Manulife aims to reap more than just trees with its forestland investment

(Bloomberg) — Manulife Financial Plc’s asset-management business is seeing a slow but steady investment in a new revenue stream: timber, which is paying dividends for the Canadian insurer.

The company has been exploring alternative investments to diversify its own and its clients’ portfolios, managing more than $16 billion in timberland and agricultural assets in countries including the United States, New Zealand, Australia and Brazil. By holding for decades, these investments can help Manulife cover long-term liabilities on its life insurance policies and provide opportunities for additional income, company executives said.

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“Woodland is not correlated with the fortunes of equities,” Paul Lorenz, CEO of Manulife Investment Management, the company’s asset-management unit, said in an interview. “There are other revenue streams,” he said, pointing to carbon-offset credits, land leasing and sales of forest products such as pine needles.

Investor interest in timber is growing as energy consumption, food demand and construction rise, and companies try to mitigate the effects of climate change. Manulife, which says it is the largest institutional timberland investment manager, expects these assets to drive net inflows of C$9 billion ($6.6 billion) into its institutional asset-management business in 2023, up 84% from a year ago. The company said at the time that timber drove higher performance fees from its asset-management business in the third quarter.

“A lot of people shy away from timber because of short-term price fluctuations, but we have a long-term philosophy,” Chief Executive Officer Roy Gori said in an interview.

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While the sector is certainly prone to large fluctuations in value, as of 2022, privately owned timberland in the U.S. generated a 20-year average annual return of 7.2%, according to the National Association of Real Estate Investment Trusts’ Timberland Asset Index, which tracks the sector’s investment performance.

The region is home to other big asset managers: MetLife’s Institutional Investment Management unit has built expertise in timberland-backed lending, and even wealthy families have become interested in timber assets in recent years as a way to diversify their holdings and hedge against inflation.

Read more: Wealthy families with time on their hands turn to timber for growth

In April, Manulife Investment Management secured more than $330 million in commitments, including the first corporate investors, for the second round of the Manulife Forest Climate Fund, which aims to give stakeholders access to forestland that prioritizes carbon sequestration over timber production and generate carbon credits for investors.

The business of selling voluntary carbon credits to polluters is set to see a surge in demand but can be fraught with risk, including reputational damage from allegations of data fraud and questionable accounting practices.Manulife executives say they recognize the importance of credibility in the sector, and have hired their own teams to manage some 5.4 million acres (2.2 million hectares) of forest and use third-party certification programs to verify the sustainability of their forest assets.

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As part of its asset management business, Manulife manages most of the forest assets of institutional investors, but it also held C$5.7 billion worth of timber and agricultural assets in its general fund as of the end of last year. The land is part of the company’s alternative long-term assets, held in a portfolio to invest customer premiums, which also includes private equity, government and corporate bonds, mortgages and cash.

Those assets are helping Manulife make money from another unexpected activity: relocating endangered turtle species. In Florida, the company is setting up a conservation bank on one of its forest properties to set aside new habitat for gopher tortoises, then selling credits in exchange for hosting the reptiles.

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