Investors looking to diversify their portfolios and insure their wealth against the ravages of volatility in traditional markets will have encountered a range of forestry investments that promise to provide superior inflation and risk-adjusted returns for the long-term investor.
So how did the timber investments perform? And how does the smaller investor join this interesting alternative investment asset class?
First, let’s look at the past performance of forestry investments as measured by the NCREIF Timberland Index, one of the main timber investment indices; According to this key measure of return on investment in the industry, this asset class outperformed the S&P500 by nearly 37 percent in the 20 years from 1987 to 2007. Forestry investments returned 15.8 percent when stocks averaged 11.5 percent annually.
At the same time, returns from investments in timber and woodland have proven to be much lower volatility, an attractive feature for today’s investor.
Previously, most of the investment returns from forestry investments had been wiped out by larger, institutional investors such as pension funds, insurance companies and university foundations, which have collectively invested over $40 billion in timber over the past decade.
Well, let’s move on to the second question; How do smaller investors participate in such alternative investments?
According to a study by Professor John Caulfield of the University of Georgia, returns from forestry investments are tripled;
An increase in timber volume (biological growth of trees), accounting for about 61 percent of the ROI.
Land price appreciation only accounts for 6 percent of future returns.
The increase in per-unit timber prices provides the final 33 percent of investment returns for timber landowners.
Therefore, the best way to benefit from the performance of timber investments is to take ownership of the trees either directly or through a series of forestry mutual funds or other structures.
One way for the small investor to participate in timber investments is through a Real Estate Investment Trust (REIT). These investment structures are similar to funds in that investors can buy and sell shares in a stock exchange trust, with REITs buying and managing timber investment properties, but unlike regular companies, they must pay 90 percent of their earnings to investors through dividends.
Here are some examples of Timber REITs:
Plum Creek Timber is the largest privately owned timber landlord in the United States and the largest timber REIT with a market capitalization of approximately $5.6 billion, many investors have chosen it as their path to forest investments.
Potlatch is also a timber investment REIT.
Rayonier derives about 30 percent of its REIT earnings from timber.
Weyerhaeuser divested its paper and packaging business and will become a REIT by the end of the year.
Wells Timberland REIT is not open to the public, but can be purchased through Wells Real Estate Funds.
Another way for small investors to add forestry investments to their portfolios is to buy Exchange Traded Funds that try to track the performance of their timber returns. This is less direct than owning a timber land or investing in a timber REIT, as the ETF may also invest in shares of companies involved in the timber supply chain, including processors and distributors. This means that investing in forestry through ETFs exposes the investor to some of the volatility of the equity markets.
The Guggenheim Timber ETF owns approximately 25 stocks and REITs in the global lumber and paper products industry, with a 30% weighted US companies.
The S&P Global Timber and Forestry Index Fund owns 23 securities, 47 percent of which is invested in the United States.
Timber Investment Management Organizations (TIMO)
Those with more capital can participate in forestry investments through TIMOs, but most of these investment professionals require a minimum investment of $1 million to $5 million and a commitment to raise funds for up to 15 years. TIMOs primarily trade timber land assets, acquire suitable properties, manage them in a way that maximizes returns to investors, divests and distributes profits to shareholders.
Many experts believe that the active management style of TIMOs makes them more sensitive to market conditions than REITs, and therefore they do not tend to fall or rise at the same rate as the market.
Direct Forest Investments
Those with access to adequate capital and appropriate expert advice can invest in physical properties. Commercial timber plantations are complex operations that require skills, knowledge and expertise to maximize returns while reducing risk and managing them effectively.
For seat investors or those with less reserve capital