Traditionally Forest Investment has been an asset class that has been only available to Institutional investors. This is now no longer the case.
Over the past 5 or 6 years this has all changed and many forest investment companies are now actively marketing forestry to the retail investor. The reason for this is that a lot of institutional investment has been reduced due to the credit crunch.
So, should you look at Forestry as an investment to get involved in? One company that is well positioned to answer that question for you is, Mercer, the Worldwide Investment Consulting business. They have analysed the performance of timberland over the last 100 years.
Their report reviews over 100 years of information from timberland in the North Western USA. In this report it shows that on average returns have delivered a positive 3% above inflation every year of the period covered. Today that could be significantly improved due to information now becoming available about timber in tropical countries where growing conditions are more favourable.
Since the credit crunch most economic commenters suggest we live in an overly financial world. Timberland is different in that 66% of all growth is from biological growth. This makes the returns from timber must more certain and less volatile, than traditional financial asset classes.
The other great reason why timber should be in your portfolio is that when measured against all the other asset classes its sharpe ration was second only to small cap equities. The sharpe ratio is a measure of the average return on an asset class divided by the volatility of that return ie risk. An investor could achieve a higher return with small cap equities, but many investors may feel they are too risky for them.
When it comes to diversification, both investors and advisors consider portfolio diversification in too narrow a context. To many it is diversifying your equity holding across a number of sectors. True diversification requires the investor to hold asset classes that are not correlated with one another. Timber therefore is a great asset to hold as it is not correlated with other asset classes.
That is why I believe forestry should be part of every savvy investor’s portfolio. Nowadays there is a forest investment that will meet any investor’s pocket. In most cases the investor will lease a lot of land off the forestry company and the forestry company will plant the trees and manage the trees over the lifecycle of the investment.
The unit of measurement used by most forestry companies is called a lot and is normally 0.1 hectares, but check because sometimes it can be 0.05 hectares. A 0.1 hectare lot will normally purchase you 111 trees at initial planting. This over time will reduce as the smaller trees will be felled to provide more space for the stronger growing trees. This is called felling and will generate a small element of the return. The main return comes at final harvest.
Most consider forest investment to be a long term investment, this is true if you invest when the trees are initially planted, but some species reach full maturity in as little as 6 or 7 years, alternatively you could invest in trees that were planted a number of years ago.
Now some investors will see forestry as a long term asset or not sufficiently liquid for their investment needs. The reality is that most good forestry companies will be able to liquidate an investors holding in a few months. This is because there are always other investors who want a return over a shorter period of time and will buy 7 year old Teak with a 10 year timeframe rather than a 17 year timeframe. If you invest with a good forestry company they can normally provide a solution to meet your investment requirements. Should you like to know more about Forest Investment please visit www.forestinvestment.co.uk