

"The skill of the manager is very important, given the amount of moving pieces there are," he said.

In addition to Timber Investment Resources, the board also heard Thursday from its other timber manager, Hancock Timber Resource Group.

While TIR's land is located in the South, about half of Hancock's ARM Board holdings are in the Pacific Northwest.

The board hopes to make money both from the increase in the price of timberland as well as the growing and selling the timber from the land.

In addition to investment professionals, both companies also must employ foresters to determine which parcels to buy for the state, and when and where they should be harvested.

"We have foresters who get their boots dirty," TIR's Johnson said.

One of the benefits of timber is that if prices go down, the managers can delay logging until it goes back up.

"It's not perishable, so during low market periods we can leave the inventory on the stump," Johnson said.

That's what Hancock's Thomas Sarno said they're doing with a former Weyerhaeuser Co. parcel in Washington that it just bought for $25,6 million for the ARM Board.

"We made an active decision to reduce harvest because timber markets right now are at a low point," he said.

"They'd be leaving that timber on the stump," he said.

"We'll let the timber continue to grow and sell it later when markets are better," Sarno said.

About two-thirds of the timber will be sold to local mills, with the remainder being exported to Asia where prices are currently higher.

The recent financial crisis caused timber prices to decline as the number of housing starts declined to the lowest level since the 1940s, but it may be rebounding, Sarno said.

That may mean the ARM Board bought at the right time.

"We think the timberland markets have reached bottom and we expect them to recover," he said.

The board has committed to investing $240 million in timberland, but so far has only invested $183 million of that, including the Weyerhaeuser purchase.

The two companies are each paid under one percent of the land value in management fees, but they also receive 20 percent of what they earn above fixed amounts between 6 percent and 8 percent, said Gary Bader, Chief Investment Officer for the state Department of Revenue.

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