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Seeing the Forest for Its Hedges

External Reference/Copyright
Issue date: 
July 9, 2010
Publisher Name: 
New York Times
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FOR decades, some university endowments, pension funds and other big investors have put part of their money to work in the woods. They’ve bought large tracts of timberland, viewing them as an asset class separate from stocks, bonds and other forms of real estate.

Jeremy Grantham, co-founder and chief investment strategist at GMO, the asset manager based in Boston, calls timber “a perfect investment” for someone with a time horizon of, say, 20 years or more. “Timber is safer than stocks but not quite as safe as Treasury inflation-protected bonds,” he said. “And as long as the sun shines and the rain rains, trees grow.”

Timber also acts as an inflation hedge. “If you look at commodities, you find a pattern that all of them, except timber, had a declining real price up until 10 years ago,” Mr. Grantham said. “But standing timber has a long-term record of modestly rising prices.”

Retail investors, for the most part, haven’t been able to exploit the investment benefits of timberland because acquiring it has demanded too much money and expertise. A typical swath of Georgia pine or Maine spruce could sell for millions of dollars, and buying it required knowledge that couldn’t be gleaned from typical investment books. A buyer had to understand land, lumber and even bugs, said Bob L. Izlar, director of the Center for Forest Business at the University of Georgia.

After all, an insect infestation can destroy a stand of trees just as surely as a financial crisis can bring down a bank.

“The mountain pine beetle has eaten 70 million acres of timber in Canada,” Mr. Izlar said.

Lately, however, novices have been invited to play in the woods. Over the last three years, exchange-traded funds have been introduced that, in theory, provide easier access to the diversification benefits of timber. The Claymore/Beacon Global Timber Index E.T.F. and the iShares S.&P. Global Timber and Forestry Index fund buy securities like timber-related stocks and real estate investment trusts.

“The traditional timber market had very high barriers to entry,” said Steven A. Baffico, head of United States retail distribution for Guggenheim Claymore. Besides being costly and hard to understand, it required that investors lock up their cash. Unloading timberland can take anywhere from six months to two years, Mr. Baffico said. And if you want to enjoy the full benefit of your investment, you may have to wait decades for trees to mature.

In contrast, an exchange-traded fund holding easy-to-trade stocks and REITs gives investors the ability to sell shares daily: it may lack larches and lodgepoles but compensates with convenience. Besides, companies in the Claymore/Beacon index, like Weyerhaeuser, often own ample acres themselves, Mr. Baffico said.

“Beacon measures the amount of timber ownership of the underlying companies,” he added. “We want a good proxy for the timber industry at large.”

Experts are divided over whether E.T.F.’s can replicate timberland closely enough to serve as a substitute investment.

Andrew W. Lo, a finance professor at Massachusetts Institute of Technology, likes the diversification that timberland investments bring: he said that the returns correlate less with, say, United States stocks than Western European stocks would. As a result, timberland might help to prop up the value of a portfolio during a bear market.

E.T.F.’s, by design, dilute that benefit, Professor Lo said. Someone like David F. Swensen, head of Yale’s endowment and a pioneering timber investor, “is buying actual forests and getting direct exposure to the asset,” he said. “E.T.F.’s don’t do that, so they’re changing the investment focus.”

Because they own shares of companies, not just land and trees, E.T.F.’s are making bets on all timber-related sectors of the economy — everything from papermaking to homebuilding. As a result, their long-term price performance could end up correlated more with stocks than with timberlands, Professor Lo said.

“The jury is still out on whether E.T.F.’s can provide the kind of exposure to timber that David Swensen can get for Yale,” he said. “If they do, they could add value for investors.”

J. Brian Fiacco, owner of Timberlands Strategies in Summerville, S.C., advises institutional investors on timber purchases, and has concluded that E.T.F.’s are not an accurate proxy for timberland. Too many of the companies that they hold no longer own much, if any, actual timber, he said. Consider International Paper, whose shares are owned by both iShares and Claymore Beacon. It sold the bulk of its timberland to focus on manufacturing, he said.

In addition to E.T.F.’s, investors can buy shares of timber REIT’s. The United States has three — Plum Creek, Potlatch and Rayonier — and Weyerhaeuser is taking steps to become one. All four have substantial land holdings. For example, Plum Creek, based in Seattle, owns seven million acres in 19 states.

Although the REITs are closer to a timber pure play than the E.T.F.’s, they are still likely to be more correlated with Wall Street than with the woods, Mr. Fiacco said. So he is skeptical of using them to achieve diversification.

INSTEAD, he advocates the old-fashioned path of just buying timberland. That’s more expensive and time-consuming than buying a security, but may not be out of reach for some affluent people. “You can own small tracts,” he said. “I have 58 acres right outside of Charleston. I also own 150 acres in the northern Adirondacks.”

Timberland brokers and appraisers can help with the identification and evaluation of properties, and buyers can pool their funds with other people to reduce their risk, he said. A group of friends might form a limited liability corporation and buy a few hundred, or even a few thousand, acres.

To be affordable, the land would probably have to be a long drive from, say, New York City or Boston — perhaps in the Adirondacks or rural Maine, he said. And as the trees grow, the land could produce a modest flow of cash through a hunting lease.

“It’s both possible and practical,” Mr. Fiacco said. “Your timberlands don’t have to be diversified. If you’re a huge timberland investor, yes, the age and diversity of the trees and the region of the country — all of that stuff matters. But the average investor, who already has a 401(k) and stocks and bonds, if they buy one tract of timberland, that’s additional diversification.”


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Extpub | by Dr. Radut