RISKS AND RISK MANAGEMENT

There are various risks with any investment asset class or opportunity. Often risk is defined as the historical volatility associated with the investments return. The following chart compares the Sharpe ratio, (calculation which includes investment volatility) of various asset class indices over the last 18-year period. The NCREIF Timberland Index ranks highest for historical risk-adjusted performance among the asset class indices based upon the calculated Sharpe ratio.

Specific risks associated with timberland investments can be classified into two major categories: economic risks and physical risks. With proactive timberland and portfolio management, most risk factors can be minimized dramatically. The Campbell Group, through its extensive timberland management experience, has implemented numerous controls and policies to minimize physical and economic risks to its investors.

⁽¹⁾ S&P split the index into a separate paper and forest index in 2002.
The return used since 2002 is the Forest Index.
⁽²⁾ S&P renamed Goldman Sachs Commodity Index to S&P GSCI in May 2007

Sharp Ratio: A risk-adjusted measure calculated by dividing a portfolio's return in excess of the riskless return (90 day t-bill) by the portfolios standard deviations. The higher the Sharpe ratio, the better the fund's historical risk-adjusted performance.

Physical Risks:

Fire

Fire risk varies greatly across the U.S. Areas of the U.S. with longer, drier summers are most susceptible. Areas of the south and interior west are more susceptible than areas west of the Cascades in Oregon and Washington due to climate. Fire risk is minimized through the implementation of comprehensive fire protection plans designed to provide for early detection and extinguishing of wildfire. Cooperative fire protection services are utilized during fire season. During high-risk periods, regional fire fighting agencies, which usually include state and federal agencies, are on stand-by ready to respond to any reported incidents of fire. Harvest activities and public access are curtailed or eliminated during high-risk fire season. We also proactively manage risks through stocking level control designed to maintain healthy stands with minimal ground fuel (needles and dead wood) accumulation. Well-maintained roads provide access for fire fighting agencies, thus minimizing response times and risks. Over the last 25 years, fire loss on lands managed by The Campbell Group and owners prior to The Campbell Group has averaged less than one-tenth of one percent.

Weather

Wind damage is isolated, and generally limited, to prominent ridges in mountainous areas. Overall, wind damage is insignificant. Areas susceptible to damage are fairly predictable, and risk is minimized through appropriate timber harvest unit placement, avoidance of clear-cut boundaries on damage-susceptible ridge tops, and maintenance of vigorous, wind-resistant stands of timber. Losses due to wind damage have been less than one-tenth of one percent per year.

Hurricane risk is generally limited to southern coastal timberlands. While devastating in nature and difficult to predict, damage losses due to hurricanes are minimized through active salvage efforts directed at capturing the value of downed timber.

Ice and snow damage can occur across the country, but is minimized through species selection and stocking level controls. Overstocked stands are generally more susceptible to damage. Timely salvage of damaged trees minimizes loss. The Campbell Group has experienced little damage of this nature over the last 25 years.

Insect

The southern pine beetle poses the most notable insect risk to Southern timberland. Over the last fifteen years, reported losses have been less than three-tenths of one percent annually. The greatest risk of infestation is associated with widespread devastation resulting from hurricanes or similar natural occurrences. Where salvage efforts have failed to remove downed timber, beetle infestations and damage occur. Scientific silviculture helps maintain healthy forests. Early detection and removal of infested trees minimizes the risk associated with this pest.

In the West, the mountain pine beetle and western spruce budworm have caused damage over the years. As with other pests, these species are most likely to affect trees already stressed due to lack of active management or due to extraordinary drought. Losses due to these pests are insignificant due to active management practices employed by The Campbell Group, which includes salvage programs minimizing value loss.

Disease

Disease damage generally occurs in single trees or small stands of trees. Disease may not cause immediate death of the tree, but rather a reduction in value. Fusiform rust is one of the more common diseases affecting pines in the South. Careful management of seedling selection and continued research through seedling cooperatives helps to keep losses at a minimum. Root diseases are one of the more common diseases in the West. Physical removal of affected trees or treatment designed to treat root rot on site eliminates spread of the disease. Another disease in the West is Swiss needle cast affecting Douglas-fir in the coastal region of Oregon. This fungus disease is best managed by avoiding Douglas-fir in the affected areas where western hemlock is more appropriate. As with other physical and biological risks, disease losses are minimal due to active management and maintenance of healthy, well-stocked stands of timber.

Animal damage

Deer, bear, mountain beaver and porcupine are attracted to trees at various stages, potentially killing individual trees, but more often reducing growth rates. Deer and mountain beaver damage occurs most frequently in your seedlings where portions of seedlings are damaged, slowing the rate of height growth. Seedling protecting devices minimize the risk associated with deer and mountain beaver browsing. Bears and porcupines can damage the bark or cambium of saplings and mature trees. The Campbell Group has implemented "bear feeding" programs to provide alternative food sources during the season when trees are vulnerable to bear damage. County-based animal control programs minimize porcupine damage.

Theft

Timber harvesting creates the product of raw logs. As with any product, the potential for theft exists. Numerous controls are in place within the industry, and TCG has implemented additional controls to reduce the risk of theft. Each log and load of logs is tracked and accounted for in a customized log accounting system, providing timely management information to field foresters.

Economic Risks:

Economic risks can cause the most material risks to timberland. Again, through proactive timberland and portfolio management, these risks can be greatly reduced. Economic risks include:

Price risk

Log and stumpage prices are volatile. Price changes occur based on cyclical and seasonal fluctuations and demand dynamics. The impacts of price volatility can be diminished through active management, harvest scheduling, and diversification of a timber portfolio among log markets and regions. The Campbell Group has 25 years experience in log marketing and has the capacity to maximize investor returns through appropriate market analyses and follow-through.

Supply risk

Supply risk is composed of two factors: productivity and environmental constraints. Harvest scheduling and long-term planning incorporate these factors and minimize supply risk enabling the operations forester to respond to price fluctuations in a manner designed to capture market opportunities. Supply is projected utilizing economic optimization techniques while at the same time providing flexibility for operations foresters to accelerate or withhold supply in response to market changes.

Productivity is a measure of the ability of forestland to grow trees. Productivity is improved through active management such as silvicultural activities, which include planting genetically improved seedlings, fertilization, thinning, and weed and brush control. Risks to productivity include poor management practices that degrade site productivity, or poor recognition of site productivity and the inappropriate application of otherwise sound management. TCG's silvicultural principles minimize risk to productivity.

Environmental constraints include regulations associated with environmental protection and wildlife conservation. In the Northwest, the northern spotted owl and various species of salmon have been listed as threatened or endangered species, resulting in changes in harvesting practices on both private and public timberlands. The restrictions have led to significant reductions in timber supply on federally-owned lands and have helped increase the value of private lands. The value of some individual private timberlands can be negatively affected if previously unknown habitat is discovered, and restrictions on harvesting are imposed. Comprehensive due diligence at the time of acquisition minimizes financial risks associated with environmental constraints.

Other protected species in the Northwest include the marbled murrelet and bald eagle. The red-cockaded woodpecker is a notable protected species in the South. Numerous less notable species have also been protected in these regions. Other environmental constraints include the protection of streams and rivers, archeological sites and scenic areas.

TCG constantly monitors state and federal regulations that may impact forest management. In addition, we have established stewardship practices that meet or exceed industry standards minimizing risk.

Demand risk

Reductions and increases in the demand for raw logs are impacted by various external factors. These factors include:

• Substitution of other finished products, such as steel or various recycled materials.
• Substitution of other raw products, for example, export substitution from other countries.
• Reduction in overall demand for forest products related to usage, such as a decline in housing starts.
• Population growth increasing the overall demand for wood products, reducing the impact to the entire portfolio.

Liquidity

Liquidity risk can be minimized through acquisition due diligence, sound stewardship principles, and the ability to identify and respond to disposition opportunities that enhance investment returns. The acquisition of well-managed properties, and the continuation of high-quality management enhance the value of a given property and maintain or enhance liquidity. As with many other risks, diligent active forest management based on sound investment objectives minimizes liquidity risk.  Various investment products, including commingled funds and Real Estate Investment Trusts ("REIT"), provide numerous structural opportunities for timberland investors, and increase the liquidity of timber assets.

In conclusion, there are two major risk categories that exist: Physical and Economic. Through active management, these risk factors can be greatly reduced. In addition, timberland investments can reduce the overall risk of an investor's portfolio, as many of the risk factors associated with timber tend to be counter-cyclical with other traditional investments.