Gresham’s law states that bad money drives good money out of the market. That is, we hoard the good stuff, trusting it to hold its value, while offloading the dross. That resonates with Tony Dalwood as boss of Gresham House, the Aim-quoted alternative investment company. Source: Financial Times
So it should — and not just because his business is named after the Elizabethan financier Thomas Gresham. Managers of esoteric assets are natural proponents of Gresham’s law, hoping to buy and hold the best investments while selling or sidestepping the rubbish.
But where money-market watchers and economists point out that when debased currencies dominate circulation, trust reduces and everything is assumed to be of the lowest quality, managers such as Tony Dalwood talk about the illiquidity premium.
They argue in essence that illiquid assets that can’t be sold in a hurry, such as fields of forestry, perform better in the long run.
Investors who are able to tie up their capital for long periods and can wait for decades for a bet to pay off, are compensated for the uncertainty. That is why last week Gresham House tripled its bet on forestry by paying £25m for FIM, which manages 83,000 hectares of forestry worth £600m.
Gresham now owns more than 100,000 hectares of prime pinetums in the North of England, Scotland and Wales. Forestry is renewable, uncorrelated to stock markets, diversifies investors’ portfolios and protects them against inflation. And it is a market where demand outstrips supply.
The UK imports between half and three quarters of what it needs to build houses, depending on exchange rates and commodity prices. Less than half of the country’s 3m hectares of forests are investment grade. And not much of the good stuff comes to market.
Owners of the best investable plantations of croppable trees in the UK hold on to it, sometimes for generations because of the generous tax breaks.
Most ordinary savers don’t own any trees barring what is in the garden. Most pension funds have less than 1% in timber. The exceptions are the big endowment funds.
By 2016, Harvard Management had invested more than 11% of its US$35bn funds directly into farms, vineyards and timber plantations from California to Chile.
In 2010 the Church of England began switching out of agriculture and into forests. Now less than 4% of the Church’s £8bn endowment fund is tied up in arboreal assets, some of which is managed by Gresham.
It is now about the largest owner of UK forests after the Forestry Commission. The Church’s bet has paid off. Its woodland portfolio returned 24% in 2016 and 12% over six years, against an average return for timber of 15% five years.
The Royal Institute of Chartered Surveyors says commercial forestry land has been the top-performing UK asset type in the past 15 years. Land prices alone have risen from £2000 in 2016 to £8600 per stocked hectare in 2017, easily outperforming farmland. That is aside from the income from selling planks.
However, not all is rosy in the arboretum. Harvard has drastically written down its $4bn natural resources portfolio in the past two years. In September, Narv Narvekar, the fund’s new chief executive cited market “challenges”. The message was that illiquid assets were tricky to value, it was easy to pay too much at the outset, returns might be illusory and repositioning the portfolio would take many years.
Closer to home, that message has been echoed by Cambium Global Timberland, an Aim-quoted fund which last year wrote down its Brazil estate — which is up for sale — from £7m to £4.5m. And Phaunos Timber Fund, a UK-listed closed-end fund investing in New Zealand and Uruguay, is being forced to wind up by shareholders fed up with prolonged poor performance.
It overpaid for uncommercial assets in remote areas, says an adviser. And now it is struggling to make disposals.
Gresham House invests in UK land, which may obviate the problems and local politics that have felled rivals. Still, it is all very well to talk about illiquidity premia and diversifying into uncorrelated markets, but it is a bit of a nonsense when the benefits of diversification are nullified by illiquidity.
Theory is no help if you cannot make an exit when necessary and when you do, Gresham’s law prevails and everyone loses faith in the asset class.
