Separating the wood from the trees: a closer look at timber

By Paul Burgin

Investors are looking to diversify into non-correlated assets as volatility and the risk of political shocks continue to haunt bond and equity markets. As an alternative asset, timber should fit the bill. The industry is increasingly global, well established and recovering from the financial crisis. Managing and harvesting timber has green credentials too.

Timber and forestry is benefiting from rising interest in all alternative asset classes. It is a good diversifier and plays to inflation-linked concerns and the need to invest in real assets. Schroders multi-asset fund manager Michael Spinks says a growing number of institutional investors are interested in tapping the potential of forestry, but investing in timberland is not necessarily simple. “There are issues about liquidity as pension time frames are shortening. There is a lot of interest but the sector can be frustrating as schemes cannot always take the long maturity times,” he says.

Few pension schemes have the willingness or ability to simply buy a patch of forest and wait for trees to grow, but larger statutory schemes such as Denmark’s ATP have more choice in how they access forestry investment and it directly owns and manages forests around the world.

Spinks says other large operations prefer to outsource mandates to specialist managers such as Hancock Timber Resource Group, part of Canadian financial services firm Manulife Financial. It is one of the world’s largest timber portfolio operators with assets of $9.1bn.

Until recently, international investors faced tax issues investing in US forestry funds or holding US timberland assets. The market is now opening up, drawing global investors into the sector and allowing US-based firms to spread their wings. Hancock has acquired plantations in Canada, Australia, New Zealand and Brazil and is now targeting the UK and the Nordic region.

Such specialists tend to operate closed end funds with long lock ups, says Spinks. The increasingly global nature of specialists such as Hancock and rival Brookfield also adds in an additional layer of complexity about crossborder ownership. “They manage the growth rate of trees, manage the forests themselves and decide on cutting at the right time, market cyclicality and the land’s value,” he adds. Mercer Alternatives Boutique principal Simon Fox confirms that client interest is growing. The consulting group began talking to UK investors about timberland last year as prices had become more compelling. “The more established exposure is from the US and Northern Europe, but we are now also seeing a large amount of interest coming out of Germany and some from Australia too,” he says.

Fox says he likes timber as an asset class: it is relatively simple to understand and investors know what they are getting into. “It’s not a sexy asset class; you are not investing to get double digit returns, but not a lot goes on under the bonnet,” he says.

While interest is rising, investors may see the opportunity set diminish throughout 2012. A number of the well-known US closed-end fixed life co-mingled funds – known as Timber Investment Management Organisations (TIMOs) – have recently closed or are set to do so soon.

Franklin Templeton Real Asset Advisers managing director for infrastructure and real resources Joyce Shapiro says these fixed life funds tend to run for 10 years. When they reach the end of their life, they either have to ask investors for an extension or return capital and profits to them. Asking for extensions can be tricky unless all investors agree to keep their capital tied up for longer. “A lot of traditional TIMO funds will terminate from 2012 to 2014. There will be pressure to put assets into the market place,” she warns. Secondary trading is not well established and Shapiro believes that pricing of such assets and the disparity between prices and investor expectations will be an issue, particularly as the downturn has yet to be fully priced in. Instead, she says investors are looking for more local opportunities that are not linked to the traditional benchmark National Council of Real Estate Investment Fiduciaries (NCREIF) composite of US timber properties. Shapiro says investors are considering timber within an infrastructure exposure, looking to buy into timber mills and transportation. The new role for wood within the renewable energy complex is also of interest to investors.

Although it is hardly a mainstream asset class, timber is far from a minor market. According to the Collaborative Partnership on Forests, an international consortium, global output from the world’s forest industries was $1.7trn in 2010. Wood export products were worth around $400bn. One tenth of production and exports comes from tropical countries.