I grew up next to a forest. I remember, as a child, hiking through the trees with our two golden retrievers in tow and, hilariously, panning for gold in the stream. I started with high hopes. I saw plenty of gold — all fool’s, alas.
Investors, too, have been hunting for riches in the forests — and these days, they’re also seeking shelter there. Market guru Jeremy Grantham, whose investment firm, GMO, has historically been bearish about stocks, keeps a large chunk of his personal portfolio in timber — seeing it as a valuable defensive investment in a tumultuous market like this one. For similar reasons, Harvard University has invested in timberland for many years. And Boston financial-services giant John Hancock owns 5.3 million acres of timberland around the world on behalf of institutions and rich clients.
There are good reasons for all this interest. The correlation between timber and other assets is low, which means timber is not very likely to lose value when, say, stocks are tumbling. Over the past two decades, the benchmark timber index, tracked by the National Council of Real Estate Investment Fiduciaries, has produced a tenfold return.
And it’s a steady performer in tough economic times. As Grantham once wrote, timberland “has had a history of rising in all great equity bear markets.” He adds that it’s “very safe: If the sun shines and it rains, the trees grow about on schedule.”
But there’s just one problem. Unless you are a major institution or a very wealthy individual, investing in timberland is in most cases pretty difficult. John Hancock requires a minimum investment of $5 million. Other TIMOs — or Timberland Investment Management Organizations — may let you in for less, but you’ll still need hundreds of thousands of dollars. The money gets tied up. And you may not get much geographic diversification, either.
What are the alternatives? Many investors will turn to timberland and forestry mutual funds or exchange-traded funds. But you need to watch what you’re buying. The funds invest across the timber and forest-products sector. And that means they invest in a lot of companies — paper mills and so on — that aren’t really timberland plays. They are manufacturing companies, with expensive factories and lots of staff, that happen to own and use timber. Rayonier, for example, is held by many timber mutual funds, but it’s a diversified company. Last year it made most of its money from specialty chemicals.
So where can you go? “If I just wanted timber exposure,” says Daniel Cooney, an analyst at Keefe, Bruyette & Woods, “Plum Creek would be the stock. They have the widest geographic exposure. They have minimal manufacturing.”
Plum Creek is a real estate investment trust that owns 6.7 million acres of forest across 19 U.S. states. Unlike a private TIMO, it gives you wide geographic diversification, and you can trade in and out easily through the stock market. It also pays dividends, and these are taxed lightly, as long-term capital gains, because most of the earnings come from harvesting a long-term capital asset: trees.
Naturally, there are caveats. It’s just one company, and it’s riskier to expose yourself to a single company’s ups and downs. It gets little direct benefit from China’s building boom, as few of its forests are in the Pacific Northwest. Instead, Plum Creek is heavily exposed to the dismal U.S. housing market. Recent earnings disappointed. At $39, the stock isn’t cheap. The dividend yield, around 4.3 percent, is low by historical standards.
There are alternatives for the adventurous: Cambium and Phaunos, two closed-end timberland trusts that are run from the U.S. but are listed on the London Stock Exchange.
Cambium is smaller, with around $140 million in net assets. Most of its forests are in two countries: the U.S. and Brazil. Phaunos is bigger and more global. That makes it look more appealing. It has $595 million in net assets and owns forests from Latin America to China to East Africa. The U.S. accounts for just 7 percent of the portfolio. Phaunos investment chief Liane Luke, a John Hancock veteran, says forests outside the U.S. are cheaper and offer better — although perhaps riskier — investment returns. Half the forests are mature.
Phaunos’s earnings per share tripled last year, to 4 cents. The fund has about $40 million in cash and just launched its first dividend, at 2 cents a share.
Both Cambium and Phaunos are structured as closed-end funds, which trade like stocks and see their prices change throughout the trading day. And shares in both trusts are priced at hefty discounts. Cambium recently sold for 90 cents a share, 20 percent below its net asset value. Phaunos traded for 75 cents, more than 30 percent belowits net asset value of $1.11.
There is no reason to fear investments listed in London, where corporate governance and disclosure are perfectly good. But you’ll need a broker that can trade international stocks. (Oddly, because Phaunos trades in dollars, few discount brokers will handle it; Luke even opened a Fidelity brokerage account so she could invest personally.) Why is it listed in London? Luke says the regulations here in the U.S. are just too much to deal with. A sad state of affairs.
I wish there were more mainstream ways of adding some timber to my portfolio. Phaunos, Cambium and Plum Creek are among the few and are worth watching. But it’s still a challenge finding gold in the woods.