It would come as a surprise to most to learn that Canadian financial services industry giant Manulife Financial Corp. is one of the largest managers of forestland in the world, owning some 3.7 million acres on three continents worth a total of US$7.4 billion.

More specifically, the Toronto-based firm owns almost 139,000 acres of farmland in the U.S. — and more than 7,400 acres of farmland in Australia valued at US$900 million.

But while Manulife’s timber and agricultural investments are significant in terms of real dollars, the fact is they represent just a small slice of a wide and diverse portfolio of some $161 billion in investments the company manages for itself — and another $96 billion managed on behalf of institutional investors and high net-worth customers, for which Manulife earns fees.

For many years now, Manulife has pursued a strategy of matching the liabilities on its books from the sale of insurance products with investments in a wide variety of asset classes, not just the usual fixed-income vehicles favoured by most insurance firms.

These diverse asset classes include equities, private equity, retail and commercial real estate, oil and gas companies, timber assets, agriculture and, of course, fixed-income instruments such as bonds, mortgages and loans.

“We believe we derive superior return enhancement and risk reduction by using a blend of assets,” Don Guloien, Manulife’s senior executive vice president and chief investment officer, said during the company’s conference call this past month releasing its fourth-quarter financials. “We’re not dependent on the riskier end of the fixed-income markets in order to meet our yield requirements.”

Says Shane Jones, managing director of Canadian equities and senior portfolio manager at Toronto-based Scotia Cassels Investment Counsel Ltd.: “Manulife buys very long-term assets. It’s thinking about what it’s going to be in 20 years.”

Manulife is trumpeting the performance of its investment portfolio and its overall contribution to the company’s ongoing success. In 2007, investment income from the company’s own investments was $9.5 billion. Although that was down 6% from the $10.2 billion in investment income earned in 2006, the fall in income is attributable to a volatile equities market and the appreciation of the Canadian dollar.

Overall, Manulife posted net income of $4.3 billion in 2007, a rise of 8%. Manulife was the consensus top pick among the large Canadian insurers looking into 2008, according to financial analysts covering the industry.

“We rate Manulife’s shares as ‘outperform,’ based on the company’s sales and earnings growth track record, excess capital holdings and growth prospects in Asia,” says Andre Philipe-Hardy, an analyst with RBC Capital Markets in Toronto, in a note to clients.

Manulife’s investment portfolio has remained untouched, for all practical purposes, by the crisis in the credit markets.

Although the firm holds $694 million in residential mortgage-backed securities (RMBS), it represents a small figure relative to Manulife’s overall portfolio. Indeed, the company says, its RMBS holdings would be even smaller, but it has actually added to its RMBS position by acquiring one or two issues for what it says was exceptional value.

Manulife had no exposure to subprime collateralized debt obligations. And, although the company does have asset-backed securities, they are all backed by higher- quality mortgages and other debt, it says. Since acquiring Boston-based John Hancock Life Insurance Co. in 2004, Manulife has also been improving the overall quality of its bond holdings, decreasing its holdings of BBB-grade and below rated bonds as a percentage of its overall bond portfolio.

“We have been preparing for this credit crunch,” Guloien says.

Manulife also sees the current market turmoil as a great buying opportunity, but it will stay disciplined in terms of acquisitions.

This past month, Manulife added to its timber assets portfolio by making a deal to acquire 900,000 acres of forestland in Arkansas, Louisiana and Texas for US$1.7 billion in cash and debt from New-York based iStar Financial Inc. and three other U.S.-based private equity partners. The company made the deal, which is expected to close in the second quarter, through its Hancock Timber Resource Group subsidiary, which Manulife inherited when it bought John Hancock in 2004.

In 2006, Manulife acquired almost 500,000 acres of timberland in New Zealand and, in 2005, bought 930,000 acres of U.S. land and timber rights from Harvard University.

Timber assets are considered an attractive investment for institutional and high net-worth clients looking for diversification, capital preservation and good long-term returns with relatively low risk. Timberland returns are realized through sales of timber and land and leasing of land. When prices are high, timber can be sold for good returns; when prices are less favourable, the asset continues to grow on the stump. Since its inception in 1985, Hancock Timber Resource Group has averaged an annual return of slightly less than 14%.

@page_break@Manulife has also been adding to its positions in the oil and gas sector, albeit in a much more modest way than recent timber acquisitions. In February, Manulife acquired Tiberius Exploration Inc. and Spear Exploration Inc. for $115 million in an equal partnership deal with Calgary-based NAL Oil & Gas Trust.

However, not all of Manulife’s acquisitions have been in natural resources. In January, the firm acquired $500 million in equity in Toronto-based CIBC, which has been forced to take large writedowns as a result of its exposure to the U.S. subprime mortgage market. Manulife was part of a group making a $1.5-billion investment in CIBC shares.

The decision to acquire a stake in CIBC is an example of how Manulife is taking a disciplined but opportunistic approach to new acquisitions, Guloien says: “We’ve migrated to a position of extremely low risk. I think the CIBC transaction that we entered into recently was an example of that.”

And Manulife is not limiting itself to CIBC in terms of making opportunistic investments and acquisitions. “We’re basically making outbound calls to financial institutions pretty aggressively,” Guloien says, “if they’re stuck with stranded debt or equity positions that we can help them with — at a price.”

For its investment portfolio, Manulife is guided by a philosophy of building “from the bottom up,” choosing investments and asset classes that match the “term, cash- flow patterns and liquidity needs” of the liabilities that the company takes on through its sale of insurance products.

By not limiting itself to fixed-income products, Manulife says it has more flexibility to match long-term liabilities with long-term assets.

“It’s very hard to get 20-year bonds. It’s even harder to get 30-year bonds. It’s next to impossible to get [favourable] spread at 20 years and 30 years,” Guloien said at a Citigroup financial services conference held in New York in January. “How the heck do you match a long-term care portfolio that has liabilities running out 40 years in the fixed-income world? You can’t.”

And although investing in assets — rather than sticking with fixed-income, as many big U.S. insurers do — might appear more risky, Guloien argues that having a variety of asset classes means you don’t have to “stretch out” to find yield on fixed-income products.

Guloien adds that Manulife is not afraid to get out of a liability market if it feels that spreads are not justifying the risk .

“We have demonstrated that,” he says, “by exiting the wholesale funding agreement and GIC businesses [a few years back] when the spread economics simply did not pay.”

The fact that Manulife manages a general investment account for itself while managing third-party investments also works in its favour, Guloien said. The heft of the combined accounts allows it to make big acquisitions, such as some of the timber buys. And third-party investors like knowing the firm is investing in the same things they are.

Included in Manulife’s investment portfolio is $6 billion of commercial mortgage-backed securities (CMBS), which the company feels is a safe investment despite the turmoil in the residential market.

“Most of our portfolio was underwritten in 2000 and prior years, and most is AAA-rated,” Guloien says. “And most significantly, we underwrite our CMBS portfolio on a mortgage-by-mortgage basis, not relying simply on rating agencies to do the work.”

Manulife also has $26.1 billion in what the company says are “extremely high-quality” mortgages, and $5.7 billion in North American commercial real estate.

“Our balance sheet is in great shape,” Guloien says, “and we are looking forward to capitalizing on opportunities at a discount or a higher spread.” IE