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timberland as a portfolio diversifier

timberland as a portfolio diversifier - Timberland as a...

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Timberland as a Portfolio Diversifier R e s e a r c h N o t e s 2003
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T I M B E R L A N D A S A P O R T F O L I O D I V E R S I F I E R R E S E A R C H N O T E S 2 0 0 3 Timberland as a Portfolio Diversifier T his research note evaluates the historical perfor- mance of U.S. timberland investments during the period 1960-2002 relative to the performance of other assets such as stocks, bonds, and commercial real estate. Our research is divided into two sections: a comparison of the level and volatility of past returns for the various asset classes, and an examination of the capacity of timberland to diversify a portfolio of stocks, bonds, and commercial real estate. A companion research note entitled Historical Returns for Timberland details the measurement of historical timberland returns, and presents estimates of the past performance of forest assets in various regions.
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2 T I M B E R L A N D A S A P O R T F O L I O D I V E R S I F I E R R E S E A R C H N O T E S 2 0 0 3 Returns for Timberland, Commercial Real Estate and Financial Assets To compare the historical level and volatility of returns for U.S. timberland investments with other assets, we obtained historical rates of return since 1960 for S&P 500 stocks, small company stocks, long-term corporate bonds, and U.S.Treasury bills from Ibbotson Associates. Past rates of inflation (measured by the CPI-U) were obtained from the same source. Returns for international equities were calculated from Morgan Stanley’s Europe, Australia and Far East (EAFE) Stock Market Index. Rates of return for private equity investments in commercial real estate were obtained by combining returns for the Prudential Property Investment Separate Account (PRISA) from 1969 through 1977 with returns from the National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index since 1978. Returns for a timberland portfolio with 40 percent of its value in the U.S. Pacific Northwest, 50 percent in the South, and 10 percent in the Northeast (the portfolio is rebalanced each year) serve as the benchmark for timberland performance.The returns prior to 1987 for the Pacific Northwest and South, and prior to 1994 for the Northeast, were obtained from the John Hancock Timber Index. Returns after those years are from the NCREIF Timberland Property Index. The following table compares the mean and standard deviation of the annual rates of return for each alternative asset class during the periods 1960-2002, 1973-2002 (30 years), 1983-2002 (20 years) and 1993-2002 (10 years).The data for 1960-2002 (or 1969-2002 if earlier returns are not available) are presented in graphical form.
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3 T I M B E R L A N D A S A P O R T F O L I O D I V E R S I F I E R R E S E A R C H N O T E S 2 0 0 3 Figure 1 Risk and Return of Alternative Investments (before fees) 1960-2002 Return (%/Year) 5% 0% 10% 15% 20% 25% 30% Standard Deviation (%/Year) 4% 6% 8% 10% 12% 14% 16% Commercial Real Estate* Long-Term Corporate Bonds Timberland U.S. Treasury Bills Small Cap Equities Please refer to Note on page 9.
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