Investors seeking to diversify their portfolios and insure their wealth against the ravages of volatility in traditional markets have most likely come across a variety of forest investments, which promise to deliver superior inflation-adjusted and risk-adjusted returns for the investor over time. long term.

But, how have the investments in wood behaved? And how does the small investor participate in this exciting alternative investment asset class?

First, let’s look at the past performance of forestry investments, as measured by one of the leading timber investment indices, the NCREIF Timberland Index; Based on this basic measure of industry investment returns, this asset class outperformed the S&P500 by 37% in the 20 years from 1987 to 2007. When stocks returned an average annual return of 11.5%, investments forestry generated 15.8%.

At the same time, returns from investing in timber and forests have been shown to show much less volatility, an attractive feature for today’s investor.

Previously, most returns from forest investments have been absorbed by larger institutional investors, such as pension funds, insurance companies, and university endowments, which have collectively placed more than $40 billion in forest investments in the past decade.

So to the second question; How do smaller investors participate in this type of alternative investment?

According to a study by Professor John Caulfield of the University of Georgia, the returns on forestry investments triple;

1. An increase in the volume of wood (biological growth of trees), which represents about 61 percent of the return on investment.
2. Land price appreciation, accounting for only 6 percent of future returns.
3. Increased per unit timber prices, generating the final 33% return on investment for timber land owners.

Therefore, the best way to harness the return on timber investments is to take ownership of the trees, either directly or through a variety of forest investment funds or other structures.

wood REITs

One way for small investors to participate in timber investments is through a Real Estate Investment Trust (REIT). These investment structures are like funds, in that investors can buy and sell shares in the trust on an exchange, the REIT buys and manages lumber investment properties, but unlike normal companies, you must pay 90 percent of its earnings to investors through dividends.

Some examples of wood REITs are:

Plum Creek Timber is the largest private owner of timber land in the US and the largest timber REIT with a market capitalization of around $5.6 billion, many investors have chosen this as their route to forestry investments .

Potlatch is also a timber investment REIT, while

Rayonier generates about 30 percent of its REIT earnings from lumber.

Weyerhaeuser has divested its paper and packaging businesses and will become a REIT by the end of the year.

The Wells Timberland REIT is not publicly traded, but may be available for purchase 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 timber yields. This is less straightforward than owning timber land or investing in a timber REIT, as the ETF can also invest in stocks 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 stock markets.

The Guggenheim Timber ETF owns around 25 stocks and REITs involved in the global wood and paper products industry with a 30% stake in US companies.

The S&P Global Timber & Forestry Index Fund owns 23 stocks and is 47 percent invested in the US.

Timber Investment Management Organizations (TIMOs)

Those with more capital available can participate in forest investments through TIMO, although most of these investment specialists require a minimum investment of $1 million to $5 million and a commitment to lock up funds for up to 15 years. OWLs essentially trade in timber assets, acquiring suitable properties, managing them to maximize returns for investors, disposing of them and distributing the proceeds to shareholders.

Many experts believe that the active management style of OWLs ensures that they can be more reactive to market conditions than REITs and therefore do not tend to rise and fall as much in line with the market.

Direct Forest Investments

Those with access to sufficient capital and the right expert advice can invest in physical property. Commercial timber plantations are complex operations that require skill, knowledge and experience to manage them effectively and maximize profit while minimizing risk.

For salon investors, or those with less capital to spare, many companies offer investors the opportunity to purchase or lease a small portion or parcel within a larger, professionally managed timber plantation. Investors typically acquire ownership of their parcel and trees through a lease, while the timber investment firm plants, manages and often harvests the trees on the investor’s behalf.

Options for investors vary from species to species and region to region, with current opportunities in Brazil, Panama, Costa Rica, Germany, Nicaragua and other more exotic locations such as Fiji.

Investors should beware, as many of these direct forestry investments carry huge commissions for sellers and developers, with many offering ‘agents’ up to 30 percent commission on the sale of plots to investors and, in many cases, without due diligence or even departures

In some cases, the author has seen investment forestry lots in Brazil packaged up and sold to investors for over £100,000 per hectare. The investor should seek the advice of an independent consultant who is experienced in this alternative investment asset class and who can present a full set of due diligence material, including an independent valuation of the forestry investment property on offer.

Summary

Investors choose forest investments because of their effect as a hedge against inflation and their ability to generate an uncorrelated return on investment over the long term.

Asset class performance is driven by demand for wood, weighed against global supplies, and over the long term, we are using wood at a faster rate than we can grow, making wood investments worthwhile. an attractive asset class for the investor seeking stable, long-term capital appreciation within their investment portfolio.

Investors looking for what type of forestry investment is right for them should consult an adviser who can demonstrate experience and knowledge within the sector.