Harvard Endowment Branches into Timber

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The New York Sun

“Need some wood?”


That was President Bush’s quip in the second presidential debate about what Senator Kerry claimed was $84 in income that Mr. Bush earned from an investment in a timber company. But it might be delivered just as easily these days by President Clinton’s treasury secretary, Lawrence Summers.


Mr. Summers is now president of Harvard University, which has invested almost $2 billion of its $19.3 billion endowment in timber assets across the globe. Moreover, analysts and investors familiar with Harvard’s plans say the school might buy more timber assets in the near future.


Late last year, Harvard Management Company, the university’s in-house investment manager, closed on the purchase of a 408,000-acre timber estate on New Zealand’s North Island, the largest contiguous piece of timber property on the island, for $650 million. An analyst familiar with the management company said the college now owns the timber-harvest rights to 1.3 million acres globally. Though that amount pales next to the 5 million or 6 million acres worth of timber controlled on average by global paper companies, the college’s appetite for timber has become so well-known that Wall Street’s investment bankers regularly trek up to Cambridge to pitch the company on bidding for land parcels owned by their paper and forest-product clients.


Harvard Management Company’s president, Jack Meyer, did not return several calls seeking comment. Mr. Meyer, in a late December interview with the Harvard Crimson, a student run daily, said the Harvard company was managing its timber holdings with an eye to being “good stewards,” and he spoke of the sustainability of its timber harvesting practices.


Universities’ investments in natural resources companies can produce public-relations nightmares.


Earlier this year, the $12 billion Yale endowment fund was forced to withdraw investments from some properties held by a hedge fund, Farallon Capital Management, after a coalition of left leaning Yale graduate student unions complained that the properties used environmentally unsound practices.


Harvard, however, has researched its purchases and expects no such backlash, a source familiar with the deals said.


“Mr. Meyer knows that a big risk here is that the HMC gets into a high profile situation like Yale got into last year with its investments,” the source, who asked not to be named, said.


For Harvard, buying timber is a “nobrainer,” given the university’s longer time horizon and its need to reduce exposure to the global capital markets, a timber property executive, Joel Shapiro of Timbervest, said.


Timber is attractive because it is a hedge against inflation and offers steady cash flow.


“Harvard is exposed to every move the stock and bond markets make,” Mr. Shapiro, who is familiar with the management company’s actions, said. “Having something that is proven to increase in price over time and that doesn’t lose value if stocks drop sharply makes sense.”


He added that since universities spend about 5% or 6% of their endowment every year, the 8% average return from timber covers that obligation handily. Meanwhile, since healthy trees can grow several feet annually, the value of the not-yet-harvested wood tends to increase by up to 6% a year, he said.


Harvard, unlike public traded forest product companies, does not have to maximize quarterly earnings by cutting younger trees for cash flow. That means its investment will compound in value as the trees grow larger, Mr. Shapiro said. He said that in a good year, where the management company’s bond investments throw off enough cash flow to cover the endowment’s share of the university’s costs, a university endowment timber property wouldn’t have to cut trees at all.


Mr. Shapiro said other schools, big and small, are following in Harvard’s footsteps. “I am working closely with two well-known colleges that are drawn to the returns and low-risk nature of timber,” he said, declining to identify them.


In rotating assets away from traditional investments, Harvard seems to be at the forefront of a collegiate trend. Over the past year, Yale has announced that it is targeting 20% of its portfolio for what it calls “real assets,” such as timber, oil, gas, and real estate. Princeton, Dartmouth, Stanford, and Columbia have also increased their allocations for timber.


Harvard has a solid investment track record. Last year, its portfolio returned 12.5%,and in the past decade the fund’s annual returns have averaged 14.7%.


On Wall Street, the management company is held in open admiration for its returns, especially in fixed income, where last year’s performance – the domestic bond portfolio was up 29.9% and the foreign bond portfolio was up 52.4% – placed the endowment among the top performers globally.


As a result of this track record, Harvard investment managers are among the highest paid in their field. The two senior bond managers, Maurice Samuels and David Mittelman, were paid $34.5 million each last year. FundFire, an investment management trade publication, reported this week that Mr. Meyer earned $7.8 million last year. The pay levels sparked campus protests, which led university officials to form a panel to investigate.


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