Investing In Timber
by the Investment U Research Team
Every American goes through a 100-foot tree every year.
How, you ask? Just look around you… Chances are that you’re sitting at a desk made of wood, littered with paper reports, inside a room with wood trim and/or a house that was framed in wood.
The commodity makes for big business. So if you’ve never considered investing in timber as an investment strategy, perhaps you should.
Over the past two decades, some of the world’s most prominent investors and institutions – pension funds, endowments and insurance companies – have plowed $40 billion into this asset class… up from just $1 billion in 1989.
Timber has been one of the consistent favorite investments of legendary investor Jeremy Grantham. He points to how it’s risen 3% more than inflation for more than 90 years. During the next several years, he expects timber to have an inflation-adjusted return of 6%.
The fact is that timberland has actually beaten the stock market over the long run and with less risk. It has outperformed the S&P 500 over the last 100 years since 1910. And since 1987, the NCREIF Timberland Index climbed by an average of 15% per year, compared to about 11% for the S&P 500.
The returns on timber are especially good in bear markets…
During the Great Depression, for example, timber gained 233% while the price of stocks fell more than 70%. In fact, during the three worst market downturns of the 20th century (1911-20, 1929-41 and 1966-81), timber outperformed the S&P 500 by a wide margin.
More recently, when the S&P tanked by 38% in 2008, timberland rose by 9.5% based on the NCREIF Timberland Index.
You see, trees grow come rain or shine/ And so does their value… by an average of 2% - 8% per year. It might not be a glamorous business, but it definitely is a profitable one… in more ways than one.
Timber is also a natural inflation hedge. Real prices for timberland have risen steadily for over 100 years. And during the last bout of high inflation in the U.S. (1973-1981), it was a fabulous hedge, increasing by an average of 22% per year.
Timber is also a fabulous portfolio diversification tool. It sports a very low correlation with most asset classes of less than 0.1. So adding it to your portfolio enhances the potential for return while reducing your risk at the same time.
The Future for Timber
Let’s take a look at the demand for timber. The United Nations forecasts that world demand for wood will nearly double by the middle of the century.
Not surprisingly, that’s in large part to China, which ranks second only to the U.S. in wood consumption. It’s also the #1 importer of timber products in the world. In fact, more than half of the timber shipped anywhere in the world is destined for China, which happens to be about 50% of the country’s supplies.
The Chinese government wants to be self-sufficient in timber by 2015. But right now, the supply deficit – along with organic, annual demand growth of 10% – makes achieving that goal rather difficult.
The bottom line is that China is a large net importer of timber. And it will continue as such for some time.
Who Owns The Timberlands?
Contrary to popular thought, most timber is no longer harvested from public lands. The U.S. has about 500 million acres of potentially productive timberland, around 71% of which is now private. Environmental restrictions and loss of land to development pressures have greatly reduced global availability of timberland.
Reduced cutting on public lands has increased both the value of private forests and imports from international sources. In 2004, the U.S. began taking in net imports of wood for the first time.
Up until the 90s, most private timber was owned by integrated lumber businesses. Companies like Weyerhauser and Georgia Pacific produce construction lumber, bulk paper, cardboard and even pencils.
But then they began looking for ways to monetize their timber assets in order to increase the value of their stock. The most practical way to do this was to sell the land outright.
That’s where TIMO, or Timber Investment Management Organizations, comes into the picture.
TIMO raises pools of money ($5 million minimum) mostly from pension funds, university endowment funds and other institutional investors. Then it uses that money to buy and manage the land.
Meanwhile, the investors get to watch their portfolios grow like redwoods: slow and steady.
How Can Individuals Profit by Investing in Timber?
Until recently, only the significantly wealthy could really take advantage of timber.
But that’s all changing now that certain public companies are profitably harvesting their own timberlands. The best part is that the financial press has virtually missed their stories, which means this rising market is still invisible to most investors.
Just as soon as Wall Street realizes these stocks have been outperforming other investments, these companies are going to light up the radar… especially the ones with assets in the Western United States and Canada.
Though the following list is anything but extensive, all of the companies below own large chunks of west coast timberlands:
- Plum Creek Timber (NYSE: PCL), a Real Estate Investment Trusts (REIT), is the largest private US timber landholder with 6.6 million acres in the North East, North West and Southeast regions of the United States.
- Rayonier (NYSE: RYN), also an REIT, owns, leases and manages 2.7 million acres of working forests in New Zealand and the US.
- Weyerhauser (NYSE: WY) is converting to a REIT. It owns, manages or leases 20.15 million acres in the US and Canada, and other acreage in China and Uruguay.
- Potlach (NYSE: PCH), yet another REIT, owns 1.44 million acres in Idaho, Minnesota and Arkansas.
Investors who prefer a more diversified approach can choose between two ETFs that hold a broad portfolio of timber stocks: iShares S&P Global Timber & Forestry Index Fund (NASDAQ: WOOD) and the Guugenheim Timber ETF (NYSE: CUT).
Of the two, WOOD is the superior choice.
Overall though, timber companies offer steady capital appreciation over the long run. Their cash flow is high and reliable, and management tends to funnel excess cash back to shareholders in the form of dividends.
If history is any guide, timber may turn out to be a safer place to invest than either the stock market or the real estate market over the next five years.
But investors will need to exercise patience… Think of timberland as a zero-coupon bond. You have to wait for the investment to mature before you get paid.
But that wait pays off big time in the end, proving once and for all that money actually can grow on trees.
The Investment U Research Team