Assessing the Financial Performance of Timberland Investment

Transcription

1 Assessing the Financial Performance of Timberland Investment Wenjing Yao, Richard Mei, and Mike Clutter Warnell School of Forestry and Natural Resources University of Georgia 1

2 Overview! Background! Objectives! Methodology! Data! Data analyses and results! Comparisons and conclusions 2

3 Background! Changes in Timberland Industry! Supply Side! Vertical integrated forest products firms! Restructure and focus on specific products! Demand Side! Interest in timberland investment in US is growing! Real Estate companies bought timberlands! Institutional investors are allowed to diversify investment 3

4 Background! Financial performance of timberland investment! Low correlation with market financial assets! Effective hedge against higher-than expected inflation! Better and higher returns if biological growth is known! Relative inefficiency exist in timberland markets! Institutional timberland investments have low risk but excess returns! Cointegrated with other nontimber financial investments in long run 4

5 Background! Ways to invest in timberland investments! Own timberland directly! Hold lumber futures! Public-equity timberland investment! Private-equity timberland investment 5

6 ! Performance during and Background Rate of Returns % Q1 2000Q2 2000Q3 2000Q4 2001Q1 2001Q2 2001Q3 2001Q4 2002Q1 2002Q2 2002Q3 2002Q4 2003Q1 2003Q2 2003Q3 2003Q Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 National South Northeast West-pacific Public Market 6

7 Previous research! Sun, C.Y., and D.W. Zhang "Assessing the financial performance of forestry-related investment vehicles: Capital asset pricing model vs. arbitrage pricing theory." American Journal of Agricultural Economics 83(3): ! Mei, B., and M.L. Clutter "Evaluating the Financial Performance of Timberland Investments in the United States." Forest Science 56(5):

8 Objectives! Evaluate the financial performance of timberland investments in the US from 1987 to 2010! Assess the returns of public- and private-equity timberland investment! Compare the financial performance of timberland investment in two different sub-periods 8

9 Methodology! Capital Asset Pricing Model (CAPM)! Arbitrage Pricing Theory (APT) 9

10 Methodology! CAPM ER [ i] = Rf + βier [ m Rf] Excess return form: R R = α + β (R R ) + µ i f i i m f i If α i > 0, outperforms the market α i < 0, underperforms the market If β i > 1, more risky than the market β i < 1, less risky than the market 10

11 ! APT! R = ER [ ] + βδ 1 1+ βδ βδ + e β in : sensitivity of asset i to factor n δ i : common factor e i : random error to asset i i i i i in n i Methodology! Extract common(risk) factors: Factor analysis! Principle Component Factor Analysis (PCFA)! Maximum Likelihood Factor Analysis (MLFA) 11

12 Data! Historical quarterly returns from ! Five timberland investment returns! Private: NCREIF National, South, Northeast, Pacific northwest! Public: Value-weighted portfolio! Fifteen investment portfolio or price index returns! Exchange, Gold, Steel, Aluminum, LT bond! PNSPA, Paper, Chair, Wood, SSPA, Lumber Future, JHTI, NonUS, Global All the data are in % of rate of returns 12

13 Data analyses and results Table 1. Estimation of CAPM using five timberland return proxies (1987Q1 2010Q4) CAPM Asset Coefficient P Coefficient P R 2 National < South < Northeast Pacific northwest < Public <

14 Analysis & Results! APT! Step1 Extract factors using PCFA Eigenvalues of the Covariance Matrix # of Factors Eigenvalue Difference Proportion Cumulative ! Step2 Calculate factor scores 14

15 Analysis & Results! Step3 Calculate sensitivity coefficients Asset R 2 National South Northeast Pacific northwest Public ! Step4 Calculate risk premium associated with each factor E(R i ) = *β i *β i *β i *β i *β i5 15

16 Comparison! Compare annual historical and required returns with APT in Asset Historical Annual Rate of Return Required Annual Rate of Return with APT Excess Return Percentage with APT I II (I-II)/II National South Northeast Pacific northwest Public

17 Comparisons! Compare Annual Historical and required returns with APT in different time periods Asset Historical Annual Rate of Return Required Annual Rate of Return with APT National South Northeast Pacific northwest Public

18 Comparisons Rate of returns % National South Northeast Pacific northwest Public 18 Historical Return Required Return Historical Return required Return 00-10

19 Conclusions! Private-equity timberland investment:! Outperforms the market but have lower systematic risk! Has excess returns! Higher average historical and expected returns in ! Public-equity timberland investment:! Performs similarly to the market! Does not have excess returns! Changes are not significant in two periods 19

20 20