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Tuesday, 23 August 2011

Timberland: A True Growth Asset

Timberland, also referred to as forestry, provides a sound long-term investment in both low and high-inflationary environments.  A major attraction of investing in timberland is the competitive returns it offers in comparison with other asset classes on a risk-to-return basis. Timberland income can be used as a tool to balance returns from other asset classes such as stocks, bonds, real estate, private equity and hedge funds.

Forests are historically linked to long cycles and economic growth. Timberland prices have historically appreciated above the rate of inflation.  It is a tangible, cash-generative real asset.  It can form an effective diversification tool as part of any institutional investor’s long term portfolio.

Returns from timberland investments exceeded the S&P 500 Index for 11 of the past 20 years from 1990 through 2009. During that period, timberland compounded at an annual return of 11.75% versus 8.20% for the S&P500.  In addition, the returns from timberland offered lower volatility in comparison with the equity market.

Timberland investments can be local, regional, national or global in nature.  For example, there are opportunities to invest in timberland in Europe, North America, South America, Africa, Russia, Asia and Oceania.  Global wood consumption is expected to increase by 60% over the next 25 years.

The asset value of growing timber accumulates over time (assuming no adverse events) and apart from thinning and normal forest management will occur without any significant human or technological involvement.  The revenue stream is also flexible as the timing of harvesting and profile of the timber can to some extent be matched to market conditions and investor’s needs. 

A key feature about timberland is that biological growth accounts for more than 60% of historical returns.  Timber and land prices constitute the balance with about 15% each.

While some pension funds in the US and Europe have been substantial players in timberland for some time, it is still little understood and under-represented in most institutional investment portfolios.

Timberland can also provide environmental benefits as trees absorb carbon during their life and may therefore help counter global warming.  The carbon can remain locked into timber used for construction and other products being one of the few renewable raw materials used in construction.  When used as a fuel in place of coal, oil or gas, the use of timber can be effectively carbon negative.

Timberland investing sets out to achieve long term capital appreciation through the identification, acquisition and effective and effective and sustainable management of forestry.  It offers institutional investors:

·         The potential for long term capital appreciation;

·         A reduction in portfolio volatility by having a low correlation with equities;

·         Low correlations with other asset classes;

·         Effective inflation hedging;

·         Socially and environmentally responsible investment;

·         Tangible real assets; and

·         Secure land title


In addition to pure financial returns, significant quality of life benefits can accrue from timberland investing including:

·         The protection of the natural environment and timberland heritage by ensuring the role of forests and forestry in soil protection, erosion control, water regulation, carbon capture, improvement of air quality, mitigation of climate change effects, and conservation of biodiversity.

·         The promotion of the sustainable development of the forestry sector as a contribution to rural development and, in particular, to the creation and preservation of jobs in rural areas.

·         To enhance renewable forest management, such as increasing the use of sustainably produced wood and other forest products, as environment-friendly and climate-neutral sources of materials and energy.

Pension plans and other institutional investors have been putting timberland into real asset or inflation-hedging asset allocations, alongside infrastructure, commodities and inflation-protected bonds.  It could also be categorized as a sustainable or renewable investment allocation.

Building on significant scientific advances in silviculture, forest management practices depend on experienced professionals to integrate the biology of growing forests with financial management to achieve attractive economic returns for clients. Importantly, this must be done while managing the timberlands with a dedication to the stewardship of the land, water, and wildlife resources that have been entrusted to us all.

1 comment:

  1. Good post! Thanks for sharing this information I appreciate it. God bless!

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    ReplyDelete