TIAA-CREF Institutional Perspectives on the Asset Class: Portfolio Construction Techniques Sandy LaBaugh Sr. Director & Portfolio Manager – TIAA-CREF October 8, 2013 1
TIAA-CREF
Institutional Perspectives on the Asset Class: Portfolio Construction Techniques
Sandy LaBaugh Sr. Director & Portfolio Manager – TIAA-CREF
October 8, 2013
1
TIAA-CREF
Agenda
Institutional Perspectives on the Asset Class – aligning portfolio construction
techniques with the goals of your investment strategy. Determining the optimal mix
of geographies, species-types and management styles.
TIAA-CREF introduction
Why invest in real assets such as timberland?
Modern Portfolio Theory – Can it be applied to Timber?
What are some alternative allocation strategies?
How to differentiate between the many different Timberland Investment
Management Organizations (“TIMOs”)?
What are some diversification strategies that could be employed within a global
timberland portfolio?
Strictly for professional use and not for public distribution. 2
TIAA-CREF
TIAA-CREF organization overview
Fortune 100 company providing financial solutions to clients for more than 90 years
Leading provider of U.S. retirement benefits serving nearly four million participants
at more than 15,000 institutions and 27,000 plans
TIAA is one of only three insurance groups in the United States to hold the highest
ratings currently awarded from all four leading independent insurance industry
ratings agencies*
−A.M. Best (A++ as of 5/13)
−Fitch (AAA as of 6/13)
−Moody’s Investors Services (Aaa as of 7/13)
−Standard & Poor’s (AA+ as of 6/13)
7,500 employees with offices across the U.S., England and Luxembourg
A leader on Environmental, Social and Governance issues
Strictly for professional use and not for public distribution. 3
With financial strength
and a heritage of
integrity, TIAA-CREF
offers a wide range of
investment capabilities
and services.
*Per S&P criteria, the downgrade of US long-term government debt limits the highest rating of U.S. insurers to AA+ (the second highest rating available). There is
no guarantee that current ratings will be maintained. Ratings represent a company’s ability to meet policyholders’ obligations and claims and do not apply to
variable annuities, mutual funds or any other product or service not fully backed by TIAA's claims-paying ability.
Sustained
Excellence Award
2010 & 2011
Partner of the
Year Award
2008, 2009 & 2013
Co-founder of
The Farmland
Principles
TIAA-CREF
Equity $215
Private Real Estate
$34 Other**
$17
Alternatives $17
Fixed Income $240
4
TIAA-CREF AUM: $523 billion as of June 30, 2013*
Strictly for professional use and not for public distribution. 4
*Assets are preliminary.
**Other represents consolidated assets not reflected in the asset class breakdowns. The assets in the TIAA General Account, variable annuities, mutual funds and private funds are managed by TIAA, TIAA-CREF Investment Management, LLC, Teachers Advisors, Inc. and TIAA-CREF Alternative Advisors, LLC.
Private Real Estate
Core Value-add
Opportunistic Mortgages
Equity
U.S. Emerging Markets
Global REITs
International 130/30
Fixed Income
Core Core Plus
Mortgage-backed Asset-backed
High-yield Emerging Markets
TIPs
Alternatives
Agriculture Private Equity
Energy Timber
Infrastructure
TIAA-CREF
28%
40%
9%
7%
6%
3%
2% 2% 1% 1.0%
1% US South
US PNW
US NE Hdwd
New Zealand
Australia
Brazil
Uruguay
Chile
Poland
Belize
Other
TIAA-CREF Timberland Group
Timberland investing since 1998
Approximately $1.7 Billion in timber assets (NAV)
Manages global timberland investment portfolio located in: the U.S.,
Canada, Australia, New Zealand, Chile, Uruguay, Brazil, Guatemala,
Belize, Poland, Panama and Cambodia
Experience with multiple strategies to capitalize on least efficient portions
of the market, including: plantation investments in fast-growing poplar for
biomass, early growth timber, fast-growing hardwoods, softwoods, and
high value hardwoods
Nearly all assets are 3rd-party certified under the Forestry Stewardship
Certification (FSC) and the Programme for Forest Certification (PEFC)
group of standards
The Timberland Group is part of TIAA-CREF’s Natural Resources and
Infrastructure (NRI) Department, focusing on agriculture, timber, energy,
infrastructure and other related investments
− Shared expertise across real assets provides market/execution insight and
other investment synergies
In 2012, TIAA-CREF acquired controlling interest in GreenWood
Resources, Inc., a premier fast-growing plantation timber manager with
operations located North America, South America, Europe and Asia
Strictly for professional use and not for public distribution. 5
*As of June 30, 2013.
TIAA-CREF timberland investments by Species*
TIAA-CREF timberland investments by Geography*
10%
11%
11%
28%
21%
19% Radiata Pine
Douglas Fir
Other Softwood
Hardwood
Hemlock
TIAA-CREF
How TIAA invests in natural resources & infrastructure assets
6
Agriculture
• Row Crops
• Permanent Crops
Timberland
• Hardwood
• Softwood
• Biomass
Energy
• Oil
• Natural Gas
Infrastructure
• Airports
• Arena
• Toll Roads
• Water Treatment
• Bridges / Tunnels
Vertical
Integration
- Grain Storage
- Packing
- Processing
- Rail, Ports
- Trucking
Pipelines
Transmission
Power Generation
- Solar, Wind
- Geothermal
- Gas-Fired
- Hydroelectric
Bio-Fuels
- Ethanol
- Bio-diesel
Electricity
from Biomass
- Timber
- Sugarcane
Strictly for professional use and not for public distribution.
TIAA-CREF
15%
Real assets*
U.S. equities
International equities
Fixed income
Short-term/cash
Other alternatives**
Growing institutional demand for real assets Portfolio allocations to real assets are expected to
rise from 5%-10% today to 25% in the next
decade. (JP Morgan research, April 2012)
Average endowment fund allocates 15% to real
assets, including private real estate and natural
resources (oil, gas, timber, commodities and
managed futures).
(NACUBO-Commonfund, January 2013)
Strictly for professional use and not for public distribution. 7
Endowment funds: Asset allocation, 2012
Exposure to real assets continues to rise
*Includes private real estate and natural resources (oil, gas, timber, commodities, and managed
futures)
**Includes hedge funds, private equity, venture capital, distressed debt, and other alternative
investments
***Includes oil, gas, timber, commodities and managed futures; excludes private real estate.
Source: 2012 NACUBO-Commonfund Study of Endowments. Percentages represent dollar-
weighted average allocations across all endowments surveyed.
0.4%
1.6%
8.0%
2002 2007 2012
Rapid growth in allocations
Natural resources*** as % of portfolio assets
(excludes private real estate)
TIAA-CREF
Real Assets: Attractive investment characteristics
Potential for diversification, steady income and capital appreciation
Diversification potential on two levels
−Low correlations with traditional asset classes
−Low correlations among sub-categories of real assets
Asset values often correlate with inflation, providing a potential hedge
Inelastic demand and supply often result in hybrid-like return
characteristics
−Stable, bond-like current income
−Equity-like upside potential for capital appreciation
Long-term hold strategy can optimize asset performance
Relatively low volatility for private real asset vehicles*
−Private investments not exposed to market speculation driving
commodity prices
Strictly for professional use and not for public distribution. 8
*Real assets are less liquid than investments that are continuously marked-to-market. Periodic appraised values may exhibit large fluctuations
reflecting economic, asset-specific, currency, political, regulatory, or environmental factors
TIAA-CREF
Real Assets: Compelling Fundamental Factors
Underlying asset values help ensure capital preservation
Population growth and urbanization increase demand
Natural resources are in finite supply with values rising over time
End products meet basic human needs – few substitutes:
−Agriculture: Food, clothing, biofuel
−Energy: Heat, fuel, electric power
−Infrastructure: Foundation for economic development
−Timberland: Building construction, paper products, biofuels
Strictly for professional use and not for public distribution. 9
TIAA-CREF
Demand fundamentals: Timber consumption
Positives
Recovery of the U.S. housing market
Income elasticity of demand is highest for middle incomes
− Large wood deficit in China; emerging in India, Indonesia
Use of recycled fiber has reached an economic maximum
Increased use of wood for energy
Internet shopping increases demand for containerboard
Restrictions on trade amplify regional shortages
Negatives
Internet has reduced demand for printing and writing paper
Improved technical efficiency in wood products and
manufacturing reduces demand for timber per unit of GDP
10
0
500
1000
1500
2000
2500
0
200
400
600
800
1000
1200
1965 1975 1985 1995 2005 2015 2025 2035
mil
lio
n c
ub
ic m
ete
rs (
Wo
rld
)
mil
lio
n c
ub
ic m
ete
rs
North America Europe
Latin America Asia (Excluding Japan)
Japan World
scaled world
Source: FAOSTAT; FAO (2012).
Notes: Projected consumption for Asia includes Japan. Projections made using data
through 2005 only. Dashed-line projections scaled using ratio of 2005 and 2010
consumption.
Industrial roundwood consumption, 1964-2030
Wood consumption is projected to rise 59% from 2010 to
2030
Regional supply and demand imbalances will create
opportunity
Summary
Strictly for professional use and not for public distribution.
TIAA-CREF
How to construction a timberland investment portfolio?
Institutional timberland portfolios have historically focused on softwood markets in the U.S., Canada, Australia
and New Zealand –the staple of many institutional timberland portfolios. With increasingly mature institutional
investor presence and high market efficiency, timberland investing is posed to expand geographically, and
consequently in terms of species mix as well.
Strictly for professional use and not for public distribution. 11
Forest (>10% tree cover)
Other land
Water
Source: FAO Global Forest Resources Assessment 2010
The World’s Forests
TIAA-CREF
Modern Portfolio Theory: Capital Asset Pricing Model
• Modern portfolio theory (MPT),
introduced by Markowitz in the 1950s,
was an important advance in the
mathematical modeling of finance to find
the best diversification strategy.
• MPT has the aim of selecting a collection
of investment assets that has collectively
lower risk than any individual asset based
on the concept that different types of
assets often change in value in opposite
ways.
• The efficient frontier is the portion of the
opportunity set that offers the highest
expected return for a given level of risk,
and lies at the top of the opportunity set
or the feasible set.
Strictly for professional use and not for public distribution. 12
Example of real asset impact on portfolio performance*
*Illustrative example based on internal TIAA-CREF analysis
TIAA-CREF
Modern Portfolio Theory: Challenges
The framework of MPT makes many assumptions about investors and
markets including:
• All investors are price takers, i.e., their actions do not influence prices
• Correlations between assets are fixed and constant forever
• Asset returns are (jointly) normally distributed random variables
• All investors have access to the same information at the same time
• All securities can be divided into parcels of any size
• MPT does not account for the personal, environmental, strategic, or social
dimensions of investment decisions
• It only attempts to maximize risk-adjusted returns, without regard to other
consequences
• There are no taxes or transaction costs
Strictly for professional use and not for public distribution. 13
TIAA-CREF
14
Timberland value: Top-down approach
Consider macroeconomic trends (GDP, employment,
political environment, exports, currency markets, etc.)
Examine the business environment (ease of doing
business, corruption risk, labor markets, strength of
legality, tax, etc.)
Study the investible universe
What regions grow what species? What are their
long-term prospects?
What are the end markets? How diversified are they?
How mature are the markets? If immature, why?
What financial return can be achieved?
What crops are favored in this region over the
medium to long term? Are others becoming less
relevant?
Any possible non-agricultural uses for the land?
Look at the broader timberland markets
Identify areas where opportunities appear robust
Macroeconomic
conditions, global
perspective
Identify timberland
market themes
Create return
parameters and
market strategy
Implement strategy
with desired vehicle
structure
Strictly for professional use and not for public distribution.
TIAA-CREF
15
Demand fundamentals: U.S. timberland market
The overall forest products industry was impacted by the recession,
most significantly through the fall of the U.S. housing market, but also
through lower consumer demand.
− Production dropped dramatically from 2006 through 2009. Since then, it
has rebounded gradually, as non-housing markets have further
developed (e.g. industrial, energy, infrastructure) and housing has
gradually rebounded.
− Markets such as the Pacific Northwest, with strong export access, were
less directly impacted.
The U.S. forest products industry is one of the most developed in the world, producing a wide variety of product types from a diverse mix of species and geographies.
Source: RISI
Source: RISI
Strictly for professional use and not for public distribution.
TIAA-CREF
Demand fundamentals: Biomass in Europe
Current situation
2009 EU Renewable Energy Directive: 20% renewable energy target
National Renewable Energy Action Plans (NREAP) indicate large shortfall in
biomass; confirmed by independent research
Sources of supply
Domestic EU pellets: Flat over last 2 years; +5M oven dried metric tons
(“ODMT”) by 2020 (Pöyry)
Imported pellets: +10M ODMT by 2020 (Pöyry)
New plantations required to meet demand
− Outside Europe for EU pellet imports: 1.10 M ha
− Inside Europe for EU pellets: 0.65 M ha
− For wood chips 4.50 M ha
TOTAL 6.25 M ha
Summary
Enormous opportunity exists for developing dedicated biomass plantations
16
0
100
200
300
400
500
600
NREAP Poyry/Eurelectric
Domestic Biomass Supply Biomass Demand
Estimated Biomass Supply and Demand in EU (Million ODMT)
Strictly for professional use and not for public distribution.
TIAA-CREF
Top-down themes: Species mix
With the U.S., Canada, Australia and New Zealand as the traditional timberland investment regions, institutional
portfolios have been largely comprised of softwood species. However, with timberland investments becoming
increasingly global, species mixes within institutional portfolios will likely transition to more equal weighting
between hardwood and softwood varieties.
Strictly for professional use and not for public distribution. 17
Offers access to efficient
commodity markets with easy
institutional opportunities
Linked to inflation
Intermittent cash flows
Emerging opportunity with
potential to create institutional
platform on global scale
Relatively frequent cash flows
compared with other species
Unique international opportunities
with limited institutional presence
to date
More scarce resource
Long term appreciation
Softwood Fast-growing Hardwood Fine Hardwood
TIAA-CREF
Top-down themes: Risk-adjusted real timberland discount rates
With increasing opportunities for international timberland investment, attractive forestry fundamentals must
be balanced with appropriate risk-adjusted returns. The analysis below depicts adjusted and non-adjusted
returns, but realized returns in these countries likely fall somewhere within these ranges.
Strictly for professional use and not for public distribution. 18
0%1%2%3%4%5%6%7%8%9%
10%11%12%13%14%15%
Adjusted for Corruption and Ease Not Adjusted for Corruption and Ease
Countr
y 1
C
ountr
y 2
C
ountr
y 3
C
ountr
y 4
C
ountr
y 5
C
ountr
y 6
C
ountr
y 7
C
ountr
y 8
C
ountr
y 9
C
ountr
y 1
0
Countr
y 1
1
Countr
y 1
2
Countr
y 1
3
Countr
y 1
4
TIAA-CREF
Top-down themes: Geographic allocation
Strictly for professional use and not for public distribution. 19
Most species, both globally and within specific regions, do not have high correlation. This means that forest
product prices do not move in lockstep globally, and diversification may help long-term portfolio performance.
Brazil
Sawlogs
Chile
Sawlogs
Poland
Sawlogs
Spain
Pulplogs (C)
Spain
Pulplogs (NC)
Indonesia
Pulplogs (NC)
US PNW
Sawlogs (DF)
US South
Sawlogs
(Pine)
US South
Pulplogs (C)
Brazil
Sawlogs 1.0
Chile
Sawlogs .0912
1.0
Poland
Sawlogs .3770* .1019 1.0
Spain
Pulplogs (C) .1655 .1033 .4544* 1.0
Spain
Pulplogs (NC) .2442 .0048 .4448* .7631* 1.0
Indonesia
Pulplogs (NC) .2234 .0160 .0792 .0766 .0802 1.0
US PNW
Sawlogs (DF) .2250 .1683 .3365 .2055 -.0401 .1500 1.0
US South
Sawlogs
(Pine)
-.1462 -.3242 -.0142 .0037 -.1624 .0794 .5342* 1.0
US South
Pulplogs (C) .1485 .1663 .1940 -.0367 -.0238 .2596 .3320 .1531 1.0
Source: GWR research; Wood Resources International. Notes: Quarterly price data for the periods: 1Q/2006 to 1Q/2013 for the US; 1Q/1998 to 1Q/2013 for Poland and Indonesia; 1Q/1995 for Brazil, Chile, and Spain. C indicates coniferous and NC non-coniferous; *Significant at the 1% level.
TIAA-CREF
Top-down approach: Pros and cons
20
While good for framework and strategy creation, top-down analysis must be supplemented by bottom-
up consideration of specific opportunities and on-the-ground resources.
Strictly for professional use and not for public distribution.
Pros Cons
Flexible management allows guidance
of portfolio allocation in response to
most attractive themes
Implementation challenging, due to
market complexity and need for local
presence
Narrows down investible universe in
efficient manner, allowing strategy focus
on market segments
Ability to build presence in market
constrained by diversity and depth of
managers and opportunities
TIAA-CREF
21
Timberland value: Bottom-up approach
Manager quality is critical, as returns within similar
strategies can vary meaningfully
Examine the opportunity set of funds and other
structures, seeking best alignment of interests for your
organizational and investment goals
Consider both manager quality and structural alignment of interests
Funnel opportunities to manageable set
Work through a deep-dive with select managers
See the investment through – manager should provide
periodic updates and strong transparency
Consider projected vs. realized results and differentiate
between factors within and beyond manager control
Narrow down opportunities
Compare results against strategy sought…
Define universe of
vehicles to
implement strategy
Consider investable
opportunity set
Define managers that
best align both
strategy and interests
Strictly for professional use and not for public distribution.
TIMO selection
TIAA-CREF
Direct
Investment
Private timberland investment structures
There are several options for investing in private
timberland depending on investment size and
investor preference.
Strictly for professional use and not for public distribution. 22
Separately
Managed
Account Fund of Funds Commingled
Fund
Investment Manager
Investor
Commingled
Fund
Investment
Manager
Timberland
Properties
Timberland
Properties
Timberland
Properties Timberland
Properties
Investor
TIAA-CREF
The TIMO universe
Research by the International Woodland Company identifies 112 TIMOs, representing a wide range of
geographies and strategies.
Strictly for professional use and not for public distribution. 23
New opportunities are emerging, with 64% of TIMOs having been founded in the last five years.
This opens new geographies and regional strategies, but must be weighed against the investment opportunities and
alignment of interests offered by the manager.
38
34
40
0
10
20
30
40
50
> 2 Years 2-5 Years < 5 Years
North America, 38%
Europe, 39%
South America, 15%
Oceania, 6%
Africa & Asia, 2%
TIMO manager tenure Source: IWC
TIMO manager geography Source: IWC
TIAA-CREF
How to differentiate the many different TIMOs?
Timber Investment Management Organizations (“TIMOs”) are
distinguished by a variety of factors.
Strictly for professional use and not for public distribution. 24
Experience Track record
Strategy Regional focus
Transaction size Fees
Property
management
Vertical integration
Subcontracts
TIAA-CREF
Bottom-up approach: Pros and cons
25
While good for framework and strategy creation, top-down analysis must be supplemented by bottom-
up consideration of specific opportunities and on-the-ground resources.
Strictly for professional use and not for public distribution.
Pros Cons
Ease of implementation and oversight Potential portfolio imbalance by stage,
geography, species, etc.
Focus on managers which best align
desired strategy and best interests
Vulnerability to macroeconomic or
environmental factors beyond manager
control
TIAA-CREF
Alternative allocation strategy for timber portfolios
26
Combine a top-down approach with a bottom-up analysis
of individual opportunities
Find and clarify parameters of timberland value, diversify
geographically
Buy with eye on obtaining best value and high quality in the
world’s premier forested regions
Monitor/manage the portfolio to create a mix that suits our
belief in value and where we want to be on the risk spectrum
Look for selective or unique situations as increasing
specialization / optimization occurs across markets
So how do you determine a framework for timberland
value (both top-down and bottom-up)?
Define the “What”, “How,” and “Where”
Top-Down
(Strategy: Species,
Geography, End
Markets, Etc.)
Bottom-Up
(Property Analysis,
Competitive Position,
Etc.)
Strictly for professional use and not for public distribution.
TIAA-CREF
The combined approach
Strictly for professional use and not for public distribution. 27
Define universe of
vehicles to
implement strategy
Consider investable
opportunity set
Define managers that
best align both
strategy and interests
TIMO selection
Macroeconomic
conditions, global
perspective
Identify timberland
market themes
Create return
parameters and
market strategy
Implement strategy
with desired vehicle
structure
Top-down Bottom-up
Allocation risk Pricing risk
Portfolio
construction
and structure
Oversight and risk
management
TIAA-CREF
Future opportunities
Increasing competition has altered institutional timberland investment markets over the last few years, and
investors may increasingly want to take advantage of less efficient markets that offer the strongest return
potential. Often this involves matching attractive property characteristics with resilient markets and
knowledgeable managers who have the ability to add value over the long-term investment period.
Strictly for professional use and not for public distribution. 28
International
Timberland
investing must
balance a range of
outside factors,
including:
Sovereign
Risk
Political
Risk
Legal
Risk
Macro-
Dynamics
Land
Title
Labor
Laws
Environ-
mental