By Christopher O’Dea


Money doesn’t grow on trees, cialis sales but this could be missing the point. As some institutional investors have found, buy cialis see the trees themselves are valuable. And they tend to become more valuable over time as they increase in height and volume, making their lumber suitable for a wider array of purposes.

Civilisations as far back as ancient Mesopotamia learned that lesson the hard way when unsustainable use of wood caused the price of timber to rival precious metals and gemstones. Timber prices typically spiked just before those societies suffered sharp declines as lumber shortages curtailed ship construction, homebuilding and heating, and early Bronze Age manufacturing.

Thanks largely to the discovery of fossil fuels as the primary source of energy for industrial societies, wood no longer determines the rise and fall of civilisations. But wood continues to occupy a central economic role as material for housing, furniture, and a vast array of paper and packaging products based on new and recycled wood pulp. What’s more, forests are now understood to be the planet’s lungs, giving timberland an added dimension as a sustainable investment option for the increasing number of institutions that have social and environmental targets.

It is a significant market, with the total value of global investable core timberland standing at an estimated $125bn, according to Pension Consulting Alliance’s (PCA) June 2014 review of major asset classes. Institutional investment in timberland totalled $45bn as of 2011, according to Hancock Timber Resource Group, a unit of Manulife Asset Management. While there are investable forests around the world, the single largest market is the US, which accounts for 62% of the value, with Latin America a distant second with a 19% share, followed by New Zealand, Canada, Australia and the Finland/Sweden market with about 5% each.

Consultants say timberland can serve a unique function in a portfolio. “One of the main benefits of the asset class is the ability for investors to ‘store on the stump’,” says Daniel Butler, senior analyst at Courtland Partners. Since trees grow slowly, timber functions as both a factory and a warehouse. Growing timber builds value every year, and investors have the flexibility to harvest trees when timber prices are favourable, and delaying harvests when prices are down. Timber also increases in value as trees mature, because larger-diameter trees are disproportionately more valuable than smaller ones, Butler says. The end result is an asset that preserves capital, while adding significant diversification without adding a lot of volatility.

The risk-reward profile of timberland has been attractive, with returns negatively correlated to US equities over the past 10 years, PCA says. Timberland returns have increased each year for the past five years, according to the National Council of Real Estate Investment Fiduciaries (NCREIF). Reflecting better economic conditions, NCREIF’s Timberland Index posted a total return for 2014 of 10.48%, consisting of 2.86% from income and 7.46% from price appreciation.

“Increasing EBITDDA returns show that timberland managers are capitalising on the renewed demand for wood in domestic markets,” says Ryan Reddish, chair of the NCREIF Timberland Committee and acquisitions analyst for Forest Investment Associates (FIA). Annual appraisals of timberland values “contributed to a sizeable bump in fourth quarter returns”, he says.

Timberland returns have also become competitive relative to other property types tracked by NCREIF. The NCREIF Property index, for example, posted an 11.82% return for the year. Since the inception of the Timberland index in 1986, the average annual return has been 12.59%. The index tracks the value of 452 investment-grade timber properties worth just under $24bn, encompassing 320 properties in the South, 83 in the Northwest, 16 in the central Lake States, and 28 in the Northeast.

While performance has been on the upswing, the volatility of timberland declined slightly through the end of June 2014, from an annualised standard deviation of 5.9% over the past 10 years, to 4.7% in the year through June, according to PCA. During that time, the volatility of timberland was only slightly above the Barclays Capital Aggregate Bond index, which posted a 2.4% annualised standard deviation for the first half of the year, with timber producing a 9.9% return, against a 4.4% return for bonds, the consultancy says.

Timber returns over the 10-year period ending June 2014 were similar to equities, but as more institutions have entered the market, PCA says the income portion of the return from timber has declined, leading to greater reliance on long-term price appreciation. Institutions began moving into timber in the mid-1980s, when ‘forest products’ companies began to evaluate the strategic role of their timberland holdings. Some saw the value of their forests, particularly in the underlying land, as a source of capital – they could sell the timberland and invest the proceeds in wood-processing facilities. Institutions with capital, a long time horizon – and in the case of US pension funds at the time a legal mandate to diversify their investments – became the new timber barons.

Pension funds continue to invest in timberland. The Colorado Public Employees Retirement Association, which oversees more than $45bn, in January received a recommendation from Aon Hewitt Investment Consulting to increase the size of its ‘opportunity fund’ to $1.6bn. Timberland comprises 40% of the opportunity fund, which also includes commodities, risk-parity strategies and tactical opportunities. Colorado PERA already has positions with external timberland managers that comprise 14 timber properties with locations in the US, Canada, Australia and New Zealand.

Pension fund investors presumably know money doesn’t grow on trees. But they are certainly buying plenty of them to boost returns.