Constructing optimal global timberland investment portfolios

Gwenlyn M. Busby, Clark S. Binkley and Rafal P. Chudy

Forest Policy and Economics, 2020, vol. 111, issue C

Abstract: 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.

Keywords: Portfolio optimization; Timberland; Global investments; Sharpe ratio; Conservation impact forestry (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:forpol:v:111:y:2020:i:c:s138993411930259x

DOI: 10.1016/j.forpol.2019.102083

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