At a time when recession fears are rattling the stock market, some financial advisers are looking to trees for growth.
At a time when recession fears are rattling the stock market, some financial advisers are looking to trees for growth.
Long a favorite of institutional investors — Cambridge, Mass.-based Harvard University's endowment, for instance, has invested in timber as an asset class since the mid-1990s — timber can be used to diversify assets, and its returns typically are uncorrelated to the stock market as a whole. But advisers are struggling to find the best way to capture timber's potential.
One option is to buy shares of lumber or paper companies, although these have provided mediocre to poor returns recently, said Brian Kazanchy, a financial adviser with Chatham, N.J.-based RegentAtlantic Capital LLC, which manages about $1.8 billion in client assets.
A second approach is to invest in timber real estate investment trusts, such as Seattle-based Plum Creek Timber Co. Inc. or Rayonier Inc. of Jacksonville, Fla. Timber REITs, however, are more correlated to equity markets than to the value of the underlying commodity, thus reducing one of the big benefits of timber as an asset, Mr. Kazanchy said.
POOLING NECESSARY
Timber investment management organizations, or TIMOs, buy timberlands and provide the "purest" vehicles for investing in the asset, he said. However, TIMOs carry minimum investments in the millions of dollars, which is too much of an allocation for RegentAtlantic.
"We don't have the assets needed to get the attention we want in the space," Mr. Kazanchy said, so his firm is seeking to partner with four or five other advisory firms to create a pooled vehicle that would be sufficiently large to make a direct timber investment.
"With $150 million, we should be able to attract some of the better TIMOs," he said.
Mr. Kazanchy envisions that the investment would have some type of a limited-liquidity option, as TIMOs typically invest for 10- to 15-year periods. After funds were pooled and invested, advisers would allocate the timber position among their clients, he said.
RegentAtlantic already recommends that clients invest about 20% of their portfolios in alternatives, which is more than many financial advisers counsel. When the firm has a timber investment to offer, it will recommend that clients invest an additional 3% of assets in timber, Mr. Kazanchy said.
The firm began talking to clients about including timber in their portfolios a few years ago, and many were excited. "Now we're trying to temper down expectations until we can deliver it," he said.
Some clients were concerned that a timber investment would be anti-environmental. However, timber harvesters are "pretty green," Mr. Kazanchy said. Timber is a crop, and harvesters take care of it and care for the land, which becomes the home of the next batch of trees, he said.
In fact, the physical growth of trees is an important feature of timber's investment potential.
"The biological growth of the trees is a key component to the asset's growth," said Christian Busken, a vice president of research at Cincinnati-based Fund Evaluation Group LLC, which helps endowments, foundations, universities and religious organizations find investments. He focuses on natural resources and specializes in timber.
Fund Evaluation Group's clients generally invest in TIMOs such as The Campbell Group LLC in Portland, Ore.
Although returns in many past years have been in the double digits, Mr. Busken said, he's expecting annual returns of about 6% to 7% over the next 10 to 15 years based on the current environment for timber.
"A ton of money has gone into the asset class over the last few years, which has pushed up prices of what are a limited number of timber deals," he said. "The asset class has actually become less attractive because of the significant capital inflows."
Many of the deals over the past 15 years have featured large, integrated paper or forest product companies' selling off their timberlands. In fact, companies such as Memphis, Tenn.-based International Paper have sold about 50 million acres of forest land in the past 15 years to institutional investors, Mr. Busken said.
'A CHALLENGE'
With these companies out of the timber-growing business, deal flow often comes from other managers, which results in assets' changing hands at higher values, he said. Therefore, biological growth is the source of value these days, Mr. Busken said.
He said he "imagines it will be a challenge" for RegentAtlantic and other advisory firms to create a pooled investment to attract TIMO interest.
Mr. Busken also questioned whether the effort will be worthwhile, considering that expected returns are "not too exciting" and that fees will erode returns further.
"Timber has become an area where there's just a lot of money chasing a limited number of deals," he said.
Hancock Timber Resource Group, a Boston TIMO with about $7.4 billion in assets, said that it offers timber as an investment to individuals, with a typical minimum of about $5 million.
"This asset class is best suited for those who can accept timber as an illiquid, long-term total-return product," said Brian Carmichael, spokesman for the Hancock TIMO, which is part of Toronto-based Manulife Financial Corp.
