Business Focus

Hancock Timber Tries
To Solve Knotty Problems

By DEAN STARKMAN
Staff Reporter of THE WALL STREET JOURNAL

Hancock Timber Resources Group, the big oak in the business of managing timberland investments, is fighting to stay on top in a business it helped to create.

In a little more than two years, the John Hancock Financial Services Inc. unit has seen a slew of top and midlevel managers leave, lost market share to new rivals and stumbled into an embarrassing lawsuit with a former partner.

Worse, it angered two big customers. During the same period, the California Public Employees Retirement System, also known as Calpers, and the Teachers State Retirement System of Ohio, two influential pension funds, yanked a total of about $789 million of a combined $1.55 billion the two had with Big John.

Hancock's stumbles come at a time of unprecedented opportunity -- and turmoil -- in the business of buying and managing timberland for institutional investors. Land prices are rising, huge blocks of forests are changing hands -- and money is pouring in. At the end of 1999, the amount of money invested in timber-investment-management companies had shot up to $7.5 billion world-wide from $3.2 billion in 1994, according to Hancock research.

The problems at Hancock illustrate the growing sophistication of clients in an investment class that only a decade ago was considered exotic.

William C. Coleman, the timber unit's president and chief executive since March 1998, characterizes most of the client-related issues as "communication problems" and normal "bumps" in relationships. He said the management changes have left the company stronger and that investments from 13 new clients have more than made up for the withdrawals.

Joshua L. Zaret, a timber analyst for investment bank Warburg Dillon Read, agrees the "really bad blood" between some clients and Hancock is in the past. "They've really re-made themselves," Mr. Zaret says.

New Organization

Indeed, Hancock Timber Friday plans to announce big shifts in the way it does business. The company says it will place Calpers' remaining assets with Hancock -- $842 million -- into a limited-liability corporation 98%-owned by Calpers, with the rest owned by the Hancock parent and Hancock Timber employees, who are investing $2.5 million of their own money.

The arrangement gives Calpers direct ownership of its timberland assets, for the first time, and much more control over investment decisions. The deal also will mark the first time that Hancock employees will participate in an investment with clients.

In the past, Hancock formally owned the land through a type of annuity contract and exercised considerable decision-making authority -- an arrangement that came to grate on some Calpers officials.

Timber-investing for pension funds dates to the mid-1980s, when corporate raiders such as Sir James Goldsmith bought paper companies at bargain prices primarily to acquire their undervalued timber holdings. The turmoil spurred paper companies to begin selling timber holdings and to look for new buyers.

Hancock, which had long acted as a lender on paper companies' timber acquisitions, formed its timber unit in 1985 based on the idea that paper companies often are in conflict between the need to supply mills and the need to wait for trees to mature to full value, which can take decades. The long-term outlook of pension funds matches well with the biological growth rate of trees. Hancock would make its money primarily from fees based on the size of assets under management and the financial returns they brought.

Timberland investments -- boosted by rising land prices -- posted annualized returns of 17% for the 10 years ended Dec. 31, according to the National Council of Real Estate Investment Fiduciaries, in Chicago. (The Standard & Poor's 500-Stock Index averaged an 18.21% annual gain during the same period). Hancock grew quickly and by 1994 dominated the business.

Period of Tumult

By the mid-1990s, land inflation cooled. Clients began pressuring Hancock to lower fees and questioned its costly system of hiring outside firms to manage property and consult on investments. Hancock, in turn, demanded the property managers lower their fees, leading to a protracted legal dispute with Campbell Group Inc., Portland, Ore., a longtime consultant.

Meanwhile, top executives began to leave Hancock, with some going to smaller firms that had started to challenge the company. In October 1998, the Ohio Teachers fund took its entire $350 million timber portfolio from Hancock and gave it to two rivals, including one founded by a former Hancock top executive who left only a year before. Kevin Stahlman, an executive with the Ohio fund, said the fund wanted to move to "smaller, more entrepreneurial" firms.

Last September, Calpers moved $439 million of the $1.2 billion it had invested entirely with Hancock to Campbell Group. A Calpers spokeswoman said Hancock had under-performed the industry benchmark, the real-estate fiduciaries index. (Hancock says it essentially matched the index "on a risk-adjusted basis.") The Calpers spokeswoman said the new contractual relationship is part of a fund reorganization of its entire real-estate portfolio. She added that while some Calpers officials were "not satisfied" with the former arrangement with Hancock, "we're moving on."

Mr. Coleman says the company "listened and learned" and will strive to improve communication with Calpers.

As for Ohio, he said: "From our perspective, we think Ohio made the wrong decision."

He said Hancock posted impressive returns for the fund, adding: "All I can say is that sometimes performance and relationships inexplicably decouple. One of my jobs in the future is to make sure this doesn't happen again."

Write to Dean Starkman at dean.starkman@wsj.com¹

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