During the 1980s and 1990s timberland and agriculture opportunities were initially added to the asset class ‘menu’ for some institutional investors. During this time, private market asset classes were experiencing a tremendous boom following the 1978 amendments to the Employment Retirement Income Security Act (ERISA) which encouraged greater portfolio diversification and allowed corporate pension funds to allocate to private equity. Furthermore, President Ronald Reagan’s Economic Recovery Tax Act of 1981 effectively lowered the capital gains tax rate, substantially increasing the attractiveness of private market investments that provided higher growth opportunities. Investment syndicates ―effectively the organizers of these projects―marketed these opportunities to investors for longer-term lockup. During the early 2000s, institutional investment in timberland and agriculture grew substantially as attractive investment returns drew capital to the sector. In the last decade, interest has notably ebbed and flowed as returns softened and opportunities in other ‘real asset’ segments competed for investor capital. Investors remain drawn to both timberland and agriculture due to their low or uncorrelated private market asset exposure that can complement a broader diversified portfolio.
In this Topic of Interest white paper, we will aim to inform readers of the investment thesis for timberland and agriculture, detailing the return drivers and characteristics unique to each asset class. Next, we cover historical performance and how these asset classes might fit within institutional portfolios and contribute to portfolio return objectives. Here we touch on the commonly acknowledged issues around interpreting the volatility of private market assets, due to data lag and appraisal-smoothing effects. Last, we conclude with a Verus outlook on both Timberland and Agriculture in the current market environment.
