Strengthen your portfolio with a few planks of wood.
I'm sure if I worked in forestry I'd love the fresh air, although it wouldn't be long before I did some serious damage to myself! But investing in forestry is a fascinating prospect -- call it 'armchair forestry' if you like. It never occurred to me that so many products or services, or means of generating revenue, could come from growing trees.
First, there's the obvious list -- wood products like pallets, veneer, furniture, pulp, paper, packaging, housing, infrastructure, etc. Then there are 'energy' or 'alternative energy' products -- wood for fuel, charcoal, carbon offsets, land for wind farming, etc.
Lastly, there are land uses such as leisure, agroforestry or 'crops between the trees', or sometimes natural resources. No part of a tree need be wasted with the 'co-products' that come from them.
Why timber?
Looking at this question there's a bit of a paradox to understand first -- prices for timber, or lumber, and forestry land prices do not correlate at all. Lumber has been in a long down-cycle, and is one of the most dismal commodity performers of the last decade, losing 32%. Lumber prices are the 'spot' prices paid -- so low construction means low demand means lower prices.
Forestry land values, however, as measured by a couple of indices (the UK-based Investment Property Databank and the US-based Timberland Total Return Index) have done very well over the last decade and indeed before that. When equities declined 29.9% in 2008, the Timberland Index was up 9%. When they declined by 22.3% in 2002 the Timberland Index went up 2%.
So why is timber land uncorrelated with stock markets? Partly it's based on anticipated future demand for timber, partly on environmental pressures and protections on 'old' forests, and partly because you don't have to cut down a tree if you can't get a good price for it. A tree increases both its size and value year on year if left 'on the stump'.
Remember the fence panel crisis?
Let's look at demand. Remember the fence panel crisis in Spring 2007? A winter of high winds here causing damage, and the Baltic States and Russia diverting their shipments of fence panels to China for a better price. Fence panels were being offered on the black market at £80 instead of £20.
Housing markets and construction in Western economies will come back up to restore demand, but the big story will be the demand from Asia Pacific urbanisation. The population balance in China is currently 60% rural and 40% urban dwellers, but is expected to switch entirely the other way round by 2030. As well as the extra houses, just imagine the demand for hundreds of millions of tables and chairs, drawers, beds, and the like!
Lastly there are tax advantages. The right investments are not subject to Capital Gains Tax, and if you've owned woodland longer than two years it's exempt from Inheritance Tax.
Buy the trees not the products
One way into investing, but which needs careful consideration, is using ETFs. There are two -- iShares S&P Global Timber & Forestry Index Fund and Claymore/Beacon Global Timber Index Fund. The need for care here is because ETFs are not pure investments in forestry land and so don't provide a hedge against stock market volatility (sorry about the pun!).
They both invest in very similar portfolios of 25 major international companies (with different weightings), but these companies may be in the paper/pulp industries, or timberland ownership/management, and they may use those properties as a resource for something else they produce. The former is up 30% over the last year, the latter 50%. But they are likely to be cyclical with equities.
Be careful not greedy
Charles Lees-Millain at FIM says a good forestry investment should give you an after-tax return of 5% a year over a period of 10 years or so with forestry land at current prices.
FIM is one of a number of companies offering a pooled investment opportunity, over 10 years, for a minimum £25,000 investment. Oxigen Investments is another, specialising in tropical hardwoods. A different note of caution applies here: there are some grandiose claims about annual returns of 15% or more on timber funds and the advice of an IFA who specialises in this area is recommended.
I actually like an AIM-listed company called Cambium Global Timberlands (LSE: TREE) launched in March 2007. It raised £104m and in May 2009 it finally became fully invested in a geographically diverse portfolio of 10 forestry properties. It is also diverse across softwoods, hardwoods, has 38% unplanted land, and a good mix of plantations of different age classes.
It paid a 4% dividend in September last year and has a target dividend yield of 5%. It also stands at a discount of over 20% to NAV. It would be eligible for a SIPP and should be eligible for an ISA because they are also listed in the Channel Islands.
Apart from those benefits, what I also like is who owns large tranches of the shares -- Baillie Gifford 15.8%, Rensburg Sheppards 11%, British Steel Pension Fund 9.6%, SVM Asset Management 5.8%. Director ownership is very low, however.
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Phil McSweeney does not own any of the shares mentioned in this article.
