On the Importance of Manager Selection: The Case of Timber Funds

Abstract

The increasingly competitive nature of timberland markets has created a perception by some that most of the value already has been extracted from the timberland investment space. We tested this theory by analyzing the long-term upper quartile and lower quartile returns of commingled funds and separate accounts managed by timberland-specific investment managers, as tracked by the National Council of Real Estate Investment Fiduciaries. The results indicate that there is a wide variability of performance across the asset class. The differences among the better and poorer performers exceeded those observed in many other asset classes, including real estate. Moreover, this variability of performance is seen as increasing, not declining, in recent years. This suggests that timberland remains a highly inefficient market with a great deal of complexity and depth. In such a diverse universe, timberland managers with different strategies, skill sets, and executional approaches can create widely divergent returns for their investors. From this perspective, we believe timberland still offers investors many opportunities to unlock value and generate strong returns. The key is embracing the right strategy and engaging the right investment manager to execute it.

TOPIC: Manager selection

Key Findings

• • The degree to which US timberland portfolios generate levels of long-term performance that vary considerably over long time horizons suggests that the timberland asset class remains quite inefficient.

• • NCREIF data on timberland fund and account performance indicate some timberland investment managers have significantly outperformed their peers over such time horizons.

• • Timberland is not yet a homogenous market. It is possible to create and experience superior—or inferior—returns in the asset class relative to one’s peers. For that reason, manager selection is important.