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R I S K & R E WA R D
A c ritical e ye o n f inancial i nnovation
Wooden Performance
Buttressing our portfolios with timber can
add to their steady growth.
By Eileen Gunn
ick Molpus, chief executive officer of Molpus
Woodlands Group in Jackson, Miss., is the scion of
a family that has harvested timber since 1905. Molpus,
who buys and manages pine forests for landed families
and other investors, recalls that dur ing the 1990s, as
stock markets roared ever-higher, people usually nodded
off when he tried to extol the virtues of investing in
timber. “A steady 8 or 9 percent return didn’t seem very
exciting,” he recalls.
Times have certainly changed. Pummeled by seesawing stock and bond markets, investors are awakening to
timber’s appeal. Using numbers from financial data
provider Ibbotson Associates, the Hancock Timber
Resource Group, a Boston-based asset manager, calculates that timber returned an average of 10 percent per
year between 1993 and 2002, beating the per-annum
returns of both the S&P 500 (9.3 percent) and the market for long-term corporate bonds (8.8 percent). It did
so despite having less risk than either stocks or bonds.
The standard deviation of timber (which is a measure of
how widely its price swings over time) was 7.5 percent
dur ing this per iod, compared with 19.7 percent for
stocks and 9.9 percent for bonds, according to Hancock.
Growing investor interest has spurred some timber
specialists to launch timber investment management
organizations (TIMOs), which manage investment funds
for institutions, individuals and family offices. Fir ms
such as Molpus Woodlands Group, which have traditionally managed their timber assets in other ways, have
begun to raise their first funds.
TIMOs have compiled enough historical data (nearly
20 years of it) to credibly demonstrate the extent of timberland’s appreciation to investors. Meanwhile, wood
products companies such as International Paper have
been restructuring and selling off their corporate forests,
putting an unusually large amount of timberland on the
market for acquisition by TIMOs. There are now nearly
half a dozen TIMOs marketing investment funds in the
$50 million to $200 million range.
D
BOTANICAL BREADWINNERS
Unlike asset classes that depend on rising markets to
generate retur ns, “65 percent of your timber retur n
comes from biological growth,” Molpus notes. As trees
Robb Report Worth • August 2004
mature, they yield more wood, while the wood itself
becomes increasingly valuable.
A 15-year-old southern pine sold as pulpwood to a
paper mill garners about $8 a ton. When that same tree
is 20 to 25 years old, it is reclassified as softwood timber,
and can fetch $40 a ton. When it reaches 30 years, the
tree becomes hardwood, and sells as lumber and flooring
for $50 a ton. Even if hardwood prices were to fall by 10
percent over that period, an investor who bought the
tree when it was at the softwood stage would still earn a
reasonable return.
“The best way to do well in timber is to buy things
over time and sit on them for a while,” notes Kurt
Akers, director of research for Global Forest Partners, a
TIMO that raised a $300 million fund earlier this year.
Of course, timber is a commodity, and like other commodities, demand for it is subject to cyclical swings.
Housing starts, interest rates, consumer confidence and,
as timber markets become increasingly global, currency
exchange rates all affect the markets for wood. If consumer spending falls, manufacturers will need less cardboard and paper for packaging. When demand for new
housing slows, so does demand for lumber and flooring.
If these and similar markets stay depressed, or unusually
strong, for long enough, the trend will eventually work
its way back through the supply chain and tug at prices
for timber, and, eventually, land.
However, while investors need to time their timber
investments with these factors in mind, the uncertainties
of the market are less of a concern than with other asset
classes. “If you don’t like the prices available for your
trees at a particular time, you can leave them on the
stump and let them grow for another year to two,” says
Eva Greger, managing partner for GMO Renewable
Resources, a fund launched by Boston’s Grantham,
Mayo, Van Otterloo & Co. in 1998. Investors can also
diversify geographically and by species of tree to hedge
against market swings.
Funds often need several years to find appropr iate
land at an attractive price. “If the land is a great buy,
you’ve started with that much more of a leg up in terms
of generating a good return,” says David Nunes, CEO of
Olympic Resources in Poulsbo, Wash., which plans to
close its first $50 million timber fund later this year.
Market conditions right now favor investors. Keith
returns. “The devil is in the details,” cautions Dave WatBalter, vice president of analytical products for Resource
son, an attorney who represents timber funds for GoodInformation Systems in Bedford, Mass., notes that lumwin Procter in Boston. “You want to know if the TIMO
ber and plywood prices in the United States hit rock
receives the same management fee every year. And does
bottom between 2001 and 2003. Paper pulp prices tumit get its share of returns when it sells the land, or after
bled at the same time. “A correction in timberland folinvestors get a preferred return or at some other point?"
lowed,” he notes. For example, Southern plantations that
It is also important to understand where a fund is
had been selling for $1,500 to
investing, and what economic
$2,000 an acre in the late 1990s
dynamics might affect its ability
From Your Side of the Table
fell to $750 to $1,500 an acre.
to buy land or sell timber at
Questions to Ask Your
Because land always tends to lag,
prime prices. Olympic Resource
Financial Advisor About TIMOs
he says, “product prices are now
Management plans to focus on
starting to come back, but land
the Pacific Northwest, where 10
1. What returns will the fund deliver
is still cheap.”
percent to 30 percent of the timover 10-year and 15-year periods?
ber is bound for Asia, Nunes
says. That means he is following
ARBOREAL ALLOCATION
2. Does the fund charge the same
trends such as Japan’s economic
TIMO manager s recommend
management fee every year?
rebound and rising living stanthat we allocate no more than
3. Can I redeem my interest in the
dards in China.
3 percent to 5 percent of our
fund if I want to reallocate my
We also need to examine how
portfolio to timber, despite its
assets?
timber funds calculate their peradvantages, for several reasons. As
formance numbers. As with other
Akers points out, any investment
4. Are the timberland assets varied
illiquid assets, it is difficult to
held for 10 to 15 years bears the
geographically?
ascertain the day-to-day value of
r isk of the unknown. “Interest
5. Could direct ownership and
a timber fund. Some provide
rates, inflation, another terrorist
management of timberland offer
investors with data from interim
attack, a Chinese banking crisis,
greater returns?
appraisals. With these, Greger
the gover nment could reopen
notes, “One should understand
federal lands for timber harvestthat it’s an estimate, not a market
ing,” Akers says. “We don’t know
transaction. You can’t really know the return until the
whether a major shock might come along or what
property is sold.” Akers says that appraisals can be off by
impact it could have.”
more than 10 percent. “All that matters,” he argues, “is
Since timber investments are extremely illiquid,
what you buy in for and what you sell the land for.”
potential timber investors also need to weigh their cash
Despite all this, our timber investments’ tangibility can
flow needs, and plan accordingly. Funds’ returns are typibe reassuring. If credible performance numbers are hard
cally a combination of income from periodic harvests
to find, we can always accompany our fund manager on
and the appreciation of the plantation or forestland as
a walk in the woods, and see for ourselves how our
trees mature. The bulk of the returns (from 50 percent
investment is growing. W
to 80 percent, depending on whether a TIMO is focused
more on income or appreciation) does not
come until late in the fund’s life, when it
sells the land.
Timber, as an investment vehicle, has
TO P V I E W
Timber funds have investment minioffered patient investors steady returns that have outpaced inflation—and, in
mums of $500,000 to $5 million. Those
who prefer to invest in timberland directly
some cases, outperformed both the stock and bond markets. Timber Investmay pay $10 million to $15 million to
ment Management Organizations (TIMOs) offer investment funds that pura s s e m bl e a p o r t f o l i o. ( S e e “ F u n d s o r
Forests?”) Timber fund management fees
chase, maintain and manage timberland for investors. TIMOs also can mantend to be around 1 percent, though they
age individual timber holdings for those seeking the additional flexibility of
may be as high as 2 percent. Funds also
take 10 percent to 20 percent of the annual
direct investments.
August 2004 • Robb Report Worth
Risk & Reward
Funds or Forest?
DAVE WATSON, AN ATTORNEY who works with timber funds for
Goodwin Procter in Boston, is an owner of family timberland in
Maine. His family saw demand for their poplar trees spike last fall
as construction projects in Iraq called for more compressed wood
boards, which can be made from poplars. His family quickly
arranged to sell the harvesting rights. “They were actually running
out of pressboard locally, so timber prices tripled,”Watson recalls.
Fifty-eight percent of the private forestland in the United States
is in the hands of 10 million small owners, including families like
Watson’s, as well as individuals, partnerships, estates and trusts,
each owning anywhere from 10 to thousands of acres. This group,
which supplies roughly half of America’s wood, maintains direct
ownership and control over its timber assets, rather than investing
indirectly through a TIMO fund. The advantage is flexibility: “You
can sell less when prices are high and more when prices are low if
it’s a steady income you’re after; or you can sell more when prices
are high to maximize returns” says Jack Lutz, a forestry economist
in Old Town, Maine.
Much of this flexibility is lost with a fund, where individual
investors rely on the fund manager’s strategy. To reclaim it, many
TIMOs offer individual account options for investors who wish to
directly own land. The TIMO provides market and management
expertise, while we, the landowners, maintain the ability to sell at
a time of our choosing. “We like individual accounts because
clients can tell us their goals for a long-term return and year-toyear cash, and we can design a portfolio around their fiscal needs,”
notes Dick Molpus, of Molpus Woodlands Group in Jackson, Miss.
Direct ownership also enables families to take full advantage
of the long-term nature of timber investing, which makes it ideal
for planning intergenerational wealth transfers. Molpus, for
example, has clients who specifically ask him to buy forests with
very young pine stands—which might not be harvestable for 10
to 15 years and which will not reach full maturity for more than
30 years—so they will be ready for sale as grandchildren approach
adulthood.
The downside of direct investing is that the costs of diversification can be prohibitive. A firm might buy plantations or forestland
across a few states for a client, which is a good hedge against local
damage from threats such as pests, fire or floods. However, it will
probably focus on a particular region, so it can make use of its local
expertise. If we want exposure to both Northeast hardwood
forests and Southern pine plantations, we would have to open
accounts and meet investment minimums at more than one firm.
According to most analysts and firm managers, the jury is still
out on the performance of direct timber investment relative to
that of pooled funds. The benefit, however, lies in increased control
over a very long-term investment vehicle. Says Watson, “It’s nice to
be able to sell when there is a great market.” —EG
Reprinted from Robb Report Worth © 2004 Robb Report Worth, a CurtCo Publishing, LLC publication. This reprint does not constitute an endorsement, implied or otherwise, by CurtCo
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