Assessing the effects of adding timberland and farmland into resource-based Sovereign Wealth Fund portfolios

Sovereign Wealth Funds (SWFs) have been prompted to reconsider their traditional asset allocations given the underperformance of equity markets post-2008 financial crisis and the collapse of commodity prices in recent years. Timberland and farmland investments are increasingly attracting the attention of these funds, seeking higher and more stable returns and means to hedge commodity risk. However, analytical analyses on the effect of these investments to SWFs are still limited. This paper studies the effects of including timber and farmland investments in the strategic asset allocation (SAA) of an oil-based SWF. We model the portfolio of investment of an SWF using Norway's Government Pension Fund Global as a case study, and gathering empirical data for the period Q1 2007-Q1 2016. We examine how allocations in timberland and farmland affect returns, the fund's net growth, and the portfolio exposure to commodity risk. Our results indicate that timber and farmland bring positive effects when supplanting equity investments, improve the return-risk characteristic of the portfolio, and provide hedging again oil risk.