Forestry Investments through Forestry Funds
Forestry investments have been generating more attention over the past few years as turbulent economic times have highlighted the asset class as a safe haven both in terms of strong returns, low correlation to traditional asset classes and a good inflation hedge. Institutional investors have been adding forestry investments to their portfolios as a stabaliser, with a large percentage of pension funds and over 50% of US endowment funds now having some resources allocated to the asset class. Large university endowment funds such as Harvard and Yale have invested heavily in timber investments, the Harvard Endowment fund alone having invested $500 million in forestry in New Zealand during 2010.
We will take a look at the specific characteristics of timber investments as an asset class and what appeal they hold. With a number of investment vehicles facilitating forestry investments, we will also look at the specifics of choosing forestry funds as an investment vehicle.
Forestry Investments as a Safe Haven
The current economic landscape is one of uncertainty and poor performance of traditional asset classes, particularly those linked to the stock exchanges and financial markets. Fears of looming high inflation due to currency and financial crises in the USA and Europe also play heavily on the minds of investors when making decisions on where to allocate their capital. Over the past two decades, timber investments have actually yielded stronger returns than most traditional asset classes as well as exhibiting low correlation to them. It is also considered to be a relatively low-risk investment and we’ll look at the reasons why. We’ll try to cast some light on the pluses of timber investments as a stabilising asset class as part of an investment portfolio as well as a stand-alone investment.
Why are Timber Investments Considered to be Low Risk?
Timber investments are comprised of two main elements – the agricultural, though non-perishable, commodity of the timber itself, and the commercial real estate of the timberland. Both of these elements are tangible assets and recoverable and sellable in a worse case scenario meaning that there is a safety net limiting damage in any worst case scenario. Timber investments as an asset class with a built-in damage limitation policy is appealing to institutional investors.
Although timber has clearly been a sellable commodity for much longer than almost any other asset class one could care to mention, it has only been commonly invested in as such for a little over two decades. Before the 1980s, timberland was, generally with little exception, owned and harvested by landowners and forestry companies. Their priority was to feed the mills with a constant supply of timber and keep cash-flow steady. Turn-over was priority. Forestry investments as an asset class and through forestry funds has changed that. Trees gain added value the thicker the trunks become, so waiting longer before harvesting means higher value products and higher returns are more possible when regular cash flow is not such a priority.
This is another factor which makes timber investments low-risk in nature. If market conditions are not judged to be favourable, the investor can simply wait. The opportunity cost of realising the cash value of the crop at any given moment is mitigated by the fact that it continues to grow and increase in value. Forestry funds will have a closing term but that can always be extended slightly if market conditions dictate that would be more financially attractive for the investors to be given the option wait.