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Investors Turn to Natural Resources

Fri, 08 Jun 2012 15:17:44 GMT

As economic uncertainty on a global scale continues to cloud the investing environment, and confidence in traditional ‘low-risk’ assets drops off at an alarming rate, Institutional Investors continue their march toward tangible, physical alternative investment assets in an effort to reduce exposure to volatile financial markets and optimise the performance of long-term investment portfolios.

Institutional Investors Turn to Natural Resource Alternative Investments

Officials at the Church of England have been busy for the past 18 months restructuring their £5.2 billion investment portfolio, raising allocations to illiquid assets such as forestry investments. According to Tom Joy, director of investments for the Church Commissioners , many Investors have turned to more liquid assets such as to U.K. government bonds, but the church's investment portfolio “has virtually no allocation to (longer-dated) government bonds.” Real estate makes up more than 30 per cent of the Church’s portfolio including farmland investments, residential and commercial properties.

In 2011, church officials targeted a 4% allocation to timber. “Unlike traditional agriculture, timber allows delays in harvest,” Mr. Joy said. “You don't have to chop the trees down if pricing is not attractive.”

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Other UK charities are turning to investment alternatives too. Wellcome Trust, London, is the U.K.'s largest charity by assets with £14 billion of assets under management, and in September of 2011 had almost 29 per cent of its investments in private equity, up from just over 11 per cent back in 2005. When taking into account property investments, of Wellcome Trust has over 50 per cent of its funds held in alternatives.

TIAA-CREF, a US based financial services organization with $487 billion in assets under management, and leading provider of retirement services in the academic, research, medical and cultural fields, has gathered $2 billion in investment capital from institutional investors for farmland investments in the United States, Australia and Brazil through it new investment vehicle, TIAA-CREF Global Agriculture LLC.

TIAA-CREF Global Agriculture LLC manages around 400 agricultural properties covering 600,000 acres estimated to be worth around $2.5 billion. The company’s business model involves partnering with local agricultural operators to farm the land, typically by leasing the land to farmers.

The company began investing in farmland back in April last year and Investors include AP2, British Columbia Investment Management Corporation (bcIMC), the Caisse de dépôt et placement du Québec (Caisse) and other large institutional investors. TIAA retains a large stake in the investment vehicle, and its subsidiary, TIAA, Teachers Advisors, Inc., operates as the investment manager. Elsewhere, Tallahassee (Fla.) Pension Plan by the end of 2012 will issue an invitation-only search for its first value-added real estate manager to run between $12 million and $15 million. The $1.1 billion pension plan will fund the search from rebalancing. The plan currently has about 3.6%, or $40 million, in real estate.

Colony Capital in Los Angeles has raised $750 million from institutional investors to invest in bank-foreclosed single family homes in the US real estate market, and publicly traded home-builder Beazer Homes has teamed up with buyout firm KKR & Co. to launch a real-estate investment trust (REIT) to manage own residential real-estate portfolio.

Finally, the UK Pension Protection Fund, an organisation which offers a lifeline to bankrupt company pension plans is choosing agriculture investments and timber investments as it preferred route into alternative investment strategies.

The fund, worth about £9 billion, has put out a tender for managers specialising to help identify opportunities in the agriculture sector based on the acquisition of productive natural resource properties such as commercial timber plantations and farmland.

A spokesman from the PPF said: “The evolution of the PPF’s investment strategy and the growth of its assets allow access to a wider range of investment opportunities. Investment in farmland and timberland complements our alternatives portfolio and brings diversification benefits, thereby reducing overall risk. Returns will be underpinned by global population growth and other long-term secular trends. Land resources, on the other hand, are under pressure.”

The investment will be predominantly in land and the operations necessary to cultivate and market agricultural produce, or to grow and sell timber, according to the PPF. Returns are to be gained through a mix of capital appreciation and yield.

Last month, a study from Mercer showed more than half of all pension scheme investors considered climate change when making asset allocation decisions. The investment consulting firm found that one-third of project participants had begun to or planned to allocate more to “climate sensitive assets” including agricultural land and timberland.

At the end of March 2011, the PPF had a strategic 20% allocation to alternative assets, including real estate. This was double the assets it had earmarked for public equities. The remaining 70% was meant to be held in cash and bonds, much of which was due to its liability-driven investment portfolio.

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