Timber, a Natural Resource Alternative Asset

In the February 2013 issue of ai-CIO, there were two articles about timber, the natural resource investment. In Paula Vasan's article, she states that the returns of this asset type were 15% per year during the period from 1987 to 2010.  This statistic was sourced from the National Council of Real Estate Investment Fiduciaries.  The returns for the Standard & Poor's 500 were only 11.5% per year.  The future is also bright as Jeremy Grantham of GMO Capital predicted that timber prices will rise 6.5% annually for the next seven years.  In the current interest rate environment, those returns are stellar.

The second article, named Location, Sustainability, Growing Trees, was an interview with TIAA-CREF's timberland investing team:  Jose Minaya, Managing Director and Head of Global Natural Resources and Infrastructure Investments, and Sandy LaBaugh, Senior Director, Portfolio Manager - Global Timberland and GreenWood Resources' timberland team:  Clark Binkley, Ph.D., Managing Director and Chief Investment Officer and Jeff Nuss, President and Chief Executive Officer.  I have compiled a short summary of important points.

Institutional investing in timberland started in the late 1970's when companies in the forest products sector sold their land in order to concentrate on their core businesses.  Assets under management grew approximately 20% per year until 2005.  The growth rate has slowed as there are less assets for purchase.  The goals for investing were to earn good risk-adjusted returns with some cash flow, diversify into a non-correlated (with equities and fixed income) asset and have a hedge against inflation.  There are three ways to invest:  1.  the manager owns the land and hires timberland specialists to manage the timber, 2.  buy timber funds or assets or 3.  buy Real Estate Investment Trusts (REITs) that have timberland exposure.

TIAA-CREF investments into timber are split 75%/25% U.S./non-U.S. geographically.  They are currently looking at assets in Chile, Brazil, Uruguay, Europe and any supplier close to China.  The team likes the fact that there is a finite supply of timber and the corresponding effect on prices.

Greenwood Resources is a forest manager that works with institutional investors to maximize their returns on timberland.  They are seeing more investment in international timber and greenfield plantations.  The latter is when they plant trees for harvesting.  They are not harvesting old forest growth which is fraught with social and political risks.