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For redwood-sized investors, it's given redwood-sized returns over the past 20 years. But for smaller investors – say the birches of the investor forest – investing in forests has been prohibitively expensive. Now, some firms are beginning to offer ways around some of the earlier limitations while retaining some of the benefits.
Naturally enough, financial advisers in the timber-rich southeast seem to be taking the lead on giving their clients access to this kind of investment. Bart Valley, chief investment officer of the Abacus Planning Group, a Columbia, S.C., wealth management firm, says they began investing some of their clients' money in timber at the end of 2004, after two and a half years of research into the asset class.
The impetus to begin looking at timber began, Valley says, because the company was concerned about the outlook for other asset classes over the next 10-15 years. He says as his firm began looking into timber, they found they liked the low correlation of performance to the stock market, and even to real estate and natural gas. Like commodities, timber also offers a natural hedge against inflation.
"Timber we really feel like has an attractive combination of what we feel like will be competitive returns," Valley says. "We've targeted something between 9 to 12 percent, something in that range, with low volatility," he says. How is it that timber can perform so well? "As some of the guys that we've talked to in the timber space say, `trees grow,'" Valley says. Experts peg annual natural growth at between 6 to8 percent, with some variation by species and region.
But finding the right vehicle was difficult. Very few timber management companies work with non-institutional accounts. Another South Carolina financial advisor, Cary Beckwith of Beckwith Financial Advisors in Greenville, who also began incorporating timber into his clients' portfolios recently, says that most of the firms with timber funds, such as Grantham, Mayo & Van Otterloo in Boston, the firm of noted bearish investor Jeremy Grantham, have never been geared toward the individual investor market.
Finally, Valley found an Atlanta company, Timbervest, which had tweaked the structure of its latest $250 million fund to permit the entry of some high-net worth investors. While its $1 million minimums might sound like it's still for the ultra-rich, Bill Boden, a principal of Timbervest in Atlanta, says that the company will allow a single wealth manager to split a share up among 10-15 of his clients.
Boden says his firm has been encouraged by the response it's been getting from wealth managers and individual investors since they began offering the product. Although he says that most other TIMOs – timber investment management organizations – are focused entirely on the institutional investor, Boden says that the company is finding that individual investors can be a great source of capital as well. "We just think it's a great area to focus on," he says. And not too challenging to manage, since they still focus on the upper tier investor: "In many areas, your relationship is formulated with the wealth adviser who has the trust and confidence of their individual investors, so it's kind of like one relationship for us to manage," he explains.
Although it might seem like the perfect asset, timber is not without a few negatives. For instance, there are ongoing expenses and fees. Beckwith says they're insignificant, but at Timbervest they amount to 1 percent a year and 20 percent of the profits. Forest fires and disease present risks as well, but timber boosters say that these can be addressed through regional diversification.
Perhaps the major downside to investing in such a partnership – and one of the reasons that it's been so well-suited to institutional investors with long time horizons - is that the money is typically locked up for a long, long time. At Timbervest, for example, the agreement in its latest fund calls for a 10-year lock-up with the option to extend another three years if conditions warrant it, such as a bad lumber market.
Clients whose fortunes are far from redwood-sized and maybe even still in the scrub pine stage aren't entirely without options. In the past, groups of investors – typically in heavily timbered regions - would simply band together and buy property, but advisers point to the lack of diversification and the difficulty of taking on land management as two reasons most clients should probably give this option a pass.
Several public and private timber real estate investment trusts can accommodate smaller investors. The biggest is Plum Creek Timber (PCL), an S&P 500 company that owns more than 8 million acres in the Northwest, Northeast, and South. Shares currently yield a dividend of 3.9 percent.
Although investors lose the absolute non-correlation with the stock market, a stock investment still offers exposure to timber. John Hobbs, vice president of investor relations for the Seattle company, notes that in the past 10 years the company's shares have appreciated an average of 14.5 percent compared to 11.9 percent for the S&P. Over five years, he notes, the story is even better: 16.2 percent annualized, even while the average annual return on the S&P was a negative 2.3 percent.
Unfortunately, a few other people have had the same idea. Plum Creek shares had a good run this past year. Shares are now trading in the $36 range on the New York Stock Exchange, up from $27.30 last May, and the price to earnings ratio now stands at a little over 19.