Timber! This cry is beingheard in boardrooms across America as endowment investment committees and cutting-edge family offices continue to be captivated by this asset class. The September 2007 Timber Survey by Merrill Lynch found that half of all endowments had timberland investments. Over a third of these-and institutional investors in general-expected to increase their forestland allocations in the next few years, with only a tiny percentage anticipating a decline. The glaring exception to this "timber rush" is the retail investor. Insiders estimate that retail investments make up, at most, 1% of direct or private timberland assets.

"Timber is an interesting asset class but retail investors have significant access problems," says Brad McMillan, director of alternative investments at Commonwealth Financial Network in Waltham, Mass. Ultra-high- net-worth investors don't have these same issues; they can and are making timber plays. And for everyone else, there's an array of vehicles-many of them still first-generation-which allow some sort of access to timber.

What's Good about Wood

As with just about every commodity, timber is hot right now. But it also offers solid returns and unique correlations. Historically, the asset class has been negatively correlated with stocks and bonds, and positively with inflation, providing a useful hedge. "It's more correct to say timberland is not correlated with equities or bonds," says Jack Lutz, a forest economist at Forest Research Group, a timber consultancy in Maine. "There is no fundamental reason why it should be." But the resource does not move in lockstep with other inflation-sensitive assets such as oil, gas or other real estate.

Second, timber has enjoyed handsome returns, consistently beating the S&P over the past 20 years, with lower volatility. Total return over the lifetime of a forestland investment stems from both income from operations-selling timber, that is-and the land's appreciation. The relative importance of each factor varies from year to year, but provides two sources of return, both of them tax advantaged. After the first year, income generated from the harvest is typically classified as a long-term capital gain, not as current income.

And timber is literally a renewable resource. The land can be reforested after cutting. In times of low demand, harvesting can be deferred until prices improve. And it's one investment that's continually climbing: Inventory gains through tree growth at about 3% to 5% per year.

How to Buy In

Institutional investors typically access the asset class through TIMOs (timber investment management organizations), which are structured like private equity partnerships. They buy specific assets and companies, and are not publicly traded. TIMOs diversify holdings across both species and geographic regions to reduce environmental risks. A fire or infestation might wipe out one forest, but the rest of the TIMO's holdings, thousands of miles away, would be unaffected. As timberland has caught on with institutional investors, the number of TIMOs has blossomed, from three in the mid-1980s to 25 today. Among the best known: Campbell Group in Portland, Ore.; Hancock Timber Resources Group in Boston; and the Lyme Timber Co. in Hanover, N.H.

The most noteworthy characteristic of timberland investing is its illiquidity. TIMOs take a long time to mature, so investors need 10- to 15-year time horizons. Typically, they are closed-end funds. Income from timber sales is distributed to the client during the life span of the fund, and when it terminates, the client receives a capital distribution from the sale of the underlying land. "Each TIMO puts together its own fund with its own expiration dates," Lutz says.

Although returns beat the Samp;P regularly, timber's growth rate has been falling for some time, to only 8% or 9% per year in the past decade, down from roughly 22% in the previous decade of 1987 to 1996. Last year was particularly trying: Timber prices actually dropped 10% to 20% in 2007 because of the housing downturn. Nevertheless, TIMOs and timberland retained their underlying value; they have years of revenue ahead.

The second noteworthy characteristic of timber investing is the substantial amount you need to buy in. How substantial? You can't grow this mighty oak from a financial acorn: $3 million to $5 million is the current standard, up from $1 million a few years ago. If you look at the recommended timber allocation-only 3% of a portfolio-a client's overall portfolio should be in the $100 million-plus range.

Steve Holland, a portfolio manager at the Campbell Group, says, "We do have some HNW investors who can take a $5 million bet on timber." Holland's company is always looking at new options for retail investors, he says, but finding vehicles that match the long-time horizon of the asset with individuals' liquidity needs is "challenging." Perhaps this is why advisors rarely pool investments to meet the high TIMO minimums.

Timber for the Rest of Us

For investors who lack institutional-size portfolios, there are several vehicles that offer some exposure to timber. But if the investments are publicly traded, they lose the not-correlated quality that makes timber so unique. As a result, according to Holland, "none perfectly tracks the characteristics of the underlying asset class."

REITs. Timber REITs are the most accessible retail vehicle, offering the transparency and liquidity that comes with the REIT structure. But since they are publicly traded they behave differently from private TIMOs: "They have high returns but also high standard deviations," says economist Jack Lutz. Even so, Carl Kraus, senior vice president of finance at Rayonier, a leading timber and forest products REIT based in Florida, explains why these REITs should be of interest. "There is a consistency of cash flow associated with timberland investments," he says. "What's more, the dividend is considered a capital gain rather than ordinary income."