“Believe it or not, one asset class I’ve always found that stacks up well is timberland. This is especially true when stock market indexes seem on the verge of tumbling into the abyss.”
So says Peter Pham, Ho Chi Minh City-based managing director of Phoenix Capital and that company’s Global Growth and Income Fund.
Writing for Investor’s Digest of Canada, Mr. Pham says timberlands are the type of long-term organic growth that forms the basis for buy-and-hold strategies for equity indexes.
But for folks now getting into stocks, it’s hard to find value except in those asset classes that are being overlooked, or even discredited, by the market. Timberland is not only an alternative asset against inflation, but a long-term geopolitical hedge as well.
Keep in mind that trees grow six to eight per cent a year, thereby adding value as long as the sun continues to rise and set. In addition, land prices are typically stable. So, there’s nearly always a positive real return on investment.
And although timber prices rise and fall with the economy, supply and demand fundamentals keep volatility down over the long run.
To demonstrate the truth of this, I looked at how $10,000 invested in timberland in 1987 would have fared against the S&P 500 Index over the same time.
I started by looking at the timberland index of the U.S.-based National Council of Real Estate Investment Fiduciaries.
The index, which the council updates quarterly, is a pool of timberland investments held by private equities. Although the council’s data only go back to 1987, they capture every major downturn in the stock market over that period.
To reflect the compounding of the council’s data, the return for the S&P 500 includes dividends that were reinvested quarterly.
And as might be expected, timberland has vastly outperformed the S&P 500 over the past 36-plus years, growing an initial investment 25.4 times. By contrast, the index has grown only 14.6 times.
Admittedly, since the market bottomed out in the fourth quarter of 2011, equities managed to jump more than 42 per cent; timberlands, only 17.1 per cent. It’s obvious, then, that over the past few years, fortune has favored stocks.
But is this likely to continue? My guess is that it isn’t, given timberlands’ potential for organic growth over the long term.
But keep this in mind: timberland prices remained strong during the lost decade after the dot.com bust of 2000. This was a period of high inflation in basic commodities, a period where oil prices zoomed north of US$100 a barrel.
And although the consumer price index does its best to hide it, the U.S. is now entering another inflationary phase. Indeed, commodity prices are beginning to show signs of bottoming out.
Meanwhile, prices for both land and wood have been rising. Take a look at the latest data in the January 2014 issue of the World Timber Price Quarterly. Prices for sawlog and pulpwood for all types of lumber were up in 2013 over 2012. And with increased exports to China, prices are expected to keep going up.
But there’s been a problem with investing in timberlands. Simply put, there have been few, if any, publicly-traded companies that were pure plays. Rather, they’ve been a mix of land and sawmills.
This has now changed. Rayonier Inc. (RYN-NYSE, $35.02), the seventh-biggest owner of private timberlands in the U.S., has spun off its marginal fiber business, choosing instead to focus on real estate management.
As a result, most of the company’s assets will consist of either investment-grade real estate or actively worked timberlands, making Rayonier one of the few pure-plays on timberland around. Besides prime timberland in Florida and Georgia, Rayonier boasts acreage in New Zealand, putting it in a good position to supply future demand in China.
Moreover, Rayonier is structured as a real estate investment trust. As such it pays more than 90 per cent of its net income to investors (currently $0.49 a share quarterly). Then, too, the company has room to grow. In fact, its May close of $47.60 was a major monthly breakout signal — $0.31 above its February high.
Timber is less susceptible than other commodities to boom and bust cycles in credit. Timber is also less susceptible to the higher-order goods that are dependent on commodities. In addition, it needs fewer capital expenditures than, say, metals, grains, meats and coffee.
True, volatility is now at an all-time low. Yet, the longer things stay this way, the worse the correction will be when the markets return to normal. And that’s without more quantitative easing from the U.S. Federal Reserve.
During the run-up to this event, as well as during the fallout afterwards, timberland is an asset class that will protect your returns.
Investor’s Digest of Canada, MPL Communications Inc.
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