Risk-Adjusted Returns
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Risk-Adjusted Returns
Thoughts on risk, value, and alternative investments.
Curated by Jack D Bridges
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The Retail Forest: 2016 Edition

The Retail Forest: 2016 Edition | Risk-Adjusted Returns | Scoop.it
Jack D Bridges's insight:

Where is the best place to invest among publicly traded timberland owners? 

A better question: Where are the mispriced assets? 

In 2009, the answer to that question was simple: Everywhere. Equity investors placed depressed valuations on timber businesses regardless of balance sheet, geography, HBU value, or stocking. For those with cash to deploy, this total misread of the asset class was a gift. A blessing. 

Heading into 2016, few would describe the investing climate as a blessing. Rates are going up. The strong dollar isn't helping US exports (years of QE didn't hinder goods leaving our shores). And, the Chinese "miracle" of 10% growth has slowed considerably, helping send commodity prices crumbling--and tanking economies from Asia to S. America along with them.

And while some of the above has reduced harvest levels in export-ready markets, thankfully, these headwinds have not dented the US housing market a whole lot (yet).

Focus on Rayonier

But, getting back to business: Where is the value in the forest right now? Is it Plumhaeuser, and the strength of scale, capital, and synergy (and perhaps, spinning off pieces to Wall Street eventually)? Or, does the prospect of continued industry consolidation make Potlatch & Rayonier more attractive?

Strictly based on value, (the gap between private market value of the complete portfolio and the current market cap), Rayonier at $22 is worth buying. Dave Nunes, the CEO, seems to agree. He bought 10K shares at $22 last week (insider buying, unlike insider selling, sends an unambiguous signal).

This, however, is not a consensus view. Portfolio managers have dumped RYN shares throughout the year because of reduced inventory "issues" (talked about by the estimable Sam Radcliffe at the time), scaled back harvest levels in the PNW, and a reduced dividend. This selling pressure is not abating as we head into 2016. Why?

Interestingly, notice Rayonier's 4th largest shareholder: Third Avenue. On the surface, the carnage in high-yield credit markets has nothing to do with the price of a timber company from day-to-day...

But, if Third Avenue loses investor confidence (done), and has to liquidate other funds to soothe the angry hoards gated in their blown-up credit fund, some--or all-- of those 5.5M shares of RYN just might need a new home.

Keep in mind that Third Avenue alone could keep the price of Rayonier depressed for a while--and smart investors will take advantage of this forced selling, putting in low-ball bids, and remembering the long-term picture for Rayonier is very bright. 

It's worthwhile skimming this recent Rayonier Investor presentation...before looking at the ugly chart below. 

The following chart illustrates how badly RYN equity has underperformed. Ouch. But, if one is ok being early (and didn't buy above $30), this is a chart that value investors buy: 


Slim Pickings

Beyond Rayonier at $22 / share, it's hard to handicap the rest of the timber REIT field at present. And yet, we do know this: The screaming bargains of years past are no more--and as rates begin to rise, yield hungry investors hiding in the forest might retreat back to the "safety" of treasuries once again.

No, it's best to remain patient with so much in transition. The fickle nature of Wall Street may get a lot about timber businesses & investing wrong...but it's the friend of those who do their homework, make considered decisions, and always take a longer view.


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Who Can I Trust?

Who Can I Trust? | Risk-Adjusted Returns | Scoop.it
Jack D Bridges's insight:

It's not an easy question, but there isn't a more important one for investors: Who can I trust to oversee and manage my family's investible assets? 


When my father died in 2002, I was in shock--complete, utter, my-world-is-ending shock. He was not only my best friend and hero, but the man was the guide of my family's financial destiny in every way imaginable (provider, portfolio manager, protector). The paterfamilias was suddenly gone.

Thankfully, he taught me a thing or two (inheriting his innate, finely tuned b.s. detector didn't hurt, either). And, I embraced the challenge of taking the reins--trying to learn as much as I could from my dad's legacy of investing other people's money.

I'm not going to delve into everything I learned in the crazy decade that followed (please, don't follow my path and get your 7 & 65). Rather, here are 3 simple questions that every investor should ask (with two pointed at their financial advisor), that can help navigate the question of trust.

1. How much am I paying you? 

It's amazing just how many wealthy people do not know how much they pay their financial advisor. Truly.

Whether the FA gets commission based compensation, or "extra" basis points for shuffling around expensive mutual funds, or a percentage of assets under management, most people have no clue. 

It's a simple, straightforward query. And, if you cannot get a straight answer, then seek other counsel immediately. 

This question is especially critical if the FA uses firm products in portfolios. It may not be nefarious (though, usually there are cheaper alternatives if your FA works for a big bank or broker dealer), but you'll rarely see a more expensive word than "proprietary." Yep. Ouch.

2. How do you invest your own money?

Talking about issues of money and investing are very personal, and can be sensitive.

Not with your financial advisor, though. And, your FA should jump at the chance to show that they eat their own cooking (even if the recipes aren't that good, and are made at some dark industrial kitchen hundreds of miles away).

If the objectives & pieces of your advisors portfolio differ dramatically from yours, ask why. If they aren't using the same funds / products you are, that's a red-flag. If they're out playing golf while you're waiting for an answer to that question, start looking for a new FA.

3. Ask your peers how they invest

Not everyone enjoys talking about investments. But, as you get older and start providing for other people, if this is you, force yourself. Seriously.

Start by trying to find a writer who makes these issues interesting (but, steer clear of train wrecks like Suze Orman, who opine about every security / risk under the sun, and then take zero investment risk with their own capital...bad form, Suze, bad form). Guys like Barry Ritholtz, John Train, or Charlie Ellis are good places to start. 

If you're not a big reader, then try to find someone you know who works in the business, and take them to lunch. Pick their brain, sound them out, listen and learn.

My father used to love helping (gratis) those who received really awful financial / investing advice. And, he would take time over lunch to sit down and try to educate people how investing works when you're not overpaying someone who shouldn't have your trust. 

If you can find someone like this to get you on the right track, doing the three things above will be easy. Even if finding a completely trustworthy advisor like my father, is not. 


For further reading about the issues above, please read: 

DIY Advisor, by Gray, Vogel, and Foulke. 

If the above had come out in 2002, I've would have been in even better shape...

And, one of my favorite series from Barry Ritholtz:

The Apprenticed Investor (wonderful stuff!)


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PlumHaeuser | Risk-Adjusted Returns | Scoop.it
Jack D Bridges's insight:


Boom. Just like that. There is a new Redwood in the forest. OK, so it's not really new; it's just two giant trees artificially joined into a monster. 

The deal has small implications--say, the tax issue for investors who will likely own 1.6 shares of WY for every share of Plum--and, major ones that will shape the US housing market, and global supply chains for years to come. 

What are people who really know the forest products industry saying so far? Take a moment and read expert Sam Radcliffe's keen framing of the merger, and its motives:


A cynic might look at this mega-merger in the forest and say, "this is what market tops look like...one final, giant deal for bankers to encrust in lucite before higher rates, and tougher economic sledding returns." Or, "Didn't Plum Creek just create a massive new JV structure a few weeks ago...what is this?"

Other observers would point to the sheer market powerhouse the deal creates across woodbaskets, products, and relationships, and say, it's easy to understand. Weyerhaeuser ran out of cheap ways to grow and bolt-on assets. And, the deal gives the new giant something very important in our inter-connected world: Economies of scale.

PlumHaeuser will have it with frightening magnitude. And, hey, if the housing market hasn't "healed" itself back to 1.5M housing starts (and household formation remains weak), why not try another weapon: Pricing power! 

Finally, here are a few questions that will take time to sort out from this huge news:

1. What implications will the deal have for TIMOs and other competing timberland owners & investors, and how will PlumHaeuser impact the institutional marketplace for timberland?

2. How will the remaining timber REITs respond? Do we see consolidation between Rayonier (RYN) Potlatch (PCH), Catchmark Timber (CTT), or other smaller, private owners? 

3. What are the unforeseen impacts associated with this consolidation? Could it have any impact on the timberland regions that the giants typically ignore (here in the Lake States / Fly-over-Land).

Much more to come from PlumHaeuser...starting with the conference call tomorrow morning.

*Update: The pre-market bid / ask spread for PCL is: $46.40 / $46.50.

(this price action, on about 97K shares, is really just where market makers try to position the equity for the opening print). Arbs, start your engines...

Another interesting note: Over 10M shares of PCL were short, before the announcement of PlumHaeuser.


Date: 10/15/2015

Shares Short: 10,126,132749,483

Days to Cover: 13.510823 

(The DTC above is a metric that shows how long it would take to close out every share currently short in one trading day-- based on the average number of shares that trade each day (in fairly liquid names like PCL, it's not that useful; in more illiquid equities, it can signal danger for short-sellers).

But, for those of you wondering why a security trades even a bit above a merger price threshold, it's not always optimists getting ahead of themselves, or the hint of a competing bid (zero chance of that here).

No. Often, it's just the opposite: Crushed pessimists, forced to throw in the towel and close out negative bets against the stock. In this case, the shorts shouldn't get toasted beyond reason.

The price of PCL should settle into a modest price range that reflects reality (the merger price, valuation of the combined entity, and the market's views of how smoothly the merger process proceeds).

Stay tuned for more!


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Weyerhaeuser’s Earnings Poised to Rebound

Weyerhaeuser’s Earnings Poised to Rebound | Risk-Adjusted Returns | Scoop.it
The giant timber REIT is building its cash flows and operating more efficiently. And it pays a 4.2% dividend yield.
Jack D Bridges's insight:

There are plenty of issues to discuss from this "glowing" piece on Weyerhaeuser, but I'm going to focus on one: Housing starts.

To quote the humble, book-talking PM, Mr. Ryan Dobratz (WY is the biggest position in the dude's fund):

"In a more normalized housing market, (my emphasis), with housing starts of 1.5 million or more, Weyerhaeuser will generate cash flows to support a stock price of $50 a share.” Housing starts have been running at a 1.2 million annual pace, trailing the 1.5 million rate that generally connotes a vibrant market.

Excuse me. Wait a moment. Weyerhaeuser is a great company and everything, but are you telling me that 1.5M housing starts are a given, and so is a $50 share price? Right...

It's also perilous to compare earnings multiples for timber REITs, and say that WY is the cheapest, because each timber REIT has different business lines (some are more lumber / construction heavy; others are more exposed to raw log prices, and don't own mills).

In other words, one could use plenty of other metrics to argue the "cheapest" timber REIT is not WY (based on a simple sum-of-parts valuation, Rayonier (RYN) might be far cheaper than WY).

But, getting back to the assumptions at hand, maybe reading the words of Third Avenue's Mr. Dobratz gives shareholders confidence in rocketing to $50?

Not this writer. Weyerhaeuser is a fine company, and has made some very smart moves in a tough operating environment (unloading Weyco. in a tax-efficient manner was sharp). No question. And, the shares may well be worth owning for certain investors (those who need a reasonable yield (4.2%), perhaps). 

But, investors shouldn't take this sort of one-sided bull bait. In truth, it's far better to see professional investors bearish about future returns.

Consider Chip Dillon's bearish timber "opus" from 2009:


Wow. That research still burns retinas even now...and maybe his conclusion about timberland over-valuation is relevant now.

That turned out to be the best buying point of this professional's life. So, read the Barron's piece on WY with a grain of salt, and ask yourself: "why is this story running? Does it really present a great buy point for WY equity?" 


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Does Divestment Work? - The New Yorker

Does Divestment Work? - The New Yorker | Risk-Adjusted Returns | Scoop.it
If the aim of a divestment campaign is to reduce a company’s profitability by directly reducing its share price, then the campaign is misguided.
Jack D Bridges's insight:

A few quick points concerning divestment: 

1. Reallocating shares to morally indifferent investors does little

2. Valuations are unlikely to be dinged

3. The "value" of the campaign is mostly media exposure

In other words, there is far more to be gained by investing in new businesses that share more desirable values (B corps, companies that submit to 3rd party certification of supply-chain impacts & labor best practices), than there is through divestment campaigns. 

For my father, who managed money for HNW investors, the matter was simple. "You are paying me to invest your capital, and within the reasonable bounds of an investment policy statement, that's my mandate." Simple enough.

He would make exceptions for people, of course. Mrs. Haversham cannot own Philip Morris; Mr. Pecksniff shall not own Smith & Wesson. Things like that. 

Every so often, likely because of a cocktail party conversation, people would test the fence.

One potential client nanced into my dad's office one morning, unfurling a mighty parchment with all of the industries he could not support. The man lasted five minutes, having failed my father's "screen" for unreasonable clients in record time. Good-bye. 

For my money, it's always possible to find a middle ground. And, for all the trendiness of impact investing, doing this within public markets is (still) dicey at best.

Personally, divestment leaves much to be desired if one is truly looking to change society, or how capital is allocated. If one is merely pursuing a self-interested way of looking good to the environmentally conscious, I have another suggestion: Talk to your investment advisor about buying shares of the world's largest mirror manufacturer. If it works out, you can always donate the proceeds to a non-profit advocating for divestment..


Some divestment resources:

Sonen Capital's view


The Rockefeller Brother's Fund


Interesting to see one of the world's great oil fortunes, framing divestment in such terms (coal & tar sands to start, but that's it for now...).

The Harvard study cited in the New Yorker piece above:


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Plum Creek Announces Major Joint-Venture...Market Yawns.

Here is the PR:


Jack D Bridges's insight:

Here is a decent, short take on the attached slide deck from Bloomberg. 

And, here is a quote from one of the Twin Creek Timber partners, as to why this unique structure was used (as opposed to institutional capital deployed in a typical TIMO):

“This is a little unique as the investors in this haven’t been timber investors in the past,” Bob Ratliffe, managing director and head of real assets for Silver Creek, said in a telephone interview.

“The real key to this is direct ownership and partnering with an operator.”

On its face, the JV looks very attractive for Plum Creek. Great selling price per acre ($2,150, no matter what the age class of the plantation pine, looks good), management fees on acreage put into the JV, plus whatever is acquired going forward, and PCL's skin in the game is a constant 25% (so they didn't sacrifice too much to keep the majority JV partners happy with aligning interests for the 15-year life of the venture). 

Also, Plum slipped in this bit at the bottom of their press release: They're upping their stock buyback to $200M with some of the proceeds from the transaction when it closes in January 2016. 

The funny thing: The market really did yawn. Big time.

After-hours bid /ask:  $37.39 b, $37.50 a

A whopping .27% spike (why there isn't more liquidity after-hours in an S&P 500 member like PCL, is kind of ridiculous). 


Pre-market, the bid / ask spread is looking a bit more normal: The bid is now $37.72, with no shares visible below $39. I would look for at least a 5% move today in PCL, and maybe a 7%+ trading range.


Post-Script: The timberland investment world is gathered in Portlandia right now for WWOTF 11. So, please check with the always insightful Sam Radcliffe, of Prentiss and Carlisle, to see if he has a take on the Plum Creek news. 

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Plum Creek Timber (PCL) Q2 2015 Results - Earnings Call Transcript + Comments...

Plum Creek Timber (PCL) Q2 2015 Results - Earnings Call Transcript + Comments... | Risk-Adjusted Returns | Scoop.it
Plum Creek Timber Co., Inc. (NYSE:PCL)Q2 2015 Earnings CallJuly 27, 2015 5:00 pm ETExecutivesJohn B. Hobbs - Vice President-Investor RelationsRick R. Holley - Chief Executive Officer & DirectorDavid W. Lambert - Chief Financi
Jack D Bridges's insight:

No surprises from the Plum Quarter. It was modestly better than expected, and R. Holley & his team continue to focus on capital allocation (selling non-core assets; buying back stock). But, the meat from any PCL conference call isn't really about Plum: It's about the marketplace.

Here are some highlights...

Anthony Pettinari - Citigroup Global Markets, Inc. 

During the quarter, there was some discussion on CalPERS looking to trim its exposure to timberlands. And given Southern sawlog price recovery has been maybe a little bit disappointing relative to expectations at the beginning of the year for another year, are you seeing any kind of difference in institutional interest for timberlands or maybe the level of price for land, especially in the South? I was wondering if you could just kind of update us on what kind of level of interest you're seeing in the market and the transactions you're seeing?

Rick R. Holley - Chief Executive Officer & Director

I think the level of interest from an institutional standpoint continues to be very high, whether it's in the Pacific Northwest or in the South for timberlands...

So I think there's continued to be a high level of interest. I think CalPERS is going through their entire portfolio and try to trim costs and other things. We've been more than a bit disappointed in some of their timber investments of-late. And I think they've decided with those as they have with many different investments they've made that they're just going to exit. So I think their focus and maybe actions are quite different from what we see amongst any of the other institutions.

Gail S. Glazerman - UBS Securities LLC

Okay. In terms of land available on the market. It's not really just CalPERS, there's the Foley land, Molpus land. I mean, do you feel like there is kind of an incremental supply of timberland on the market? Or are they just getting maybe a little bit more headlines than they normally would at this stage?

Rick R. Holley - Chief Executive Officer & Director

Well, the Foley land has been on the market for several months now and didn't appear to be a lot of activity. I think part of it has to do with the quality there, just not of interest to people. And the CalPERS land that they've had on the market is, have a little challenge because of a supply agreement and some other constraints. We just heard, as you did, about the Molpus bringing 50,000 acres in the Southern United States on the market. And I suspect, depending on the quality, that will get a lot of attention.

So you kind of see these 50,000 acre things in the market from time and again, and I think you're going to continue to see that. And a lot of it has to do with the timing of some of the investments these people made with the TIMOs and they're coming up for renewal. And it's just time to take them to market or maybe a client want some current yield or something and so they take some of these lands to market, and we see that all the time. So that's not unusual. And I think you'll continue to see that this year and next.

Switching gears slightly, what was said about timberland price assumptions & valuations going forward? 

Mark Wilde - BMO Capital Markets (United States)

Last question I had is just a bigger picture question. I mean, you guys are generating on the range of about $60 an acre in EBITDA on the Southern lands. Can that kind of number continue to support $2,000 an acre or $2,100 an acre just from a longer-term perspective?

David W. Lambert - Chief Financial Officer & Senior Vice President

I think market participants are looking at not only the productivity of the lands and what they can produce, but what the expected pricing would be. I think if someone were to say, hey, we're going to get stuck at 1.1 million housing starts and Southern log prices aren't going to go up, I think that would impact valuations in the South. But I don't think anyone that's in this business is looking at that thinks that that's a realistic outcome and that's not the basis for the valuation.

Hmmm. Given what Mr. Holley & Co. were forecasting last year for housing starts in 2015, I would place far higher odds on that "unlikely" scenario (stuck at 1.1 million housing starts). In other words, everyone is still making aggressive assumptions when buying timberland assets in the US South. To me, this forward looking, confident math would be akin to analysts buying oil assets with $80 or even $100 still as a reasonable assumption. Smart? Time will tell...

The Upshot: The team at Plum may not be the best at forecasting housing demand / construction, or handicapping the US consumer, but they know their marketplace. This writer is far from an expert, but when it comes to assessing the impact & importance of CalPERs in the timber sphere, it's better to listen to a major industry player (than, say, the Wall Street Journal).


Be sure and check Sam Radcliffe's views on the Plum call, too:


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This Fund Sees The Trees--And The Forest

This Fund Sees The Trees--And The Forest | Risk-Adjusted Returns | Scoop.it
How do you profitably invest in a sustainably harvested forest while directing efforts toward clean water protection, flood control, habitat for fish and wildlife, soil building and carbon storage?

Industrial timberland is managed solely for the wood in the trees, but Ecotrust Forest Management, based in Portland, Ore., invests by putting its focus on entire forest ecosystems. It's creating markets around forest diversity by selectively harvesting trees rather than clear-cutting, and also selling everything from carbon credits and development rights to edibles such as honey or salal for floral bouquets.

This diversified approach to managing a forest renders the land more resilient, both ecologically and economically, said Ecotrust CEO Bettina von Hagen.

Since its inception in late 2004, Ecotrust Forest Fund I, with $30 million under management, had average gross returns per year through December 2012 of 10.6 percent compared to 8.17 percent during the same timeframe for the NCREIF Timberland Index. It won't update returns because it will be reopening the fund to investors in the next three to six months. The fee is 1.25 percent.

Ecotrust has raised $60 million for a second fund, which closed in December. It currently has 30,000 acres under management.

Via Prentiss & Carlisle
Jack D Bridges's insight:

Consider a very mature, highly efficient market, within an established asset class. As time passes, the number of actors / investors grows, amid very positive secular trends which have helped lift returns over a long time-frame. 

Within this framework, all things being equal, one can expect lower future returns, as more investors crowd into the marketplace and compete for assets. 

So, how does one compete and deliver superior risk-adjusted returns in such environment? One way is to focus on a particular niche, and devote resources to developing new revenue streams--and this is exactly what EFM does as well as anyone. 

I'm not sure who Ecotrust hired as their CIO, but knowing a few people there, it is an unquestionably talented & ethical team. I wish EFM II the best of luck as they re-open the fund to investors...


Thanks to Sam Radcliffe for the find!

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Market Crashes Haunt Investors for Decades

Market Crashes Haunt Investors for Decades | Risk-Adjusted Returns | Scoop.it
Forgetting past traumas isn't easy.
Jack D Bridges's insight:

B. Ritholtz is always a good read. For investors, what matters here is his closing graph:

"the psychological parallels I see now are to 1962, and the collective memory of the crash of 1929, rather than 2007 and the legacy of the dot-com bubble burst. There is a deep reluctance today to believe that the recession is over; to recognize that inflation is nowhere in sight; to admit that the market rally is more than just the result of Fed actions; to ignore positive economic data; and to disregard the huge recovery in corporate profits." 

Why is the above important? It's simple: One of Ritholtz's keys to investing is to recognize our biases, and by doing so, try to objectively weigh the risks / rewards that markets present--regardless of cycle, label, or investing fad. Sounds easy, yes? In reality, not so much...

Which brings me to why investing in timber makes hewing to Ritholtz's precept a little easier. How? Because, a great deal of returns from prudent investment in timberland come from patience to buy opportunistically, planning, and simple biology. In other words, one does not have to fight any cognitive impairments to find solid returns.

But, getting back to Ritholtz, he makes excellent points about what's held back so many allocators over the last few years. Looking ahead, though, and investing capital at a time when the market has so many good years in the rear-view, what's to be done? What now?

For this investor, it pays to keep reading and learning from allocators like Barry Ritholtz. His level-headed approach to markets is a help to professional and amateur investor alike. 

So, for those who find little comfort in the high asset prices of today. Stop fighting the market, and find something else to battle against: Yourself. There are plenty of us who have turned that energy to a better purpose: Struggling against our own investing biases & baggage. Doing this makes the endless pursuit of "cheap" or mis-priced securities a little easier. 

In the meantime, keep J. Zweig's quote about markets & morale in mind. Always messy and always fragile, indeed.


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Seth Klarman: Why Value Investors are Different...

Jack D Bridges's insight:

If not for the dated photograph of a 'boyish-looking' W. Buffett (did Uncle Warren ever look young...), one might think this excellent piece from Seth Klarman was written yesterday. Nope. It's from 1999.

Notice any similarities between markets in 1999 and now? Yep. Scary. 

It's always a good time to read what Seth Klarman has to say, but it's especially important during markets where value is hard to come by.


Hat Tip:

Brattle Street Capital


Jae Jun




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Farmland Without Farmers...Who will care for the land?

Farmland Without Farmers...Who will care for the land? | Risk-Adjusted Returns | Scoop.it
As agribusiness replaces men with machines, the American landscape loses its stewards, and the culture they built.
Jack D Bridges's insight:

All of my grandparents were raised on farms in the Midwest. That's part of the reason Wendell Berry's writing, and this piece especially, resonates with me. Another is the importance of remembering. 

Please, forgive this break from my usual programming. What follows has nothing to do with the equity market, or investment themes of any kind. It's merely this: What one truly gains by respecting, celebrating, and embracing the natural world (instead of extracting every ounce of profit from it as quickly as possible). 

If you will, read W. Berry's paean to farming. Even if it doesn't stir childhood memories spent on farms and fields, it chronicles the loss of an important part of our heritage: A connection to, and with, the land. 



Ecosystem Integrity Fund 

(Great find, Geoff...thanks!)

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U.S. Farmers Watch $100 Billion-a-Year Profit Fade Away

U.S. Farmers Watch $100 Billion-a-Year Profit Fade Away | Risk-Adjusted Returns | Scoop.it
Jack D Bridges's insight:

For those of us who pore over alt. investments each day, the above look at farm profit margins bears watching. 

Phrases like, “You will see some farmers not able to cover their production costs,” (this from an agricultural economist at Purdue), should worry investors. 

Where we are in the cycle doesn't bode well, either:

"The agriculture industry has boomed over the past decade as record land and crop prices boosted sales of seed and farm equipment. Net net-cash income touched a record $137.1 billion in 2012. Land values have kept rising, up 8.1 percent last year to an all-time high of $2,950 an acre, while beef and pork prices were the highest ever."

No. The best time to invest in an asset class is not when you read the words "highest ever," with costs climbing, and net income shrinking. Typically, as we've learned from Seth Klarman and other value investors, the best time to deploy capital comes when the industry / business / asset class is completely out of favor. Thus, you have a margin of safety, and can make safe assumptions about future returns....

Without being able to model conservative assumptions for an asset (or finding managers who can do this in select markets), this is a time to be very careful when chasing returns in agricultural investments in general. 


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Seeing the Forest and the Trees at Plum Creek Timber

Seeing the Forest and the Trees at Plum Creek Timber | Risk-Adjusted Returns | Scoop.it
In its 25 years as public company, Plum Creek Timber has run rings around the S&P 500. Longtime CEO Rick Holley sees more gains to come.
Jack D Bridges's insight:

Please, read the Barron's article about Rick Holley & Plum Creek Timber. Aside from the CEO puffery, and that R. Holley seems to be a very decent human being, it's more important for what it leaves out.

First, consider that deploying capital in shares of Plum Creek is an investment in an equity with wide ranging domestic timberland interests. Put another way, PCL is not to be confused for a pure 

timber investment--not even close. 

Barron's doesn't address this crucial point (which I've covered exhaustively in the past). And, below are four issues that would have added far more meat on the bones for investors in Plum Creek Timber (or any timber REIT, for that matter). 

1. Why no mention of how domestic timber businesses actually work--hyper local, lumpy cash-flows, deferred harvests, etc.? This makes earnings handicapping / cash-flow modeling difficult and subject to greater volatility (though, not necessarily more risk).

2. Other than some good background on Plum's genesis, the writer pays little attention to the unique collection of assets / structure of the timber REIT. Ms. Ward also neglects the newer and very different ways PCL generates cash (biomass, aggregates, oil / gas, real-estate, HBU land sales / easements). 

3. Barron's mentions the MWV acquisition , but leaves the bigger regional push / forecast alone. The SE region will have the biggest impact on future earnings / success for Plum, so why not discuss the HBU dynamics a bit more, or delve into the 1.5M housing start forecast issue?

4. Finally, instead of an apple peeling anecdote, why not mention one or two broad issues that face the asset class, and how they might impact Plum? 

Do we face a future of far lower real returns than what investors are being told & sold? What other challenges face Plum in the face of rising interest rates, a richly-priced domestic marketplace for timber assets, and increased expectations from investors in the space? 

It is nice to know more about the Captain of the ship. No doubt. But, it's far more important to examine the vessel in question--especially, when most investors (even professional ones) have a poor understanding of what makes such a ship sink, float, or like this tedious metaphor, crash into the rocks;)


Further Reading:


Thanks to Sam Radcliffe of Prentiss & Carlisle!

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Lessons From Dad, Part One: Flying Stock Certificates

Lessons From Dad, Part One: Flying Stock Certificates | Risk-Adjusted Returns | Scoop.it

It's been 13 years since my father passed away suddenly. And, he's still in my thoughts each and every day: the sound of his laugh; the terrible TV shows he would watch; things he would tell me about investing. 

In this season of reflection, it's this last bit that can help small investors. What follows is a story about my father (a true value investor, and stock broker of the old-school), shared by a banker friend from their days in Detroit.

Flying Stock Certificates

"I’ll never forget the case of a young man who worked for me.  

Through my introduction he opened an account with Doug and upon Doug’s recommendation had bought some common stocks – one of which was up 50-60 % in a matter of a couple of months. 


The young man called Doug and told him to sell.  Doug opined that now was not the time to sell – but the client insisted. 


Instead of merely selling the security and earning a commission, Doug stomped down to the First of Michigan vault, got out all the stock certificates owned by this guy, stormed over to the bank and threw the securities on the poor guy’s desk – informing him very graphically what he could do with them.  

In the long run, the young man had to beg Doug to reopen an account for him.

Doug was “one of a kind” and even today is recalled by many of our mutual friends as one of the most admired and unforgettable people they have ever met and dealt with."

Be True to Yourself

Now, this might strike some as insensitive, or crude. And, maybe that's not too far off the mark. But, rather than seeing the undiplomatic nature of the flying certificates, the focus should be on something else: Honesty and integrity.

My father never had trouble being himself--even if it meant less money in his pocket, or ruffling someone's delicate feathers. But, in the finance industry, this can be a rare quality. For those who understood how smart and hardworking he was, they reaped tremendous benefits. For others, who judged him by his occasionally disheveled appearance or gruff manner, the loss was theirs.

But, why did he demonstrate his displeasure with the nice young man with a piece of foul-mouthed performance art?

He wanted clients who listened to his counsel, rather than merely transacting whenever they wished, no matter how inappropriate or idiotic. He stood his ground. He would not compromise his values--no matter how big the client or commission. And, if the prospect or client did not like this arrangement, then he would tell them (more politely, usually) to find another advisor. 

In our 25 years together, I learned many lessons from my dad. But, the strength to be myself in the face of conformity / ethical "flexibility," is one of the most important things he gave me. And, 13 years after he's gone, I'm still thankful for it--every single day. 


Postscript: The above is one of the last photographs I took of my father in 2002...man, did he loathe wearing black tie. 

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Taking Stock: What PlumHaeuser Portends for Timber Equities...

Taking Stock: What PlumHaeuser Portends for Timber Equities... | Risk-Adjusted Returns | Scoop.it
Jack D Bridges's insight:

Picture this: A great big fat kid jumping into a pile of leaves. Puts a smile on your face, doesn't it?

But, smiles aside, he made a huge mess, and there is work to do. The mischievous chubby lad above is our buddy PlumHaeuser (it's a family name, leave him alone), and now timber portfolio managers have to rake all those the leaves back into neat piles. 

1. Giants Re-Balance

First, look at the largest holders of Plum Creek (PCL):

1. Vanguard                14.2M shares

2. First Eagle                12M shares

3. I'm too lazy to keep manually typing the chart, so please click on the link to it above. Thanks!

The biggest holders of PCL (index funds) will likely hold into the merger, convert the shares into WY, and then probably scale back their positions, simply due to weighting issues. 

But, what about the funds with different constraints-- say, specific mandates to invest by sector (timber ETFs like WOOD, CUT, etc.)? How does Plumhaeuser change their positioning in 2016? 

WOOD, a $230M fund, is comprised of nearly 8% WY, and 7.7% PCL. So, do you think the fund manager is going to let WY swell to 15% of the fund? No. I don't, either. Qui bono?

Rayonier will benefit in many other ways (and RYN is rising, so maybe others are anticipating this, too), but it's already 7.5% of WOOD. So, go down from the canopy and look for other, smaller beneficiaries of this fund's re-balancing act: Potlatch (PCH) would be a good guess; CatchMark Timber (CTT) as well; Deltic (DEL),  and north of the border, West Fraser (WFTBF: OTC).

The smaller, boutique saplings within the space--Pope Resources (POPE) and The Keweenaw Land Association (KEWL)--will likely not benefit from fund re-investment, simply due to institutional & structural constraints (it's too hard to build positions, and often not worth the diligence required to invest in such small companies). 

Without even looking at the more internationally focused CUT, which has $190M in assets, or other dedicated timber investors (Pictet Timber, will also probably divest some WY post-merger), this is what raking the pile of Plumhaesuer leaves looks like to PMs. Plenty of work to be done over the holidays!

2. The Esoteric & The Need For More Product!

Will Plumhaeuser tempt the bigger TIMOs to bundle some of their maturing fund assets into a creative exit for their investors, by exploring the IPO market? 

It wouldn't be easy. The scale and geographic diversification for any new entities might be tough to piece together. And, previous offerings (see CatchMark Timber, CTT, and the shards of lucite from the ill-fated Wells Timber debacle), stand as a cautionary tale of at least the timing of these deals.

Still, TIMOs like FIA (Forest Investment Associates), Campbell Global, The ForestLand Group, and others have interesting portfolios of millions of acres, and because of fund structuring / cycles, they need liquidity somehow when the time comes to return LP capital.

And, it could be argued that there has never been a better time to create & offer a new publicly traded timber company (in REIT form and otherwise), based on a host of factors (valuation, appetite among funds, baby-boomer desire for non-bond income, etc.). 

The need for more timber related equity product from Wall Street is another current to mind going into 2016.

3. Valuation, Timing, and Consolidation

If TIMOs do seek out Wall Street to find new (smaller) investors for old assets, what kind of valuations would these businesses fetch? Would they be structured as REITs? What would this new supply of equity products say about market timing, in the face of so much consolidation across industries?

Those issues all bear watching heading into 2016 and beyond. But, whatever comes to pass, Plumhaeuser shouldn't change the way Wall Street values timberland assets (I mean, it could be argued that Plum's low equity price in relation to private value helped drive the merger).

Indeed, the cash-flows from wood will still get discounted beyond reason, and will never command anywhere near the premiums of other, sexier businesses that aren't profitable...and we like it this way, of course.

The forest will remain a place to find inefficiently priced assets, and  offer patient investors a margin of safety--and usually a chance to profit at the expense of other's short-term thinking.


Prentiss & Carlisle's curator insight, November 20, 2015 2:04 PM

Some outside the box thinking from Jack Bridges, thanks Jack!

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Rayonier David L. Nunes on Q3 2015 Results - Earnings Call Transcript

Rayonier David L. Nunes on Q3 2015 Results - Earnings Call Transcript | Risk-Adjusted Returns | Scoop.it

Interesting exchanges re valuation, timberland markets and values:

Mark Wilde - BMO Capital Markets (United States)
Okay. And then, I guess as you kind of think about acquisitions kind of going forward, it just – from the outside, it's kind of hard to see how any acquisition can – because when Southern timberland, it seems to be being valued at about 2.5% to 3% on an EBITDA basis. Hard to see how any of those acquisitions can look better than your own stock yielding above 4%?

David L. Nunes - President and Chief Executive Officer
Well, and this, I think this really speaks to why we've had a fairly limited number of acquisitions that we've gone after this year. We've closed on eight acquisitions. They've generally been on the smaller side and I think the fact that in Q3 all of our capital really was allocated to share repurchases, speaks to that yield dynamic that you just referenced. But there are occasional acquisition opportunities that do present higher yields, and I think that we have seen as well on the properties that we've purchased that we don't mind paying up for properties that are highly productive. And I think that's another element of the higher yield properties is they tend to be on higher quality properties. So we look at it as having bought stronger factories, if you will.

Mark Wilde - BMO Capital Markets (United States)
Okay. All right. Then the last question I have, Dave, is just on sort of what's going on in terms of the M&A market right now. You've had two big deals out there in the market, Foley and CalPERS both of which I think have a little bit of hair on them, but what's your sense of those deals and then what's in the sort of what seems to be in the pipeline beyond them?

David L. Nunes - President and Chief Executive Officer
Well, I'd say there is a fair bit of transactions that are out there in the pipeline. Foley is still working its way through and we understand that there was a sale in the works out of a portion of the CalPERS properties in Louisiana and really until we learn more about the values on those, it's hard to comment from a qualitative standpoint.


I also would say that there are quite a number of acquisitions that were made a decade ago by a number of TIMOs that are starting to near the end of their 10-year term. And so, we anticipate that we're going to continue to see properties put out on the market. And for those that have a good fit with what we're looking for, we'll take a hard look at them.
Mark Wilde - BMO Capital Markets (United States)
Okay. And then the last question I had is just a little longer term one for Dave. And I wondered if you would just comment on this sort of disparity that exists out there from a valuation perspective between kind of public market and private market and how you think that disparity might move over time? Because it seems to me it's kind of ebbed and flowed a bit.

David L. Nunes - President and Chief Executive Officer
Yeah. And I think you also have to recognize, Mark, that I think there have been times where that disparity has been influenced from a data standpoint that perhaps people have drawn the wrong conclusions on. For example, there was a period over this last cycle where a lot of people were comparing NCREIF results to private market results or to public market results and NCREIF appeared to be defying gravity, if you will. But at that time, NCREIF was allowing companies to do internal valuations. And so it contributed to some of that gap in value. NCREIF has changed that policy now to where all properties in the index have to go through a third-party appraisal. But recognize third-party appraisals aren't always perfect, and so I think you still have noise on that front. And then even in the transactions market, you're going to see differences in terms of stocking level and productivity that may or may not be apparent to the outside player.

And then as it relates to the public market valuations as we and others have talked about, the South in particular is not a homogeneous market. You've got big differences in value. And I'm not sure that we're a believer in what you hear of, say, a new normal of pricing. I think it really depends on the attributes of the property, the stocking, the growth rates, et cetera.

Via Prentiss & Carlisle
Jack D Bridges's insight:

Many thanks to the estimable Sam Radcliffe for separating wheat from chaff here for us.

Particularly interesting are D. Nunes words about the TIMO disposition cycle--apparently, now in motion. 

Will industrial owners like Rayonier scoop up adjacent / adjoining assets when funds need to unwind, and return capital? And, will this disposition cycle push prices down?

Or, will the flow of new institutional capital in the marketplace continue to warp discount rate assumptions, scoop up this oncoming supply of assets, and keep the chase for acreage aloft?


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Plum Creek Q3 Conference Call Notes: A nap in the forest...

Plum Creek Q3 Conference Call Notes: A nap in the forest... | Risk-Adjusted Returns | Scoop.it
Jack D Bridges's insight:

There are 3 main issues for timberland investors from the PCL call: 

1. The sloth-like housing recovery in the US continues, and PCL (once again) is reducing harvest levels. This time by 500k tons (to 18.5M tons total in 2015, from the 19-20M forecast earlier). In the words of the CFO, D. Lambert:

"we plan to maintain a conservative harvesting approach, absent a meaningful price improvement in sawlogs. Our initial plan anticipated a greater second-half ramp-up in demand." 

While not a big deal for Plum stakeholders, how many times can one anticipate an uplift in prices, only to leave a "planned harvest" on the stump? If you're PCL (and you constantly overshoot with your housing start forecasts), plenty...

Here is how one analyst framed the issue, along with the response from R. Holley (CEO):

Paul Quinn - RBC Dominion Securities, Inc.

Okay. And then just back to your comment, it sounds like you're reasonably optimistic on the lumber price recovery here. And I'm just trying to understand the timing of your harvest rate reduction where it looks like you're lowering your guidance overall for the year and it's primarily coming back in lower harvests in Q4. Why wouldn't you have taken that reduction in Q3 when prices are recovering in Q4? (ha!)

Rick R. Holley - Chief Executive Officer & Director

Well, some of these commitments we have to customers and their supply agreements and other things are kind of ahead of ourselves. But we were hopeful that pricing will recover in Q3 and it didn't, and we see it still flat as I made the comment that I mentioned, if things change and we see some uplift in price in the fourth quarter, we'll bring that harvest back. 

2. What's going on in China...and have import volumes & prices stabilized?

From D. Lambert:

"Exports really had a tough third quarter. In the first half of the year, they were hanging in there, but the third quarter, they had declined much more sharply. I think the word that we're getting is just as we went through a little bit of an inventory cycle here with lumber, over in China their log decks now are down 30% from where they were earlier in the year. I think they're starting to purchase wood...

We've seen prices in the Chinese markets firm in the last month or two and turn upwards...now that inventories are more in line in China, you'll start to see activity pick up a bit and clearly be stronger in 2016 than it was here in 2015."


3. What's afoot in the broader timberland marketplace? Usually, this is the most enlightening part of any PCL call. Not this quarter. And, Plum is focused on executing for the Twin Creeks JV, and what the equity market maybe isn't getting about the deal.

Here is the exchange between Holley and an analyst that's worth reading:

George L. Staphos - Bank of America Merrill Lynch

Twin Creeks, obviously, you've got a very nice mark-to-market on your land, and you've now gotten significant proceeds which you'll be deploying over the next couple of quarters. Are there any other less obvious benefits from this venture either on operational basis or capital structure basis that you think maybe the street's not paying enough attention to? Or is it really just what it is: you've got very good values that are better than what you think your embedded values are on the public market, and you're going to utilize it effectively both to pay down debt and buy stock back?

Rick R. Holley - Chief Executive Officer & Director

Look, clearly, I think that's the benefit both recognizing the values of Southern timberlands, which we've demonstrated now for the second time, and also the opportunities of capital allocation with the proceeds.

But I think a benefit that potential comes from this is we've got some institutional investors, partners in this transaction, very, very excited about the structure, very excited about working with Plum Creek, and having our timberland management expertise at work for them. So the question you'd have to ask yourself, are there others out there, institutional investors that own timberland today that think of this as something they might want to do? So I suspect there's going to be opportunities come our way. And because of structure's in place (50:03) operating well that wouldn't have come our way otherwise... So we think there's going to be a lot of interesting opportunities come out of this transaction that aren't necessarily financially driven day one, but certainly could be long term.

George L. Staphos - BAML

Are there any operational constraints or any other financial constraints that would prevent you from doing more of this? Is there a practical limit to how far you'd want to go? I mean, would you be willing to sell up to a third of your Southern timberlands?

Rick R. Holley - Chief Executive Officer & Director

Well, there are some structural considerations, tax, and other distribution considerations. But, there's no other constraints. I mean, we could do the entire portfolio like that way but we don't think that makes sense to do. But we think that this is going to be a platform to grow from as opposed to just taking more Plum Creek lands and contributing to a second joint venture.

Another exchange: 

Tyler J. Langton - JPMorgan Securities LLC

Twin Creeks Timber, I know you mentioned you were looking to potentially grow it to a $1 billion through acquisitions. Just talk a bit about – I mean I guess what geographies it should be in?

Rick R. Holley - Chief Executive Officer & Director

With the agreement we have with our partners in Twin Creeks is that anything that we find in the marketplace that's $200 million, or more Plum Creek will do on its own account. Anything under $200 million we would take to the joint venture to our partners. As far as geographic preference, there is none. We're looking for high quality industrial timberlands. We want a very diverse portfolio; that's what our partners want as well. So that could be in areas where we operate currently to get some of the synergies associated with our current timberland management expertise in those regions: the customers we know, the contractors and that sort of thing. But it could be in the west. It can be clearly in the south where we're starting.

That's it. No surprises. No massive demand drop-off to report. Aside from the previously announced Twin Creeks news, the Plum Creek Q3 was another nap in the forest (and there's nothing wrong with that).

PCL is trading off .5% to $40.53 at present, so the harvest reduction, and lowered forecast, isn't a shock. As long as Plum continues with its capital allocation plan (the arbitrage Sam Radcliffe has written about very well), and we don't fall into a recession, PCL equity should remain stable. It currently yields about 4.3%. 

*Update: With the S&P 500 retracing a bit of its year-end beta chase rally, PCL is now hovering around $40 even (down about 2% on the day).

Two things: One, this is what happens when timber investments are more correlated to equities (and aren't pure timber investments at all); two, at market extremes this can present opportunity. At the top, a chance to reduce risk at an opportune valuation. During times of stress, the opportunity to scoop up a bargain and provide liquidity to those who shouldn't be investing in the asset class to begin with...

The call transcript can be read in its entirety, here


Prentiss & Carlisle's curator insight, October 29, 2015 11:05 AM

Great scoop by Jack Bridges. Read his full post at http://goo.gl/j1uW7F.

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Wall Street investors buying up farmland

Wall Street investors buying up farmland | Risk-Adjusted Returns | Scoop.it
But increasingly those acres of farmland is drawing the attention of Wall Street investors looking to tap into those fields for profit.
Jack D Bridges's insight:

Leaving aside the usual perils of remote, investor ownership of farmland (Wendell Barry tackles this subject incredibly well, with his "eyes-to-acres" ratio), let's focus on Paul Pittman's words from the article.

He's the CEO of American Farm Partners, Ticker: FPI, and he makes a very good point in the article (about Iowa's law limiting investor ownership of farms).

Taking his point a little further, why is that someone like Donald Trump (with no operational expertise, and a questionable track record of stewardship) could sweep across Iowa buying farmland as fast as his toupee can carry him, but long-term investors buying on behalf of teachers, police officers, and firefighters cannot?

For now, I suspect Iowans could care less. But, if farmland valuations get frothy, wouldn't it be interesting to see the Iowa legislature overturn the law? 

That might be a decent tell that a "top" is near...


*Update: As global markets reel from worries about China's economy, and the ripples of crashing commodity markets (Glencore), it's worth watching to see how this impacts the farmland asset chase.

Given the illiquid, varied (row versus permanent crops) local / regional nature of the asset class, there may very well be a lag in prices fetched at auction, and the current dislocation in many of the underlying soft commodities for row crops.

Should the indiscriminate selling of financial assets continue (the Saudis apparently sold over $70B, that's right, Billion with a 'B,' worth of global equities since August), it will be an interesting test for the US farmland marketplace--especially, for those buyers levering up and continuing to acquire aggressively (Farmland Partners, that's you!). 

Thanks to Elizabeth McGeveran (@EMcGev), Director of Impact Investing at the McKnight Foundation, for tweeting the article!

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The Bumbling Panda: A quick look at US forest exports to China

Jack D Bridges's insight:

Timberland owners in exporting woodbaskets (PNW, SE) should pay close attention to China right now. 

When the world's second largest economy is fighting waning growth (7% GDP growth, if believed, would be a blessed problem anywhere else), on top of a crashing stock market & currency "issues," it matters. How?

Consider the information provided by the USDA regarding exports to China. Now, provided the domestic housing market continues its 'slow heal' some of this slack will be consumed right at home (especially, if home starts ever reach 1.5M per year again).

On the other hand, this reduced demand from abroad won't help saw log pricing--and will perhaps, for the 379th time, delay the long expected southern sawlog price recovery (PCL, PCH, DEL, RYN have all touched on this hope). 

Indeed, China's economic struggles are already stirring industrial forest owners into harvest deferrals, and other belt-tightening measures. 

For now, it's too early to measure the longer term influence of a slowing China on exporting woodbaskets (it hasn't impacted transaction prices for timberland yet, that's for sure).

Still, read through the USDA report on the torrid growth of log / lumber exports since 2009. For forest economists who forecast these sorts of figures for a living, now might be a good time cast an eye on the bumbling Panda, and tweak those 2016 demand models a bit.


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Orion Magazine | Buying the Farm

Orion Magazine | Buying the Farm | Risk-Adjusted Returns | Scoop.it
Ross Wilken, twenty-three, and his father, Harold Wilken, don’t look much like starry-eyed radicals as they inspect their fields of black beans just west of Danforth, Illinois.
Jack D Bridges's insight:

Wonderful read about investing in the ag space--and more specifically, the benefits of taking a longer, more mindful view.

It's hard finding patient / permanent capital, but the societal benefits of long-term management are hard to deny (see the part about investors who need income in year 1, versus years 3 or 4).

Thanks to Jed Emerson (@blendedvalue) for finding the piece!

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S&P 500 Performance and Valuation | The Big Picture

S&P 500 Performance and Valuation | The Big Picture | Risk-Adjusted Returns | Scoop.it
Source: JP Morgan
Jack D Bridges's insight:

I'm back. What did I miss? What's that you say? Grexit, China's Casino Crash, and some progressive words from Donald Trump. Wonderful. 

Reading the headlines, it's easy to see that it's been a volatile summer for markets. But, thanks to all the people shorting equities, the indexes are once again a mere stone's throw from all-time highs...

What better way to check-in than to look at a snapshot of "the market." Better yet, let's take a look at valuation seen through several different frameworks (courtesy of JPM, and Barry Ritholtz). 

Conclusion: The equity market, as a whole, isn't cheap. Though, by most measures, this is not bubble territory. In short, tempering expectations of future returns, and having higher levels of cash ready to deploy, are both good ideas.

For those of us who don't mindlessly beta-chase, and follow the religion of inefficiently priced securities, the above doesn't matter all that much. The search for value continues, no matter what the broader landscape looks like. Time to get back to the grind...


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Calpers Puts Portion of Timber Holdings Up for Sale

Calpers Puts Portion of Timber Holdings Up for Sale | Risk-Adjusted Returns | Scoop.it
The California Public Employees’ Retirement System is placing a portion of its U.S. timber holdings up for sale in the latest sign of a larger strategic re-evaluation inside the nation’s largest pension fund, according to people familiar with the matter.
Jack D Bridges's insight:

One funny note from the WSJ writer:

"Any move Calpers makes away from the timber industry will likely influence other investors because of its size and history as an early adopter of alternatives to stocks and bonds."

Wrong. Hilariously wrong, actually. 

Take a look at CALPERS track record over just about any time frame you like, in just about any asset class: Meh. At best.

Managing a huge pile of money does not automatically make one "influential," or even, say, good at your job. No. Many times the complete opposite is true, due to the plethora of constraints placed on institutional allocators: Committees with their sloth-like decision making; politics; politically connected stupid people, etc. 

CALPERS may have latched on to timber during a phenomenal (and unique) cycle in the 80s and 90s. Kudos. It might have even been prescient in deploying a larger percentage of capital to the asset class then. But, the last twenty years of CALPERS alt. investing--and timberland in particular--make the "influential" label a farce. 

If anything, huge investors like CALPERS are there so that the more nimble (often far smarter) PE firms have someone to sell to during periods of peak asset prices. 

And, hence the words from an actual person of influence in the timberland space, Mr. Jack Lutz:

“A lot of people would be kind of happy to see CALPERS dump all they have. There’s probably a lot of money to go after that.”

His comments confirm the role of elephants like CALPERS in the marketplace, but they also speak to another important point: There is still a lot of money chasing too few assets in the major US woodbaskets (PNW & SE). So, maybe CALPERS won't get hosed if they unwind their forestry portfolio...but this isn't due to any particular skill or expertise on their part. It just so happens they're reviewing their exposure at a good time. 

It's a portfolio decision like any other...and their logic isn't all that impressive (why would they concentrate so heavily in a woodbasket so levered to housing / lumber demand, if they're not patient to wait out the whole cycle?)

But, to return to the point:  Smart investors don't piggy-back on the ideas of $300B pension funds. The bright minds are the ones who bought at the trough of the last cycle, and are unloading on CALPERS when that dim light bulb appears over the collective heads of the 80 person investment committee. Timber you, say? What a great idea! 

The real headline from this story: Don't Do What CALPERS Does. Ever


Also, timber sage Sam Radcliffe has weighed in on the potential CALPERS sale(s), so be sure to check out his perspective:


When Sam writes about the timberland marketplace (and this doesn't happen all that often), one would do well to take notes.

Thanks, Sam!


If there are timber professionals reading this, wondering, "How would you invest differently, Mr. Smarty?" It's a fair question--that requires a long answer. But, here are two ideas that don't require genius level thinking to execute.

1. Buy Young Properties. If the broader marketplace for well-stocked acreage (with plenty of sawtimber to harvest near-term) is pricey, what does one do? Invest in far younger age-class properties, and then let your FMP, your silviculture, and your patience create the value. This doesn't require amazing market timing. It just requires a plan and a true commitment to timberland investment.

2. Buy Cheap. Flexibility in allocating capital is essential. If one is forced to deploy capital in specific percentages, at specific times, managed by specific managers, it's often hard to buy inefficiently priced (higher odds of being cheap) assets.

So, I grant a small concession to CALPERS in this regard. But, still, even if you are a major player, you can play a very significant role as a "liquidity provider" when others are forced to sell at bad times (say, 2000, or 2009-10 for timberland). One might even keep a reserve of capital ready to invest or co-invest for times just like these...

That's it. Two quick ideas for how to improve the process & returns of big institutional elephants like CALPERS. You're welcome;)

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The Private Equity Firm That Grew Too Fast

The Private Equity Firm That Grew Too Fast | Risk-Adjusted Returns | Scoop.it
Flush with cash, Providence Equity Partners made a series of risky, and disastrous, bets during the private equity boom. Now its chief executive is aiming for redemption.
Jack D Bridges's insight:

There are more than a few good investing lessons from this piece about Providence Equity Partners (PEP): avoiding style drift, losing valuation discipline, and the dangers of hubris, all come to mind.

Style Drift

PEP was known for its wagers in telecom & media. Before they went on to raise billions more from institutions, Messrs. Nelson, Creamer, and Salem knew those industries exceptionally well. Quantifying "well", what kind of IRRs did they generate?

Without access to their audited returns, the numbers from the Times are quite good: "a 1996 fund returned 3x invested capital; a 2000 fund returned 2.5x."

Clearly, PEP's investment process worked, and they managed the investment cycles very well--i.e. they purchased equity stakes near the trough, and divested when valuations reached dizzying heights (unloading VoiceStream to Deutsche Telekom in 2000 is just one example).

Valuation Discipline...anyone, anyone

In 2000, PEP oversaw $3.6 billion in capital. By 2007, PEP managed $21 billion--and started a credit arm. Wha?

For anyone who knows how organizations evolve (especially PE firms) this should have been a warning sign. Combined with the not-so-hidden credit bubble, and the state of the US financial system in 2007-8, LPs were signing on for far more risk-taking than they bargained for--in un-tested markets and industries for their now-overweight GP.

To be fair, PEP has plenty of company in making terrible investments during the 2007-8 period (Harry Macklowe, Cerberus, TPG, the top-tickers are too many to list here). And, many of these actors are still struggling to get back to par with their '07-'08 portfolio companies. But, getting back to PEP and what we can learn, it's clear that the push to raise as much money as possible and expanding beyond telecom & media was ill-conceived. 


There is no shortage of hubris in private equity. It would be interesting to compare the humility of allocators who either buy "damaged" or   "boring"  businesses, versus those who buy pure growth equity stakes in more "fashionable," or growing companies. Leaving the value vs. growth argument aside, and the large egos behind it, how can investors avoid these mistakes? 

One, when allocating capital to managers, do your homework. Don't just compare a manager to a simple (often ill-suited) benchmark. Lazy fiduciaries will give money to managers with great recent performance because they view the decision as low-risk. Everyone is doing it--so if I'm wrong, at least I'm in "good" company. Bollocks. 

Two, are you giving money to a manager who is branching out beyond their core competency? Why? Plenty of case studies suggest very few investors across asset classes and styles can do this well. 

Three, If you're concerned about businesses fetching frothy valuations, or assumptions and projections that seem ridiculous, it's imperative to go over these concerns with managers. Some PE shops are far more mindful of this issue than others. And, this isn't market timing, either. This is avoiding making a huge mistake with an illiquid, unique investment. 

Finally, managers should be willing and open to reviewing past mistakes with potential investors. If all they do is blame "factors beyond their control," keep digging deeper. Every investor makes mistakes; the good ones can tell you what they learned from them, and what they do to avoid making the same one again with OPM.

Taking a moment to learn from the missteps of investors like PEP isn't an exercise in Schadenfreude: it's simply an opportunity to humbly learn from the experience of other allocators. 


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Velcome to the Pardee...

Velcome to the Pardee... | Risk-Adjusted Returns | Scoop.it
Pardee Resources is an innovative natural resources management & investment company with coal, oil and gas, timber, and renewable energy properties.
Jack D Bridges's insight:

At a time when equity valuations are stretched, and expectations for future returns are low (or should be), it can be hard to find value. Really hard. 

So, during times like this, this allocator goes back to the well, and to what he knows best: Hard assets, illiquid securities, and companies generating FCF ignored by most PMs. 

Pardee Resources is unusual for many reasons--but, mostly because it embodies all of the above. 

This is not a deep-dive into the balance sheet & core assets of Pardee. For that, you'll have to do your own work (and start by requesting several years worth of 10-Ks from the fine folks in Philly). 

No, this is a brief look at why PDER is worth putting on your radar, and why, for this writer, Pardee is a great place where one can learn about how investors think across a diverse set of businesses. 

1. Sharp, honest, driven management

The quality of Pardee's management springs from several sources: company history, culture, and a desire to learn from mistakes. But, it also has to do with the advantages that come with generations of running a diverse set of hard asset businesses under one roof.

There is no slick showmanship, designed to mask weaknesses or highlight particular company triumphs. No. Operating results (and measurements of past acquisitions) are presented transparently, and with the utmost integrity. For observers of typical management teams, and their phalanx of investor relations people, it's a wonderful thing. Truly.

2. Illiquid Discount 

Because it trades OTC, and is a closely held businesses controlled by a family, Pardee's float (tradable shares) is quite small. Add to this a small marketplace for the equity, and one has an inefficient market--which is exactly what long-term investors want.

We will gladly trade liquidity to buy shares of excellent businesses at a discount--especially, one like Pardee with a great asset base, and high-quality management. PDER also pays a dividend (and a safe one, at that), so one gets paid to wait, as well.

3. FCF

Those who look at Pardee's founding business (coal) and think it's a dead-end, generating zero free-cash, think again. The 2014 annual isn't handy at the moment, but Pardee generated enough cash to make a $60M acquisition last year....and buy back $13.6M worth of stock at $265.00 / share (not always a great use of capital, but for illiquids, they can make more sense at the right price). 

To digress a bit, if I were allowed to put one question to management it would be this: Did Pardee overpay for the oil / gas royalty portfolio it purchased considering the crash in domestic energy prices? Or, did the size / discount of the portfolio provide a buffer against the current climate of lower prices? No matter what management would offer in response, Pardee is a company to watch.


Considering the many competing choices investors have to cobble together a hard asset portfolio, Pardee is worth a serious look (unless you are an "activist" investor, then, please, just bugger off!). Particularly, if we head into a bear market, and investors are able to scoop up shares at bargain prices. 

Further Reading:




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Plum Allocators: A look at Plum Creek's 4Q Conference Call highlights

Plum Allocators: A look at Plum Creek's 4Q Conference Call highlights | Risk-Adjusted Returns | Scoop.it
Jack D Bridges's insight:

In keeping with the "Timber is Boring" theme, there were no surprises in Plum's final Q report for investors. But, as usual, it pays to mind the details.

Here are 4 issues worth following from the conference call with Rick Holley--not just for PCL investors, but for anyone who invests in working forests.

1) According to Rick Holley , "Over the past few years, well-managed industrial timberland values have grown, while we have seen the values for rural and recreational lands hold fairly steady. In some regions, these HBU lands continue to offer attractive premiums to the underlying timber value. This is particularly true in the Lake States in New England." 

So, expect Plum to sell or ease more lands in these regions that are not part of the bigger strategic portfolio / picture.

Taking this a step further, what does the private market for quality timberland look like, and how much dry powder is out there to be deployed? 

2) Rick Holley - Chief Executive Officer, Director

"Well, 2014 was a busy year as you all know. I think there over 2 million acres transaction for a little over $2 billion. We are not aware of any transaction in the marketplace now, but there are clearly a lot of buyers and they tend to be institutional buyers.

I think the number one focus tends to be the U.S. South.

He continues...."I think other buyers would look at U.S. South for the same reason we like the U.S. South. It has not experienced recovery and will as we see a broader recovery in the U.S. economy, so I think U.S. South tends to be the focus of most buyers, but a lot of the institutional buyers are looking for a diversified portfolio as well, so there are lands in the Lake States, or lands in the west, particularly Oregon that they are very attracted to, to kind of build out their overall portfolio.

I think there is still quite a bit of capital. I do not know the exact number, but you know $2 billion, $3 billion probably in the side lines at any point in time, so there is ready capital for transactions as they come to market.

3) As several savvy observers have noted, there is a spread right now between the prices fetched by private market sales of timberland, and the values assigned by the public market. Holley also talked about taking advantage of this arbitrage (selling "expensive" lands to TIMOs; buying "cheap" PCL equity with the cash)....if you read nothing else, please see the bold section below.

4) Rick Holley - Chief Executive Officer, Director

"During 2014, we continued Plum Creek tradition of disciplined capital allocation. We sold $65 million of core timberlands at values of nearly $2,400 per acre in the South and $3,750 per acre in Oregon.

We repurchased $50 million hundred $50 per acre in Oregon; we repurchased $50 million of our stock at an average price of $40.21 per share, a compelling discount to our view of the company's underlying value as evidenced by these sales transactions. In doing so, we captured an attractive arbitrage selling at private market value and effectively buying timberlands at a deep discount to intrinsic value to our share repurchase."

This isn't how everyone in the timber world views capital allocation. But, when you're Plum Creek, you have a large dividend to support and banks are throwing cheap debt your way...it certainly makes sense to "capture" this spread, provided the lands are fetching good prices. And, as anyone will tell you, because of QE and hyper-low interest rates, the scramble for yield continues. 


For PCL shareholders, the big takeaway is this: 2015 should be fairly steady (no dividend hike expected), while Plum focuses on continuing to capture the arbitrage detailed above. Let's leave the issue of log-pricing (pulp very robust due to bad logging conditions, and light mill decks; veneer & saw-timber in most regions, not so much) for another day.

The entire CC can be found, here:

For those who care (or have to care) about the equity market's moves day-to-day, Plum Creek opened down several percent, hit a low of $43.37, and is now trading off less than one percent at $44.50 / share. 



Prentiss & Carlisle's curator insight, February 11, 2015 9:06 AM

Great comments from Jack Bridges, check his page at http://www.scoop.it/t/risk-adjusted-returns.