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Considerations for Benchmarking the Performance of Private U.S. Timberland Investments

This is the first in a series related to timberland investments.

Benchmarking provides a useful, and often necessary, tool for evaluating the performance of alternative investments – such as private timberlands – and alternative investment managers – such as TIMOs. Unfortunately, benchmarks often serve as incomplete indicators, a challenge described in The Wall Street Journal (“Benchmarking Alternative Funds an Inexact Science,” April 10, 2014). The article notes that alternative-fund benchmarks function well as a “guidepost” but not as true metrics for individual investments. Some funds or asset classes “are so esoteric that there is no readily available benchmark.” This can prove problematic for institutions seeking guidance when making investment decisions, and evaluating asset managers.

The Q3 2015 Forisk Research Quarterly (FRQ) includes an article on benchmarking timberland investment performance (“Best Practices and Existing Indices for Privately Held Timber Assets”). The article lays out criteria for evaluating existing timberland indices and recommends proper applications of these tools. The National Council of Real Estate Investment Fiduciaries (NCREIF; pronounced “nay-creef”) publishes the two most widely referenced indices for private timberland investment performance in the U.S. These indices include the Timberland Index (TI), which reports returns derived from individual properties, and the Timber Fund and Separate Account Index (TFSAI), which reports returns from managed funds and accounts. Both quarterly indices measure the performance of mostly the same timberland properties acquired in the U.S. for investment purposes.

While NCREIF’s two timberland indices capture meaningful samples of underlying data in helpful formats, they suffer from practical and unavoidable limitations that influence broad applications. These limitations include bias, data depth and coverage. For example, while NCREIF covers four distinct U.S. regions, it is primarily a U.S. South index. NCREIF does not apply internationally, nor can it be easily localized to specific properties of markets. In addition, this coverage is specific to a certain class of investors and managers. The figure below highlights the Southern dominance, and the secondarily important role of the Northwest, in NCREIF’s coverage since inception in 1987. In 1987, NCREIF captured fewer than 40,000 acres upon inception; today, NCREIF has data for over 13 million acres.

20150904 NCREIF coverage

We compared the acreages for each NCREIF Index to current data from Forisk’s North American Timberland Owner List. Currently, the NCREIF TI covers 52% of TIMO-managed timberlands in the U.S. versus 15.8% of the estimated investable universe. The TFSAI covers 44.2% of the TIMO-managed acres in the U.S. and 13.5% of the investable universe. While the two indices include most of the same timberland properties, differences exist due to the inclusion criteria associated with each Index. Also, both indices have zero coverage of, for example, the 35 million timberland acres owned by forest industry firms and publicly traded REITs.

Two themes remain constant in evaluating benchmark quality and criteria. First, data quality dictates what is possible. Regardless the methodology or technology involved, confidence and clarity in the underlying data, where it came from, and how it’s managed drives the utility of benchmarks and indices. Second, objectives matter. How will the benchmark be used? Benchmarks designed to track asset-level or sector performance can differ from those used to evaluate manager performance and investment strategies.


Forisk will teach “Investing in Timberland and Timber REITs” in Atlanta on October 8h, a one-day course that details the operations, performance, risks and costs of available timberland investment vehicles.

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