Investors looking to diversify their portfolios and insure their wealth against the ravages of volatility in traditional markets, will most likely have come across a range forestry investments, promising to generate superior inflation-adjusted and risk-adjusted returns for the long-term investor.
But how have timber investments performed? And how does the smaller investor participate in this interesting alternative investment asset class?
Firstly let’s look at the past performance of forestry investments, as measured by one of the main timber investment indices, the NCREIF Timberland Index; according to this basic measure of investment returns in the sector, this asset class outperformed the S&P500 by some 37 per cent in the 20 years between 1987 and 2007. When stocks delivered average annual returns of 11.5 per cent, forestry investments returned 15.8 per cent.
At the same time, returns from investing in timberland and woodlands have been proven to display a much lower volatility, an attractive characteristic for today’s investor. Hauser Insurance
Previously, the majority of investment returns from forestry investments have been mopped up by larger, institutional investors such as pension funds, insurance companies and university endowments, who have collectively placed over $40 billion into timber investments in the past decade.
So on to the second question; how do smaller investors participate in this kind of alternative investment?
According to a study by Professor John Caulfield of the University of Georgia, returns from forestry investments are three-fold;
- An increase in timber volume (biological growth of trees), which accounts for some 61 per cent of return on investment.
- Land price appreciation, accounting for only 6 per cent of future returns.
- Increase in timber prices per unit, delivering the final 33 per cent of investment returns for timber land owners.
So the best way to harness the performance of timber investments is to take ownership of trees, either directly, or through one of the array of forestry investment funds or other structures.