Timber is increasingly attractive for institutional investors as part of an alternatives exposure, with benefits including diversification and inflation-hedging. To date most of the investments have been in the US, but a new report predicts this will move to emerging countries including those in Asia, with consultants advising investors spread their timber exposures to capture growth opportunities.
Timber investments offer the lure of returns uncorrelated to other financial assets and also play into several attractive potential thematic opportunities such as population growth and resource scarcity, climate change and the growing consumer-base in emerging markets.
While timber has previously been the domain of the endowments – with investors such as Harvard Management Corporation allocating 14 per cent to commodities exposures – pension funds have also been looking at these assets both for their risk diversification potential and as a hedge against inflation.
Sovereign wealth funds, including Australia’s FutureFund, and the Alaska Permanent Fund are among investors which have been vocal about increasing their timberland investments.
In 2008, CalPERS announced it would more than double its investment in timber to $2.4 billion or 1 per cent of total assets. Timber investments fall under CalPERS’ “inflation-linked” asset class, which also includes commodities, inflation-linked bonds and infrastructure.
As of this year, inflation-linked assets made up 3.5 per cent or $7.9 billion of CalPERS total asset allocation and California’s biggest public pension fund aims to increase this to 5 per cent.
Other public pension funds to move into timber include two Canadian pension funds that this week paid more than $1.03 billion in a shareholder approved buy-out of publically listed timber company, TimberWest.
British Columbia Investment Management Corporation and the federal Public Sector Pension Investment Board purchased TimberWest, Western Canada’s largest private timber and land management company.
Despite having more than 327,000 hectares of private land, TimberWest was hit by the downturn in the US housing market, making it an attractive acquisition target for the two long-term investors.
The general trend by institutional investors into timber assets can be seen in the context of a steady increase to alternatives among institutional investors. Cliffwater LLC’s recent Allocations to Alternative Assets 2011 survey found public pension funds on average allocated about 20 per cent and corporate pension funds 14 per cent to alternatives.
The survey of 97 state-wide pension funds in the US found that on average funds had 6 per cent of their alternatives’ allocation in real assets. The move is mostly coming from real estate exposures.
Principal in Mercer’s alternatives boutique within investment consulting, Simon Fox, says timber has been one of the best performing assets over the past two decades.
Taking the US NCREIF Timberland Index, timber assets have delivered an annual return of 14.1 per cent since the index was started 23 years ago.
A key diversification of risk comes from the biological growth cycle, which is uncorrelated to markets generally. As the trees grow they increase the value and the ultimate volume of wood available for sale.
Trees also mature through a number of so-called “life stages” which are suitable for different products, each providing a higher price per ton.
Mercer also says young trees are typically harvested for pulp, more established trees for chip ‘n’ saw, and mature trees for sawtimber.
There is also a growing market in trees with ongoing cashflows such as rubber trees where the latex can be harvested on an ongoing basis while the trees grow.
An attractive element of investment is also that trees can be left “on stump” during a timber price downturn and harvested when prices pick up.
Fox said Mercer is recommending the asset class from a strategic perspective for institutional investors with a 10-year-plus time horizon, describing it as “a beneficial time to enter the asset class”.
“What has been interesting for us has been the expansion of the timber opportunity into a global context and that opportunity is still maturing,” he says.
“You do potentially have risks when you move away from very mature markets like the US but it also creates opportunities as well particularly in areas such as South America and Asia now.”
The investment manager, Timberland Investment Resources LLC estimated this year that total global timber assets amounted to somewhere around the $300 billion mark.
Of this, institutional investors make up about 16 per cent only, meaning strong future demand is expected for quality forestry assets.
In recent times several funds have shown confidence in a sector that is maturing quickly on the back of growing institutional interest.
To date, more than 70 per cent of the timberland investments by institutional investors is located in forests in the US. But that is predicted to change in the coming years.
In a report released this year Timberland Investment Resources economist Chung-Hong Fu looked at global timber assets, breaking them down into established, broad and potential markets.
Established markets with a track record of investment were Australia, Brazil, Canada, Chile, New Zealand, the United States and Uruguay.
Of the non-US markets Brazil was the biggest with timber assets of more than $14.82 billion followed by Australia ($7.02 billion).
The remaining broad timber market – where investment returns are not yet proven – and more established elements of the potential timber market have about $44.5 billion in assets.
Timberland Investment Resources LLC estimates that more than 86 per cent of the global timber market is the United States.
Because housing starts at historic low levels, timber seems cheap, and many institutional funds with a long-term outlook have seen buying opportunities in US timber assets.
However, with soft demand in the US construction industry, and a realigning of demand for timber to emerging markets, particularly China and India, others are seeing that timber production will inevitably shift to emerging markets across the globe.
While housing starts in the United States have almost halved from their peak of 1.6 million units in 2006, in China housing starts were estimated at 10 million units last year.
A major beneficiary of this realignment of timber demand to Asia has been New Zealand foresters, with New Zealand timber exports growing four fold since 2008.
Canadian David Brand is the managing director of New Forests, a timber advisory company that is riding high on the back of landing the management contract for the biggest ever timber investment in Australia.
A joint venture between Alberta Investment Management Company (AIMCO) and the Australia New Zealand Forest Fund announced it would purchase more than $481 million in forest assets in Australia in January this year.
In addition, New Forest also runs a $700 million fund of established timber assets mainly in Australia and New Zealand that has attracted seven institutional investors.
Brand says more than 40 per cent of the world’s timber supply now comes from high yield plantations and to meet growing expected demand, investors will increasingly look to Asia’s attractive timber business models.
“All the emerging markets are areas where you can invest capital in growing trees and make a return but in the US you can buy an existing forest but the return on capital for new plantings would not be sufficient to attract new capital,” Brand says.
In a recently released New Forest five-year outlook for timber investment released in January, Brand says he expected that over the coming decades that the bulk of investment capital would be directed to assets in Latin America, Australia, New Zealand, African and Asian.
With investors in timber looking at 10- to 15-year time horizons, structuring timber portfolios should also look at both diversifying risk across regions and where future growth in the industry would come from, says Brand.
New Forest recommends a general portfolio that has 30-40 per cent of its timber assets in Canada and the US, 25 per cent in Latin America, 15 per cent in Australia and New Zealand and 15 per cent emerging markets such as Asia, Africa and Eastern Europe.
While the regulatory landscape is still unclear, Brand also recommends putting between 5 to 10 per cent of a portfolio in so-called “ecosystem services” that target potential carbon markets or biomass energy opportunities.
Both Fox and Brand say that timber can be part of a hedging strategy for climate change risk, with attractive potential opportunities in construction and as carbon sinks.
But the unknowns in terms of the shape and regulatory framework of any potential future global market carbon market make this a very difficult potential return to quantify.
Source: http://www.top1000funds.com/photo-stories/2011/06/15/investors-see-the-forest-for-the-trees/
Showing posts with label forestry investment. Show all posts
Showing posts with label forestry investment. Show all posts
Thursday, 16 June 2011
Pension Funds make $1 Billion Canadian Timber Investment
VANCOUVER — Shareholders of TimberWest Forest Corp. (TSX:TWF.UN) have overwhelmingly approved the $1.03-billion acquisition of the timber and land management company by two major pension fund managers.
The acquisition bid by the British Columbia Investment Management Corp. and the Public Sector Pension Investment Board, is equivalent to $6.16 per stapled unit, including debt.
TimberWest said about 98 per cent of shareholders approved the transaction at a meeting on Tuesday.
Closing of the transaction is subject to final court and other approvals but is expected to be completed by the end of the month.
TimberWest is Western Canada's largest private timber and land management company, with about 327,000 hectares of private land. It sells timber and real estate.
BC Investment Management is an independent money manager that manages a global investment portfolio of more than $86 billion for its clients, which include public sector pension plans, insurance funds and public trusts.
PSP Investments is an investment manager that manages investments for the pension funds of the Public Service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Force.
TimberWest units were unchanged at $6.07 Tuesday afternoon on the Toronto Stock Exchange.
Source: http://www.google.com/hostednews/canadianpress/article/ALeqM5jFux7viKS52xT8eNl-4DYvcBctQg?docId=7148404
The acquisition bid by the British Columbia Investment Management Corp. and the Public Sector Pension Investment Board, is equivalent to $6.16 per stapled unit, including debt.
TimberWest said about 98 per cent of shareholders approved the transaction at a meeting on Tuesday.
Closing of the transaction is subject to final court and other approvals but is expected to be completed by the end of the month.
TimberWest is Western Canada's largest private timber and land management company, with about 327,000 hectares of private land. It sells timber and real estate.
BC Investment Management is an independent money manager that manages a global investment portfolio of more than $86 billion for its clients, which include public sector pension plans, insurance funds and public trusts.
PSP Investments is an investment manager that manages investments for the pension funds of the Public Service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Force.
TimberWest units were unchanged at $6.07 Tuesday afternoon on the Toronto Stock Exchange.
Source: http://www.google.com/hostednews/canadianpress/article/ALeqM5jFux7viKS52xT8eNl-4DYvcBctQg?docId=7148404
Thursday, 9 June 2011
Timberland Launches Forestry Investment Fund
The Fund aims to provide UK and European institutional and professional investors with attractive real returns that have minimal correlation with other traditional asset-classes.
Registered in Luxembourg as a Specialised Investment Fund (SIF), Timberland Investment Resources (TIR) Europe's investment strategy is to focus on building a diversified global portfolio of timberland properties and related assets in Europe, the US and Latin America, as well as more niche market opportunities. TIR-Europe will target a total return of 8-10% per annum net of fees and operating costs, but prior to any investor tax.
Hugh Humfrey, Managing Partner of TIR-Europe, comments: “Our aim for the Fund is to generate above market returns on a risk-adjusted basis for its investors, while focusing on managing risk by building a diversified global portfolio of forest properties that generate cash flows and long-term asset appreciation.”
The investment team will operate with a disciplined and cautious style, underpinned by extensive economic research and forest biometric analysis to identify long-term trends and market inefficiencies.TIR-Europe places a strong emphasis on environmental stewardship and will manage all of the Fund’s investments in accordance with sound principles of natural resource sustainability.
Humfrey adds: “Forestry investments offer excellent inflation hedging characteristics and have generated a long history of stable investment performance consisting of both current income and asset appreciation. As a result, the asset-class tends to offer a great deal of flexibility from both a tax and cash flow planning standpoint, which makes it very compelling given the prevailing market conditions.”
The minimum investment in the fund is $2m and there is a 1.5% annual management fee.
Founded in 2010, TIR-Europe is a privately-owned investment management partnership specialising in forestry and related assets. It forms the European investment business of US-based Timberland Investment Resources which was founded in 2003 and is an independent forestry investment firm with over $750m under management.
Read more: http://www.ifaonline.co.uk/international-investment/news/2076624/timberland-launches-luxembourg-global-forestry-fund#ixzz1OmV4z9jl
IFA Online - News, blogs and analysis for IFAs. Visit the website now.
Registered in Luxembourg as a Specialised Investment Fund (SIF), Timberland Investment Resources (TIR) Europe's investment strategy is to focus on building a diversified global portfolio of timberland properties and related assets in Europe, the US and Latin America, as well as more niche market opportunities. TIR-Europe will target a total return of 8-10% per annum net of fees and operating costs, but prior to any investor tax.
Hugh Humfrey, Managing Partner of TIR-Europe, comments: “Our aim for the Fund is to generate above market returns on a risk-adjusted basis for its investors, while focusing on managing risk by building a diversified global portfolio of forest properties that generate cash flows and long-term asset appreciation.”
The investment team will operate with a disciplined and cautious style, underpinned by extensive economic research and forest biometric analysis to identify long-term trends and market inefficiencies.TIR-Europe places a strong emphasis on environmental stewardship and will manage all of the Fund’s investments in accordance with sound principles of natural resource sustainability.
Humfrey adds: “Forestry investments offer excellent inflation hedging characteristics and have generated a long history of stable investment performance consisting of both current income and asset appreciation. As a result, the asset-class tends to offer a great deal of flexibility from both a tax and cash flow planning standpoint, which makes it very compelling given the prevailing market conditions.”
The minimum investment in the fund is $2m and there is a 1.5% annual management fee.
Founded in 2010, TIR-Europe is a privately-owned investment management partnership specialising in forestry and related assets. It forms the European investment business of US-based Timberland Investment Resources which was founded in 2003 and is an independent forestry investment firm with over $750m under management.
Read more: http://www.ifaonline.co.uk/international-investment/news/2076624/timberland-launches-luxembourg-global-forestry-fund#ixzz1OmV4z9jl
IFA Online - News, blogs and analysis for IFAs. Visit the website now.
Wednesday, 8 June 2011
Huge Timber Investment in Australia
STATE Treasurer Jack Snelling has met with a Victorian private plantation management company that is emerging as one of the possible contenders in the multi-million-dollar forward sale of the region’s plantation estate.
Mr Snelling met on May 18 with representatives from Hancock Victoria Plantations (HVP), which is part of a global timber resource management group.
According to Mr Snelling’s office, Hancock is the only potential buyer he has met with to date.
“It was best described as a preliminary meeting and it would be more than likely that he would meet with any other interested parties down the track, but Hancocks was the first one,” a spokesperson said.
Mr Snelling — who attended yesterday’s first roundtable forestry meeting in Adelaide with key South East stakeholders — announced last month that the government planned to move ahead with the forward sale, despite widespread outcry.
HVP — which has a regional office in Mount Gambier and owns some softwood plantations in the South East — is one of Australia’s largest privately-owned plantation timber companies and is owned jointly by Australian and US superannuation and investment funds.
The Hancock Timber Resource Group also purchased 204,000ha of Queensland Government-owned plantations last year for $603m under a 99-year lease.
While the government has not revealed the reserve sale price for South Australia’s sprawling plantation estate, the price is reportedly between $500-$700m.
No comment was available from Hancock on the issue.
According to a local timber industry expert, Hancock could be interested in the historic deal after buying the rights of Victoria’s plantation estate in 1996 for 99 years.
“They could be well-positioned to make an offer,” said an industry insider, who did not want to be named.
They said Hancock had a track record in managing plantation estates in Victoria.
Meanwhile, another forestry expert — who also did not want to be named — said Hancock had done an “excellent job” in managing plantations in Victoria.
“They could be interested, but it is not confirmed,” the industry person said.
According to the company’s website, HVP manages around 245,000 hectares of land across Victoria, including 50,000 hectares of native vegetation for conservation.
“HVP annually supplies some three million tonnes of softwood (pine) and 300,000 tonnes of hardwood (eucalypt) to sawmillers, panel producers and pulp and paper mills in Australia and overseas,” the website said.
“Each year, HVP plantation timber is replacing half a billion dollars of potential forest product imports into Australia, supporting local investment and employment.”
The company supplies around 1.5 million tonnes a year of sawlogs and pulpwood to sawmills in Victoria’s Gippsland region, including Australian Paper’s Maryvale pulp and paper mill.
Through a joint venture business, Softwood Plantation Exporters (SPE) in Geelong, which processes plantation pine thinnings and sawmill residues for export, HVP also contributes to Australia’s export performance in expanding overseas markets
According to the company’s website, it also has an extensive firefighting commitment to the sector.
HVP fire crews are part of the Victorian Country Fire Authority, registered as CFA Forest Industry Brigades.
“As active members of the CFA, our fire crews are trained in wildfire control and work alongside other CFA volunteers on the fire frontline,” the company’s website said.
The company’s firefighting effort includes 235 trained firefighters, 40 support staff, 18 fire tankers, 32 smaller fire fighting appliances, 28 bulldozers available, six graders available, four fire towers, one aerial fire surveillance plane and two first attack helicopters.
Hancock Timber Resource Group is a global timberland investment management organisation based in Boston, Massachusetts, that manages more than two million hectares of timberland in Australia, New Zealand, Canada, Brazil and the United States.
Source: http://www.borderwatch.com.au/archives/9278
Mr Snelling met on May 18 with representatives from Hancock Victoria Plantations (HVP), which is part of a global timber resource management group.
According to Mr Snelling’s office, Hancock is the only potential buyer he has met with to date.
“It was best described as a preliminary meeting and it would be more than likely that he would meet with any other interested parties down the track, but Hancocks was the first one,” a spokesperson said.
Mr Snelling — who attended yesterday’s first roundtable forestry meeting in Adelaide with key South East stakeholders — announced last month that the government planned to move ahead with the forward sale, despite widespread outcry.
HVP — which has a regional office in Mount Gambier and owns some softwood plantations in the South East — is one of Australia’s largest privately-owned plantation timber companies and is owned jointly by Australian and US superannuation and investment funds.
The Hancock Timber Resource Group also purchased 204,000ha of Queensland Government-owned plantations last year for $603m under a 99-year lease.
While the government has not revealed the reserve sale price for South Australia’s sprawling plantation estate, the price is reportedly between $500-$700m.
No comment was available from Hancock on the issue.
According to a local timber industry expert, Hancock could be interested in the historic deal after buying the rights of Victoria’s plantation estate in 1996 for 99 years.
“They could be well-positioned to make an offer,” said an industry insider, who did not want to be named.
They said Hancock had a track record in managing plantation estates in Victoria.
Meanwhile, another forestry expert — who also did not want to be named — said Hancock had done an “excellent job” in managing plantations in Victoria.
“They could be interested, but it is not confirmed,” the industry person said.
According to the company’s website, HVP manages around 245,000 hectares of land across Victoria, including 50,000 hectares of native vegetation for conservation.
“HVP annually supplies some three million tonnes of softwood (pine) and 300,000 tonnes of hardwood (eucalypt) to sawmillers, panel producers and pulp and paper mills in Australia and overseas,” the website said.
“Each year, HVP plantation timber is replacing half a billion dollars of potential forest product imports into Australia, supporting local investment and employment.”
The company supplies around 1.5 million tonnes a year of sawlogs and pulpwood to sawmills in Victoria’s Gippsland region, including Australian Paper’s Maryvale pulp and paper mill.
Through a joint venture business, Softwood Plantation Exporters (SPE) in Geelong, which processes plantation pine thinnings and sawmill residues for export, HVP also contributes to Australia’s export performance in expanding overseas markets
According to the company’s website, it also has an extensive firefighting commitment to the sector.
HVP fire crews are part of the Victorian Country Fire Authority, registered as CFA Forest Industry Brigades.
“As active members of the CFA, our fire crews are trained in wildfire control and work alongside other CFA volunteers on the fire frontline,” the company’s website said.
The company’s firefighting effort includes 235 trained firefighters, 40 support staff, 18 fire tankers, 32 smaller fire fighting appliances, 28 bulldozers available, six graders available, four fire towers, one aerial fire surveillance plane and two first attack helicopters.
Hancock Timber Resource Group is a global timberland investment management organisation based in Boston, Massachusetts, that manages more than two million hectares of timberland in Australia, New Zealand, Canada, Brazil and the United States.
Source: http://www.borderwatch.com.au/archives/9278
Investing in Timber: Perceptions vs. Realities
As investors have grappled with uncertain markets in recent years, interest in timberland investing has grown dramatically.
Despite its impressive growth and performance, however, timberland remains a somewhat misunderstood investment opportunity. We have covered some of the most common misperceptions about the asset class in the source article.
Let me add two additional ones:
Myth: Plantation forests (those consisting of trees of the same age and species) yield higher returns than forests that are managed in a more natural mixed age/mixed species state.
Reality: Plantation forests typically produce faster growth rates and higher volumes of timber, but these characteristics alone do not translate into higher returns. Timberland investments are usually valued on a discounted cash flow (DCF) basis. This tends to level return expectations across different forest types and investment locations. Local timber and land market conditions have also a considerable impact on LT investment returns. For instance, a forest stocked with trees of varying ages and species may have a component of high quality hardwoods that are in demand for the production of premium furniture. This timber is likely to sell at a higher unit cost than timber grown in a plantation forest that is being managed to produce lower-valued pulpwood. In addition, bare land values are often considerably higher for the natural, mixed age/mixed species forest because of alternative land use pressures, such as conservation, recreation and rural home development.
Myth: The capture of higher and better use (HBU) land values almost always entails conversion of a forest for purposes of development.
Reality: A forest’s value is determined by the context in which it exists. Forests in proximity to growing metropolitan areas often see their underlying land values eclipse their values as timber production assets. In addition, population and commercial expansion tends to be accompanied by increased public pressure to protect lands for conservation and recreation. For timberland investors, it is essential to determine the “HBU” of a forest asset and to structure one’s management approach accordingly. In some cases, it may entail selling some land for development. In others, it may entail working with public agencies or private conservation groups. Regardless of the prevailing “HBU” scenario confronting an investor, the goal is to respond to land-use market demands in a socially and environmentally responsible fashion and to create additional value in the process.
Timberland is an exciting investment sector.but above all requires a timberland manager with proven knowhow, disciplined investment process and genuinely transparent with interests that are aligned with those of the investors.
Source: http://www.glgroup.com/News/Investing-in-Timberland---Perceptions-vs.-Realities-54203.html
Despite its impressive growth and performance, however, timberland remains a somewhat misunderstood investment opportunity. We have covered some of the most common misperceptions about the asset class in the source article.
Let me add two additional ones:
Myth: Plantation forests (those consisting of trees of the same age and species) yield higher returns than forests that are managed in a more natural mixed age/mixed species state.
Reality: Plantation forests typically produce faster growth rates and higher volumes of timber, but these characteristics alone do not translate into higher returns. Timberland investments are usually valued on a discounted cash flow (DCF) basis. This tends to level return expectations across different forest types and investment locations. Local timber and land market conditions have also a considerable impact on LT investment returns. For instance, a forest stocked with trees of varying ages and species may have a component of high quality hardwoods that are in demand for the production of premium furniture. This timber is likely to sell at a higher unit cost than timber grown in a plantation forest that is being managed to produce lower-valued pulpwood. In addition, bare land values are often considerably higher for the natural, mixed age/mixed species forest because of alternative land use pressures, such as conservation, recreation and rural home development.
Myth: The capture of higher and better use (HBU) land values almost always entails conversion of a forest for purposes of development.
Reality: A forest’s value is determined by the context in which it exists. Forests in proximity to growing metropolitan areas often see their underlying land values eclipse their values as timber production assets. In addition, population and commercial expansion tends to be accompanied by increased public pressure to protect lands for conservation and recreation. For timberland investors, it is essential to determine the “HBU” of a forest asset and to structure one’s management approach accordingly. In some cases, it may entail selling some land for development. In others, it may entail working with public agencies or private conservation groups. Regardless of the prevailing “HBU” scenario confronting an investor, the goal is to respond to land-use market demands in a socially and environmentally responsible fashion and to create additional value in the process.
Timberland is an exciting investment sector.but above all requires a timberland manager with proven knowhow, disciplined investment process and genuinely transparent with interests that are aligned with those of the investors.
Source: http://www.glgroup.com/News/Investing-in-Timberland---Perceptions-vs.-Realities-54203.html
Trees Offer Solid Investment Returns
Investors seeking the great prize of uncorrelated returns plus the inflation protection supposedly promised by commodities have recently had to develop nerves of steel.
Those who favour the sector continue to insist that, in the long term, prices are driven by real demand for raw materials from emerging markets, rather than speculation on price rises. However, in the shorter term, volatility looks set to stay.
Pension funds, which understandably have weaker stomachs for the roller-coaster ride, are seeking alternatives. One is timberland, which, like other commodities, is seen to offer protection against inflation.
As an added bonus for pension funds looking to take into account environmental, social and governance factors, timberland offers “explicit opportunities” as a sustainable investment, according to Mercer, the investment consultant.
Although, it also cautioned, in a report published this year, that where investments are in emerging markets, there may be higher environmental and social risks.
Timberland has been an investible asset class in the US since the mid-1980s, according to Mason Browne, director of operations, global timber acquisitions at Four Winds Capital Management, which manages the UK-listed Phaunos Timber Fund.
Phaunos, named after a classical forest god, became fully invested last year, having been formed in September 2006. It raised £59m ($96m) from institutions in its initial public offering before listing on the Alternative Investment Market in December that year.
The company, which reports in dollars, moved to the LSE main market in June 2008 and recently reported net asset value of $594m on December 31 2010, up from $575m the year before. It has announced its first dividend of 2 cents a share.
Unlike Phaunos, which Mr Browne explains has a global investment strategy and is attempting to gain exposure to emerging markets, the majority of timberland investment companies are US-based and invested in US timber.
This constitutes one of the risks in the sector – heavy exposure to the US dollar and housing market. Opportunities outside the US are limited but growing.
The UN Food and Agriculture Organisation estimates that global trade in timber is worth more than $200bn, about 1 per cent of world GDP.
“There is a huge correlation between GDP and wood consumption,” says Mr Browne.
Timberland offers some protection against fluctuations in demand, he explains. “It doesn’t trade at the spot price of lumber. It also offers a low correlation with other asset classes and a high correlation with inflation.”
The main thing investors have to bear in mind is that timber is an illiquid asset class.
Short term investors and timberland do not go together, says Simon Fox, principal at Mercer’s alternatives boutique.
He says the sector tends to require investment periods of 10-15 years. Mercer tracks about 65 timberland investment managers, most of them in the US, although it finds the global opportunities most compelling – particularly the growth of demand from China and timberland’s growing significance as a “carbon-neutral” fuel source.
“By owning the forest, you are earning that return from the growth of trees and any rise in the price of timber,” says Mr Fox.
The main risk is pricing, which means investors should ensure there is strong investment management.
Timberland also carries physical risks, from fires, hurricanes and even insect blight. Currency risk and taxation should also be taken into account.
However, there are also advantages.
“With timberland, you can control when you take it to market,” says Mr Fox.
“Unlike an agricultural commodity, which has to be harvested, with timber you can leave it on the stump.”
Eva Greger, managing director of GMO Renewable Resources, which has more than $3bn in timber assets, agrees.
“Timber provides a steady yield. The value of that yield is tied to commodity prices and the timing of the yield can be managed – you can cut the trees sooner or let them grow older,” she explains.
She says the asset class appeals to investors with longer time horizons, such as pension plans, who are seeking to hedge inflation risk by holding physical assets.
She says it also appeals to investors with an interest in sustainability and the positive environmental benefits of growing trees.
The NCREIF timber index has shown returns of just under 7 per cent over the past decade.
“But it includes only US timberland, which is considered low risk and has a commensurately low expected return. Our returns have been higher,” says Ms Greger, saying that GMO’s investments in countries such as New Zealand, Australia and Uruguay have paid off.
Source: http://www.ft.com/cms/s/0/b74cc33a-8d7a-11e0-bf0b-00144feab49a,s01=1.html
Those who favour the sector continue to insist that, in the long term, prices are driven by real demand for raw materials from emerging markets, rather than speculation on price rises. However, in the shorter term, volatility looks set to stay.
Pension funds, which understandably have weaker stomachs for the roller-coaster ride, are seeking alternatives. One is timberland, which, like other commodities, is seen to offer protection against inflation.
As an added bonus for pension funds looking to take into account environmental, social and governance factors, timberland offers “explicit opportunities” as a sustainable investment, according to Mercer, the investment consultant.
Although, it also cautioned, in a report published this year, that where investments are in emerging markets, there may be higher environmental and social risks.
Timberland has been an investible asset class in the US since the mid-1980s, according to Mason Browne, director of operations, global timber acquisitions at Four Winds Capital Management, which manages the UK-listed Phaunos Timber Fund.
Phaunos, named after a classical forest god, became fully invested last year, having been formed in September 2006. It raised £59m ($96m) from institutions in its initial public offering before listing on the Alternative Investment Market in December that year.
The company, which reports in dollars, moved to the LSE main market in June 2008 and recently reported net asset value of $594m on December 31 2010, up from $575m the year before. It has announced its first dividend of 2 cents a share.
Unlike Phaunos, which Mr Browne explains has a global investment strategy and is attempting to gain exposure to emerging markets, the majority of timberland investment companies are US-based and invested in US timber.
This constitutes one of the risks in the sector – heavy exposure to the US dollar and housing market. Opportunities outside the US are limited but growing.
The UN Food and Agriculture Organisation estimates that global trade in timber is worth more than $200bn, about 1 per cent of world GDP.
“There is a huge correlation between GDP and wood consumption,” says Mr Browne.
Timberland offers some protection against fluctuations in demand, he explains. “It doesn’t trade at the spot price of lumber. It also offers a low correlation with other asset classes and a high correlation with inflation.”
The main thing investors have to bear in mind is that timber is an illiquid asset class.
Short term investors and timberland do not go together, says Simon Fox, principal at Mercer’s alternatives boutique.
He says the sector tends to require investment periods of 10-15 years. Mercer tracks about 65 timberland investment managers, most of them in the US, although it finds the global opportunities most compelling – particularly the growth of demand from China and timberland’s growing significance as a “carbon-neutral” fuel source.
“By owning the forest, you are earning that return from the growth of trees and any rise in the price of timber,” says Mr Fox.
The main risk is pricing, which means investors should ensure there is strong investment management.
Timberland also carries physical risks, from fires, hurricanes and even insect blight. Currency risk and taxation should also be taken into account.
However, there are also advantages.
“With timberland, you can control when you take it to market,” says Mr Fox.
“Unlike an agricultural commodity, which has to be harvested, with timber you can leave it on the stump.”
Eva Greger, managing director of GMO Renewable Resources, which has more than $3bn in timber assets, agrees.
“Timber provides a steady yield. The value of that yield is tied to commodity prices and the timing of the yield can be managed – you can cut the trees sooner or let them grow older,” she explains.
She says the asset class appeals to investors with longer time horizons, such as pension plans, who are seeking to hedge inflation risk by holding physical assets.
She says it also appeals to investors with an interest in sustainability and the positive environmental benefits of growing trees.
The NCREIF timber index has shown returns of just under 7 per cent over the past decade.
“But it includes only US timberland, which is considered low risk and has a commensurately low expected return. Our returns have been higher,” says Ms Greger, saying that GMO’s investments in countries such as New Zealand, Australia and Uruguay have paid off.
Source: http://www.ft.com/cms/s/0/b74cc33a-8d7a-11e0-bf0b-00144feab49a,s01=1.html
Thursday, 2 June 2011
The misperceptions of forestry investments
Download your FREE guide to Forestry Investments and Timber Investments here
In addition, these returns have a low correlation with those of other financial assets, making it an effective portfolio diversifier, and its inflation-hedging attributes also provide capital preservation benefits.
Nevertheless, investors are still learning about the asset class and some of their most common misperceptions are discussed below.
Perception: Forestry has matured as an asset class and few opportunities exist for new investors, particularly in the United States
Reality: Approximately 15 per cent of the world's investment-grade forests are managed as institutional investments. On a market capitalisation basis, almost 75 per cent of the world's investable timberland (an estimated $212bn (£130.96bn) out of a total of $290bn) is in the US, which has the deepest, most diverse and most fragmented land and timber markets in the world.
By comparison, Brazil, Chile, Australia and New Zealand combined represent less than $60bn of the world total. Of the 64m hectares of forest available for ownership in the US, only 20 per cent are currently owned by institutional investors. In short, opportunities still exist in the US market and any timberland investment program is likely to be strengthened by a US allocation.
This is also true for those concerned about FIRPTA (Foreign Investment Real Property Tax Act of 1980) because, even allowing for the tax’s impact, the US market still provides most investors with attractive risk-adjusted returns.
Perception: Forestry investment is not environmentally responsible
Reality: Forests are biological assets that must be actively and sustainably managed to ensure that their investment potential is optimised. In the case of natural mixed-species forests, which are often found in colder climates, this often entails promoting natural regeneration and employing harvesting techniques that protect soils and promote residual tree growth.
In the case of plantation forests, which are normally found in warmer climates, the use of intensive forestry practices, planting single tree species as crops and cultivating them on shorter growth cycles, is the norm. Regardless of the circumstances, forests are renewable assets and one of the few green investments that actually reward investors for practicing responsible stewardship.
Perception: Global diversification is the key to reducing risk
Reality: Geographic diversification is important, but achieving it does not require owning timberland around the world. Portfolio risk can be reduced by 21 per cent by owning forests in five different countries. However, the same results can be achieved by investing in just five of the 21 sub-regions of the US South, which has the world’s largest investable land base with 35.2m hectares. Furthermore, such a portfolio is less expensive to manage and poses fewer political, regulatory, tax and currency challenges.
Perception: Forestry is less liquid than other alternative assets
Reality: Forests are no less liquid than many other types of alternative investments and the asset class continues to experience significant capital inflows. In addition, the capacity to generate ongoing income from the sale of timber and non-timber products reduces the holding risks associated with a forest investment, a feature that also comes with unique optionality.
A forest is both a factory and a warehouse. It produces increasing amounts of higher-valued timber through time because of biological growth (larger trees are more valuable than smaller trees because they can be used to produce more and higher-valued products) and it stores that value on the stump, providing investors with the ability to time the monetisation of cash flows. This means even when timber markets are challenging, a timberland investment can increase in value. By comparison, when a traditional commercial real estate asset loses lease income due to vacancy, that income can never be recovered.
Perception: Forestry investments with higher biological growth rates produce higher returns
Reality: There is no direct relationship between higher growth rates and higher returns. Under a common discount rate, prices for timberland assets adjust to account for higher or lower levels of biological productivity.
Perception: Forestry’s capacity to serve as an inflation hedge is speculative
Reality: Like agricultural commodities, precious metals and oil and gas, forestry is a real asset and real assets are proven inflation hedges. Wood-based products permeate every sector of the global economy and according to recent analyses comparing the US consumer price index against timberland returns (as measured by the NCREIF Timberland index) there is a strong association between the two over periods of five years or longer.
Perception: Natural risks like weather, fire and insects are the greatest threats to performance
Reality: Estimates vary, but in an average year, institutionally-managed US forestry sustains financial losses of less than 0.03 per cent due to such natural events. Fire danger is reduced by maintaining fire breaks and access roads, while disease and insect infestations are managed by monitoring forest health and by promptly harvesting affected trees. Finally, while catastrophic events like hurricanes and tornadoes are impossible to avoid, these risks are mitigated by diversifying holdings over broad geographic areas and by developing salvage harvest plans that can be implemented quickly in response to such events.
Perception: Timber Reits and exchange traded funds offer greater liquidity and the same benefits as private market options.
Reality: The actual liquidity of such vehicles depends on their size and market capitalisation and whether they are subject to exchange restrictions, all of which impact trading volume. However, when compared to private market options, such vehicles provide far less control over the asset composition of one’s timberland allocation because investors cannot influence investment strategy.
Furthermore, many such vehicles are not "pure-play" timberland investments because they also own manufacturing and distribution assets. Finally, returns for timber Reits and other exchange traded funds are highly correlated with the performance of broader investment markets, which means they do not offer the same portfolio diversification and inflation-hedging benefits of private market options.
Forestry is an expanding and exciting investment sector. Looking ahead, as it assumes a more prominent profile in institutional investment portfolios, investors will acquire a more informed perspective of its risk and return characteristics and there will be far greater understanding of its unique operational and investment attributes.
Download your FREE guide to Forestry Investments and Timber Investments here
Source FTAdvisor.com
In addition, these returns have a low correlation with those of other financial assets, making it an effective portfolio diversifier, and its inflation-hedging attributes also provide capital preservation benefits.
Nevertheless, investors are still learning about the asset class and some of their most common misperceptions are discussed below.
Perception: Forestry has matured as an asset class and few opportunities exist for new investors, particularly in the United States
Reality: Approximately 15 per cent of the world's investment-grade forests are managed as institutional investments. On a market capitalisation basis, almost 75 per cent of the world's investable timberland (an estimated $212bn (£130.96bn) out of a total of $290bn) is in the US, which has the deepest, most diverse and most fragmented land and timber markets in the world.
By comparison, Brazil, Chile, Australia and New Zealand combined represent less than $60bn of the world total. Of the 64m hectares of forest available for ownership in the US, only 20 per cent are currently owned by institutional investors. In short, opportunities still exist in the US market and any timberland investment program is likely to be strengthened by a US allocation.
This is also true for those concerned about FIRPTA (Foreign Investment Real Property Tax Act of 1980) because, even allowing for the tax’s impact, the US market still provides most investors with attractive risk-adjusted returns.
Perception: Forestry investment is not environmentally responsible
Reality: Forests are biological assets that must be actively and sustainably managed to ensure that their investment potential is optimised. In the case of natural mixed-species forests, which are often found in colder climates, this often entails promoting natural regeneration and employing harvesting techniques that protect soils and promote residual tree growth.
In the case of plantation forests, which are normally found in warmer climates, the use of intensive forestry practices, planting single tree species as crops and cultivating them on shorter growth cycles, is the norm. Regardless of the circumstances, forests are renewable assets and one of the few green investments that actually reward investors for practicing responsible stewardship.
Perception: Global diversification is the key to reducing risk
Reality: Geographic diversification is important, but achieving it does not require owning timberland around the world. Portfolio risk can be reduced by 21 per cent by owning forests in five different countries. However, the same results can be achieved by investing in just five of the 21 sub-regions of the US South, which has the world’s largest investable land base with 35.2m hectares. Furthermore, such a portfolio is less expensive to manage and poses fewer political, regulatory, tax and currency challenges.
Perception: Forestry is less liquid than other alternative assets
Reality: Forests are no less liquid than many other types of alternative investments and the asset class continues to experience significant capital inflows. In addition, the capacity to generate ongoing income from the sale of timber and non-timber products reduces the holding risks associated with a forest investment, a feature that also comes with unique optionality.
A forest is both a factory and a warehouse. It produces increasing amounts of higher-valued timber through time because of biological growth (larger trees are more valuable than smaller trees because they can be used to produce more and higher-valued products) and it stores that value on the stump, providing investors with the ability to time the monetisation of cash flows. This means even when timber markets are challenging, a timberland investment can increase in value. By comparison, when a traditional commercial real estate asset loses lease income due to vacancy, that income can never be recovered.
Perception: Forestry investments with higher biological growth rates produce higher returns
Reality: There is no direct relationship between higher growth rates and higher returns. Under a common discount rate, prices for timberland assets adjust to account for higher or lower levels of biological productivity.
Perception: Forestry’s capacity to serve as an inflation hedge is speculative
Reality: Like agricultural commodities, precious metals and oil and gas, forestry is a real asset and real assets are proven inflation hedges. Wood-based products permeate every sector of the global economy and according to recent analyses comparing the US consumer price index against timberland returns (as measured by the NCREIF Timberland index) there is a strong association between the two over periods of five years or longer.
Perception: Natural risks like weather, fire and insects are the greatest threats to performance
Reality: Estimates vary, but in an average year, institutionally-managed US forestry sustains financial losses of less than 0.03 per cent due to such natural events. Fire danger is reduced by maintaining fire breaks and access roads, while disease and insect infestations are managed by monitoring forest health and by promptly harvesting affected trees. Finally, while catastrophic events like hurricanes and tornadoes are impossible to avoid, these risks are mitigated by diversifying holdings over broad geographic areas and by developing salvage harvest plans that can be implemented quickly in response to such events.
Perception: Timber Reits and exchange traded funds offer greater liquidity and the same benefits as private market options.
Reality: The actual liquidity of such vehicles depends on their size and market capitalisation and whether they are subject to exchange restrictions, all of which impact trading volume. However, when compared to private market options, such vehicles provide far less control over the asset composition of one’s timberland allocation because investors cannot influence investment strategy.
Furthermore, many such vehicles are not "pure-play" timberland investments because they also own manufacturing and distribution assets. Finally, returns for timber Reits and other exchange traded funds are highly correlated with the performance of broader investment markets, which means they do not offer the same portfolio diversification and inflation-hedging benefits of private market options.
Forestry is an expanding and exciting investment sector. Looking ahead, as it assumes a more prominent profile in institutional investment portfolios, investors will acquire a more informed perspective of its risk and return characteristics and there will be far greater understanding of its unique operational and investment attributes.
Download your FREE guide to Forestry Investments and Timber Investments here
Source FTAdvisor.com
Thursday, 26 May 2011
Alaska Permanent OKs putting $1.75 billion into alternative timber investments and forestry investments
Download your FREE guide to Timber Investments and Forestry investments here
Alaska Permanent Fund Corp., Juneau, approved allocating $1.75 billion to its alternative investment programs and authorized manager searches for timber and diversified inflation fund managers, confirmed Laura Achee, spokeswoman for the $40.4 billion fund.
Callan Associates, the fund’s general consultant, will assist with the searches for a timber manager and a diversified inflation manager, both new investments for the fund. How much will be invested in each portfolio hasn’t been determined, Ms. Achee said in a telephone interview.
Download your FREE guide to Timber Investments and Forestry investments here
“The board believes that alternative investments are important to complement traditional asset classes, adding diversification and improving the fund’s risk-adjusted rate of return,” Bill Moran, APFC board chairman, said in a news release. “For example, timber investments, an asset class that other state funds have been in for some time, show promise to add stability and long-term returns for the permanent fund.”
The board, at its regular meeting May 19-20, also approved allocating $750 million to corporate credit opportunities; $600 million in new private equity investments, which will be made through existing managers Pathway Capital Management and HarbourVest Partners; and $400 million to infrastructure investments, which could include a search for new infrastructure managers.
The fund noted that the private equity investments will be added to a previous $3.1 billion commitment the fund expects to have in place by June 30.
Download your FREE guide to Timber Investments and Forestry investments here
Ms. Achee said the three new commitments will be funded from the fund’s $25 billion corporate exposure asset class.
The board also authorized the fund to invest in credit opportunity funds via funds of funds, in addition to direct investments.
The fund’s target asset allocation is 36% equities, 23% bonds, 12% real estate, 6% private equity, 6% absolute return, 3% infrastructure, 2% cash and 12% other categories.
Download your FREE guide to Timber Investments and Forestry investments here
Read more: http://www.pionline.com/article/20110524/DAILY/110529960#ixzz1NSe1fq65
Alaska Permanent Fund Corp., Juneau, approved allocating $1.75 billion to its alternative investment programs and authorized manager searches for timber and diversified inflation fund managers, confirmed Laura Achee, spokeswoman for the $40.4 billion fund.
Callan Associates, the fund’s general consultant, will assist with the searches for a timber manager and a diversified inflation manager, both new investments for the fund. How much will be invested in each portfolio hasn’t been determined, Ms. Achee said in a telephone interview.
Download your FREE guide to Timber Investments and Forestry investments here
“The board believes that alternative investments are important to complement traditional asset classes, adding diversification and improving the fund’s risk-adjusted rate of return,” Bill Moran, APFC board chairman, said in a news release. “For example, timber investments, an asset class that other state funds have been in for some time, show promise to add stability and long-term returns for the permanent fund.”
The board, at its regular meeting May 19-20, also approved allocating $750 million to corporate credit opportunities; $600 million in new private equity investments, which will be made through existing managers Pathway Capital Management and HarbourVest Partners; and $400 million to infrastructure investments, which could include a search for new infrastructure managers.
The fund noted that the private equity investments will be added to a previous $3.1 billion commitment the fund expects to have in place by June 30.
Download your FREE guide to Timber Investments and Forestry investments here
Ms. Achee said the three new commitments will be funded from the fund’s $25 billion corporate exposure asset class.
The board also authorized the fund to invest in credit opportunity funds via funds of funds, in addition to direct investments.
The fund’s target asset allocation is 36% equities, 23% bonds, 12% real estate, 6% private equity, 6% absolute return, 3% infrastructure, 2% cash and 12% other categories.
Download your FREE guide to Timber Investments and Forestry investments here
Read more: http://www.pionline.com/article/20110524/DAILY/110529960#ixzz1NSe1fq65
Monday, 9 May 2011
Timber Investment and Forestry Investment - The Ultimate Agriculture Investment
From the Daily Crux Interview Series
Saturday, May 7, 2011
Download your FREE Timber Investment and Forestry Investment Guide here
The Daily Crux: You've done a tremendous amount of research on timberland investing over the years… and you've been a big proponent of this idea. What is so special about timberland?
Steve Sjuggerud: Yes… I've literally been all over the world researching timberland investing. I've spent hundreds of hours on it. I've recommended many timber stocks to my readers over the years. And I've personally invested in timberland.
There's a long list of reasons why investing in timberland is a great idea… and consistently produces big returns.
Download your FREE Timber Investment and Forestry Investment Guide here
First of all, trees grow year in and year out. Trees in good growing regions in the U.S. grow at 6%-8% per year. They grow through recessions. They grow through wars. They grow through stock and real estate crashes. They grow through everything. They give you built-in investment growth that isn't guaranteed with a stock.
Along with the tree growth, the price of wood has grown at a consistent rate throughout the years. It's extremely difficult for a company to increase the prices of its goods by 6% every year. But the price of wood, according to legendary money manager Jeremy Grantham, has increased by that amount for the last 100 years. Specifically, he says "stumpage" prices – the value of all the wood on the stump – have beaten inflation by 3% a year over the last century.
Another nice thing is timberland is a resource investment, but it's not a constantly depleting one like a gold mine or an oil well. Trees will grow back. It's a sustainable resource investment.
Download your FREE Timber Investment and Forestry Investment Guide here
And not to ramble on, but you should know, timber is uncorrelated to the stock market. It makes sense… the trees have never heard of the Nasdaq bubble… and they don't know what a "War on Terror" is. This makes timber a great place to park money in big portfolios… where you need diversification.
Crux: But what happens to your timberland investment in a down year, when lumber prices crash?
Sjuggerud: That's a great question. What happens when the market is slumping? When you can't get the price you need to make the business profitable? Did you just waste eight… 15… 25 years on an investment with nothing to show for it? The answer can be summed up in five words: "Bank it on the stump."
In the industry, it's a phrase that means if conditions aren't right for harvesting your crop, you just keep letting it grow. You keep the profits on the stump and wait for a more profitable time to sell your timber – most likely, when timber prices are in your favor.
Download your FREE Timber Investment and Forestry Investment Guide here
One of the great benefits of owning timberland is you don't have to harvest it every year. It's not like fruit, where it's ripe just once and then you have to pick it. Instead, it grows exponentially on the stump for years.
This is not to imply that timber is an absolutely risk-free investment… But with the ability to bank it on the stump, investing in timber does come with an extra safety net. "If the rain rains, the sun shines, the suckers grow," Jeremy Grantham once said. "If you don't want to sell, they get bigger and more expensive."
Crux: Those are tremendous attributes. How has timberland performed over the years?
Download your FREE Timber Investment and Forestry Investment Guide here
Sjuggerud: Take a look at this chart of the period from 1971 to 2010… which was filled with all sorts of bull and bear markets for stocks…
From 1971 to 2010, an investor in timber saw average annual returns of over 14% – turning $10,000 into over $1.5 million. That's better than stocks and bonds over the same period.
Here are the rough numbers on where timberland returns come from:
* 1% Land value increase
* 6% Biologic growth of the trees
* 3% "Stumpage" price increase (the price of the actual tree)
Crux: So timberland can serve as a good alternative investment when stocks are in a bear market?
Download your FREE Timber Investment and Forestry Investment Guide here
Sjuggerud: Absolutely. One of the worst-ever bear markets in stocks began in the late 1960s and lasted until about 1980. An investor in stocks during that time lost money, due to inflation.
However, as the table shows, an investor in timber never had a losing year during that period. More often than not, the returns were in the double-digits… with a 59% return in 1973 and a 49% return in 1977.
To sum up, timberland offers high returns… It is a sustainable asset that can provide returns for centuries… It has no correlation to the stock market… It's less volatile… And it constantly grows in value.
Crux: So, how do you go about buying timberland? What's the easiest way to own it?
Download your FREE Timber Investment and Forestry Investment Guide here
Sjuggerud: It's important to point out that rather than just going out and buying a forest, you want to make sure to invest in managed timberland.
The reason it's important to make the distinction is simple: Managed timberlands, according to a study conducted by the University of Georgia and published in the Journal of Forestry, generate returns almost four times higher than non-managed lands.
With managed timberlands, you get just what it says. You get professional managers who cultivate the trees, look after them, and harvest the trees and their products at the right time.
Download your FREE Timber Investment and Forestry Investment Guide here
They look to earn extra cash by selling hunting rights to the land. They harvest and sell the straw and seeds that fall from the trees. Good managers even look to sell chunks of your timberland if a real estate developer comes along and offers a sky-high premium for your land.
My point is, everything on the "tree farm" – even the tree farm itself – is for sale. You can make these types of managed timberland investments privately, or there are usually a handful of publicly traded timberland companies on the exchange at any given time.
The big names in the U.S. are Weyerhaeuser (WY), Rayonier (RYN), and Plum Creek (PCL). To spread your risk, you can buy the big U.S. names through an exchange traded fund (or ETF) with the symbol WOOD. You can get much broader international exposure through the Guggenheim timber ETF (symbol: CUT).
Download your FREE Timber Investment and Forestry Investment Guide here
Crux: There are many good points to timberland investing. Any negative ones?
Sjuggerud: When you compare the built-in yield of timberland to any other asset class out there, timberland wins hands-down.
The only problem is timeframe – you can sell a stock or bond immediately, but you can't get rid of acres of timber like that. It's illiquid. You've got to hold it for some time to maximize its value – the ideal timeframe is infinity. It's definitely not for traders… it's for long-term thinking investors.
And keep in mind… like all investments, you have to make sure you buy timberland at a reasonable price.
Crux: Thanks Steve.
Sjuggerud: You're welcome.
Source: Gold Speculator
Download your FREE Timber Investment and Forestry Investment Guide here
Saturday, May 7, 2011
Download your FREE Timber Investment and Forestry Investment Guide here
The Daily Crux: You've done a tremendous amount of research on timberland investing over the years… and you've been a big proponent of this idea. What is so special about timberland?
Steve Sjuggerud: Yes… I've literally been all over the world researching timberland investing. I've spent hundreds of hours on it. I've recommended many timber stocks to my readers over the years. And I've personally invested in timberland.
There's a long list of reasons why investing in timberland is a great idea… and consistently produces big returns.
Download your FREE Timber Investment and Forestry Investment Guide here
First of all, trees grow year in and year out. Trees in good growing regions in the U.S. grow at 6%-8% per year. They grow through recessions. They grow through wars. They grow through stock and real estate crashes. They grow through everything. They give you built-in investment growth that isn't guaranteed with a stock.
Along with the tree growth, the price of wood has grown at a consistent rate throughout the years. It's extremely difficult for a company to increase the prices of its goods by 6% every year. But the price of wood, according to legendary money manager Jeremy Grantham, has increased by that amount for the last 100 years. Specifically, he says "stumpage" prices – the value of all the wood on the stump – have beaten inflation by 3% a year over the last century.
Another nice thing is timberland is a resource investment, but it's not a constantly depleting one like a gold mine or an oil well. Trees will grow back. It's a sustainable resource investment.
Download your FREE Timber Investment and Forestry Investment Guide here
And not to ramble on, but you should know, timber is uncorrelated to the stock market. It makes sense… the trees have never heard of the Nasdaq bubble… and they don't know what a "War on Terror" is. This makes timber a great place to park money in big portfolios… where you need diversification.
Crux: But what happens to your timberland investment in a down year, when lumber prices crash?
Sjuggerud: That's a great question. What happens when the market is slumping? When you can't get the price you need to make the business profitable? Did you just waste eight… 15… 25 years on an investment with nothing to show for it? The answer can be summed up in five words: "Bank it on the stump."
In the industry, it's a phrase that means if conditions aren't right for harvesting your crop, you just keep letting it grow. You keep the profits on the stump and wait for a more profitable time to sell your timber – most likely, when timber prices are in your favor.
Download your FREE Timber Investment and Forestry Investment Guide here
One of the great benefits of owning timberland is you don't have to harvest it every year. It's not like fruit, where it's ripe just once and then you have to pick it. Instead, it grows exponentially on the stump for years.
This is not to imply that timber is an absolutely risk-free investment… But with the ability to bank it on the stump, investing in timber does come with an extra safety net. "If the rain rains, the sun shines, the suckers grow," Jeremy Grantham once said. "If you don't want to sell, they get bigger and more expensive."
Crux: Those are tremendous attributes. How has timberland performed over the years?
Download your FREE Timber Investment and Forestry Investment Guide here
Sjuggerud: Take a look at this chart of the period from 1971 to 2010… which was filled with all sorts of bull and bear markets for stocks…
From 1971 to 2010, an investor in timber saw average annual returns of over 14% – turning $10,000 into over $1.5 million. That's better than stocks and bonds over the same period.
Here are the rough numbers on where timberland returns come from:
* 1% Land value increase
* 6% Biologic growth of the trees
* 3% "Stumpage" price increase (the price of the actual tree)
Crux: So timberland can serve as a good alternative investment when stocks are in a bear market?
Download your FREE Timber Investment and Forestry Investment Guide here
Sjuggerud: Absolutely. One of the worst-ever bear markets in stocks began in the late 1960s and lasted until about 1980. An investor in stocks during that time lost money, due to inflation.
However, as the table shows, an investor in timber never had a losing year during that period. More often than not, the returns were in the double-digits… with a 59% return in 1973 and a 49% return in 1977.
To sum up, timberland offers high returns… It is a sustainable asset that can provide returns for centuries… It has no correlation to the stock market… It's less volatile… And it constantly grows in value.
Crux: So, how do you go about buying timberland? What's the easiest way to own it?
Download your FREE Timber Investment and Forestry Investment Guide here
Sjuggerud: It's important to point out that rather than just going out and buying a forest, you want to make sure to invest in managed timberland.
The reason it's important to make the distinction is simple: Managed timberlands, according to a study conducted by the University of Georgia and published in the Journal of Forestry, generate returns almost four times higher than non-managed lands.
With managed timberlands, you get just what it says. You get professional managers who cultivate the trees, look after them, and harvest the trees and their products at the right time.
Download your FREE Timber Investment and Forestry Investment Guide here
They look to earn extra cash by selling hunting rights to the land. They harvest and sell the straw and seeds that fall from the trees. Good managers even look to sell chunks of your timberland if a real estate developer comes along and offers a sky-high premium for your land.
My point is, everything on the "tree farm" – even the tree farm itself – is for sale. You can make these types of managed timberland investments privately, or there are usually a handful of publicly traded timberland companies on the exchange at any given time.
The big names in the U.S. are Weyerhaeuser (WY), Rayonier (RYN), and Plum Creek (PCL). To spread your risk, you can buy the big U.S. names through an exchange traded fund (or ETF) with the symbol WOOD. You can get much broader international exposure through the Guggenheim timber ETF (symbol: CUT).
Download your FREE Timber Investment and Forestry Investment Guide here
Crux: There are many good points to timberland investing. Any negative ones?
Sjuggerud: When you compare the built-in yield of timberland to any other asset class out there, timberland wins hands-down.
The only problem is timeframe – you can sell a stock or bond immediately, but you can't get rid of acres of timber like that. It's illiquid. You've got to hold it for some time to maximize its value – the ideal timeframe is infinity. It's definitely not for traders… it's for long-term thinking investors.
And keep in mind… like all investments, you have to make sure you buy timberland at a reasonable price.
Crux: Thanks Steve.
Sjuggerud: You're welcome.
Source: Gold Speculator
Download your FREE Timber Investment and Forestry Investment Guide here
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