Harvard Invests in Forests

Even the savviest money managers could learn a thing or two from the Harvard Management Company (HMC) about diversifying one’s investment portfolio.

HMC’s recent purchases have made Harvard the second largest forest owner in New Zealand.

The HMC, which manages Harvard’s $21.1-billion endowment, purchased three estates in New Zealand in 2003. The most recent acquisition—468,000 acres of the Kaingaroa forest—was made on Dec. 12.

Industry sources estimate that Harvard bought its largest parcel for $600-$650 million.

HMC President Jack E. Meyer said Harvard now owns “cutting rights”—the right to harvest or seed the land—in a total of 485,000 acres of forest in New Zealand.

While the New Zealand government maintains ownership over the property, Harvard can cultivate and harvest its non-exotic forests consisting of ponderosa pines, douglass firs and other varieties of softwood trees.

“We don’t own the land itself, and eventually it will go back to the Maori Indian tribes,” Meyer said. “The government has reached an agreement with them about eventually returning the land.”

Meyer said that the move to spread Harvard’s multibillion-dollar endowment to real estate assets had begun as early as 1997.

“We think that timber is quite attractive to what other asset classes have to offer,” Meyer said. “[Timber] is also a good diversifier since its returns will not correlate closely with returns from equity markets.”Meyer said that because the most recent purchase was not “typical,” it has generated more interest than Harvard’s previous purchases of timberland.

“In most cases we don’t like to talk about individual investments because it’s not good for Harvard,” Meyer said. “In this case, this was a large transaction. It was negotiated over quite a long period of time, and it was enormously complicated with a number of banks involved. It just wasn’t possible to do this without attention from the public.”

REAPING A PROFIT

Last December, Harvard purchased the 468,000-acre parcel of the Kaingaroa forest in the center of the North Island from Tenon Ltd., a New Zealand-based corporation that focuses on wood processing, marketing and distribution of timber.

According to a Jan. 16 notice to shareholders, Tenon Ltd., with four sawmills and a capacity of 850,000 cubic meters of timber per year, would sell a large fraction of its forestry assets, and looked to auction cutting rights to international investors.

“It’s generally understood that in order for large assets to change hands in a small department like ours, it requires foreign investments,” said Paul M. Gillard, director of legal services at Tenon.

Although Gillard did not say whether or not Tenon thought Harvard would profit from the industry, Tenon’s sellout indicates that the corporation does not look favorably on the forests as an investment.

But despite the fact that the real estate portfolio returned only 1 percent in 2002 compared with 4.8 percent for the benchmark, a 2002 HMC report was hopeful that this sector would recover “in the next year or two.”

Meyer described a plan that would allow Harvard to reap maximum reward from its New Zealand property by waiting for the forest to recuperate for a number of years before harvesting the timber.

“This is a luxury we have that many companies would not have,” Meyer said. “It allows us to be a better steward of the property.”

Meyer said he could not comment on Harvard’s investment in the timber industry in the United States and South America.

CUTTING A DEAL

By some accounts, the property was a steal.

While Tenon paid 2.2 billion New Zealand dollars for the land in 1996, several estimates say Harvard paid only $650 million, or 970 New Zealand dollars, at the December auction.

Neil Paku, a native New Zealander whose wife is a post-doctoral student at the Graduate School of Arts and Sciences, said the conditions were ripe last December for Harvard to purchase the forest at a discounted rate. Paku worked this forest in log transport.

“When the government sold the cutting rights to Tenon, it was made at a time when the export demand for forest products was extremely hated. There were groups of people against this deal. And so the cutting rights were overvalued,” Paku said.

Meyer said that he felt the price Harvard paid was a just one.

“We did purchase it at a price far less than what the property was sold at four or five years ago,” Meyer said. “But the timber industry has been stressed recently.”

Despite selling many of its forest assets, Tenon maintains confidence in the resilience of the timber industry as a major source of profit.

“While the company will no longer have its own forests, it will continue to enjoy the advantage of proximity to one of the world’s most sustainable sources of good quality timber—the forest plantations of the Central North Island of New Zealand,” according to the Jan. 21 notice to Tenon shareholders.

Meyer said that Harvard will not face Tenon’s problems since they will not be involved in processing the timber beyond the harvest.

“In many cases, forest product companies back out of timber because their timber sales are all tied up with their forest product operations,” Meyer said. “And we don’t have that issue.”

ESTABLISHING ROOTS

Gillian F. Prowse—Paku’s wife and a fellow New Zealand native—said she, Paku and her two-year-old daughter would one day return to New Zealand. She said she did not feel concerned about Harvard’s large-scale investment in her country’s forests.

“It’s an inevitable thing. New Zealand has to sell off and privatize a lot of resources. Since New Zealanders can’t afford large chunks of the country, its good at least that Harvard can make use of this, though I think it’s a pity that New Zealand at the moment can’t make profit off their own land,” Prowse said. “They just don’t have the capital.”

The Kaingaroa forest, situated in the middle of the North Island, lies along the ring of fire, a belt of volcanoes.

“The issues of access to the forest are not a big a problem as they could be,” Prowse said. “There are other problems with companies buying up the coastland and preventing access to the rest of the country. I’d be concerned if this was prime real estate, but it’s a chunk of forest in the middle of the North Island.”

Paku said he understands the critical role that outside institutions play in New Zealand’s economy.

“You can categorize the forests into three groups,” Paku said. “The largest forests are owned by institutional investors. They do not usually purchase the land, but the cutting rights to the property.”

Paku said it was in Harvard’s best interest to treat the forest respectfully.

“In general, the approach is to treat natural resources with a view to the future,” Paku said. “There is no wholesale destruction of the environment involved.”

—Staff writer Elena P. Sorokin can be reached at sorokin@fas.harvard.edu.