Constructing optimal global timberland investment portfolios

• Published in: Forest policy and economics 2020-02, Vol.111, p.102083, Article 102083
• Main Authors: Busby, Gwenlyn M., Binkley, Clark S., Chudy, Rafal P.
• Format: Article
• Language: English
• Subjects: Allocations; Astronomical models; Conservation impact forestry; Decision making; Decision theory; Ecosystem services; Ecosystems; Forest conservation; Forest management; Forestry; Global investments; Institutional investments; Investment; Optimization; Portfolio optimization; Portfolios; Risk; Risk management; Sharpe ratio; Taxation; Timberland; Timberlands; Volatility
• ISSN: 1389-9341; 1872-7050
• DOI: 10.1016/j.forpol.2019.102083

Modern portfolio theory can support institutional investment decision-making around the design and management of risk-efficient timberland investment portfolios. Using a portfolio optimization modeling framework and assumptions reflecting the investable timberland universe, we describe the set of optimal global timberland portfolios. Based on this analysis, timberland may achieve returns in the range of 6.1% to 8.5% real (8.5% to 10.9% nominal) (USD, post-tax, pre-investment management fee). The maximum-return portfolio carries considerably more return volatility, having a Sharpe ratio of about 0.53 compared to about 0.80 for the portfolio that maximizes risk-adjusted returns. All portfolios include significant allocations to both the US and Latin America, with the allocation to Latin America (and Asia) increasing as the risk budget increases. Significantly, Oceania—a popular location for institutional investment—does not enter the set of risk-efficient portfolios but requires return boosts of just 10 to 20 basis points to do so. Conservation impact forestry— a US strategy focusing on the joint production of ecosystem services and sawlogs—enters the set of risk-efficient timberland portfolios. •Using a mean-variance optimization approach, we describe the optimal composition of a global timberland portfolio.•Our results show that risk-efficient, optimal timberland portfolios may achieve returns between 8.5% and 10.9% nominal.•We find that all risk-efficient portfolios include significant allocations to both the U.S. and Latin America.•Investment in a U.S. strategy focusing on the joint production of carbon and timber enters the set of optimal portfolios.•Opportunities exist for efficiency-improving adjustments to institutional investors’ current timberland portfolio.