The Irish Forestry Unit Trust (IFUT) was established in 1994, when local investment managers Allied Irish Banks and Irish Life joined forces with the state forestry company Coillte, in order to promote greater pension fund investment in the area.
At the time, the two fund managers ‘ portfolios came to Ir£14m and Coillte agreed to contribute an equal amount, but in an unusual way, explains Brendan Lacey , chief executive of IFUT. "Instead of buying forest crops to put into the portfolio from Coillte, the company put these into the fund and acquired units."
The reason was that the two groups had been investing by new plantings, which were only up to nine years old when the trust was established. "Coillte matched these with mature assets, which meant the income potential of the fund was advanced significantly, so we had crops that were coming in for harvest in the next five years." Coillte acquired units, which would increase in value and could draw these down over time as new investment flows came into the fund.
IFUT started off with assets of £28m in 1994, but with no revenue streams. By last year these amounted to £1m from timber. Established as a tax exempt fund for pensions investors, the fund only brought in around £2.5m of new investment annually in the first two to three years. "In these years, we were consolidating our portfolio structure, and then we started to accelerate unit sales," says Lacey. These increased to £7.5m in 1997 and £10.3m in 1998. "Our target is to build up a yearly inflow of around £20m." The fund is now some £57m and the unit price has grown at 5% per annum above inflation. “No income has been distributed to investors as yet, but we intend to start dividends next year."
The fund has monthly pricings of units and a full portfolio valuation yearly. "The fund is valued on 15-year moving average of timber prices , which reduces the volatility," Lacey points out
"We have set up a structure which would allow to overcome the fact that pension funds would see forestry as a relatively illiquid investment. IFUT has an agreement with Coillte that the company will buy back plantations from IFUT at valuation in the event that cash needs to be raised to "meet marginal liquidity trading", as Lacey puts it.
"This is limited to to 5% of the fund in any one year and 15% in total. This is not designed to to provide a full underwriting of the fund, but it facilitates trading in the assets."
Lacey says the fund has never been near calling on this facility as the cash flow as the investment inflow has exceeded an cash requests. "We emphasise to investors that their investment should be a long-term core holding, but there are no restrictions on redemptions or delay periods."
The intention is to build the fund up to around £250m, equivalent to 1% of Irish pension assets. "Our aim is sustainability , to build up a sustaining yield portfolio. This is the stage where you have an even age distribution across the maturity profile, so you would be harvesting and replanting the same amount each year. so that we would have steady capital base." This takes a longtime to build up with an asset that has a 40-year maturity profile, he adds.
The trust had something of a coup last year with a £13.5m purchase of private plantations of Natural Resources, from the Smurfitt Group. The policy is to buy privately as well as from Coillte.
The expectation is that the fund will return 5 to 7% above inflation annually. "That has been on a low volatility, which we would expect to continue, though no one can guarantee forecast returns," says Lacey. Fennell Betson

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