Fees critically matter for evaluating investment returns. Index fund pioneer and Vanguard founder, John Bogle, said, “You get what you don’t pay for.” His message: minimize fees. In September 2014, I gave a talk at the “Who Will Own the Forest?” conference in Portland, Oregon specific to this theme as it relates to timberland investments. Institutional investors asked conference organizers about a perceived misalignment of timberland management fees relative to prospective timberland returns. My comments focused on addressing, “well, what does the “data” say with respect to this perception?”
Timberland Investment Returns
First, let’s remind ourselves how timberland investments, broadly defined, performed during the recent economic chaos. During the ten-year period from January 2004 through December 2013, annualized returns for timberland investments outperformed the broader stock market.
Direct timberland ownership, based on the U.S. NCREIF Timberland Index, generated annualized returns of 8.4%. Ownership of shares in timberland-owning REITs, based on the Forisk Timber REIT (FTR) Index, generated annualized returns of 9.4%. During this same period, the S&P 500 returned 5.2% annually. Basically, timberland investments provided the desired stability and diversification through a distressing economic cycle.
Timberland Investment Fees
The fees and costs differ for direct timberland ownership versus shares in public timberland-owning firms. Reported returns from public timber REITs, as with any public stock, already account for “management fees”, while those associated with private timberlands as reported by the National Council of Real Estate Investment Fiduciaries (NCREIF) normally do not. However, in the past few years, NCREIF began reporting fund level “gross” and “net” returns that allow us to estimate fees paid for timberland asset management services.
The table below includes data from 11 TIMOs covering 11.9 million acres of private timberlands in the United States. The analysis separates commingled funds, which pool investments from multiple investors, from separate accounts, which manage funds from specific institutions separately. The “net” returns subtract all investment management advisory fees, including paid and unpaid performance incentive fees.
The implied annual fees are consistent with Forisk analysis of prospectuses and contract structures, which find that TIMO incentive pay representing an “overage” or “carried interest” of 10 to 20% above a hurdle of 7 to 8% nominal is common. In addition, the implied fees are consistent and in line with ranges reported by consultants at Mercer for other non-timber asset classes. Specific to timberland, Forisk research found average total fees from 2005 through 2012 of 84 basis points (0.84%).
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