US Trust: Timber investing can return 8-10 percent annually

The timber asset class should be looked at as a long term investment and, as such, can return between eight and 10 per cent annually, according to US Trust, part of Bank of America’s private wealth management group.

There are a host of advantages that come alongside investing in timber, says Doug Donnell, national timberland executive of US Trust. Its major advantage over other asset class investments is its flexibility and optionality — the asset be harvested when the price is right.

While timber has not seen the usual demand provided by the US housing market in recent years, taking a long term view of the investment means that a slow year or two is not the disaster it may be for other investments. Indeed, over a period of 10 years, the return can be up to 10 per cent, the Trust confirmed.

Another positive about timber investing is the growing interest in sustainable investment in the financial world. According to a recent report released by Morningstar, more than $6 trillion worth of US assets under management include some sort of sustainable investment factors. This means that timber investment is taking on more and more importance as an asset class. Indeed, “Timber was green before green was cool”, Doug Donnell told Think Advisor.

Mr Donnell said that he encourages investors to inject at least $5 million into the asset class and asks them to commit for at least a decade in order to ensure they receive the best possible returns. The key to successful timber investment is to ride it out, says Mr Donnell. While investors may only receive $6 to $10 per ton for a young tree, which will mainly be ‘pulp wood” as it grows older, it will become more and more valuable.

“If you attempt to sell at year three, you wouldn’t get that [8-10 per cent] type of return […] The key is that biologic growth drives the investment and the majority of total return,” said Mr Donnell.

Jeremy Grantham, co-founder of asset management firm GMO, agrees with Mr Donnell about the growing importance of timber on the world investment stage. GMO’s recently released seven-year real return forecast, suggests that timber will be the top performing asset class with a projected 4.8 per cent return per year. In contrast to this, the GMO report predicts losses for US large- and small-cap stocks.

Both experts warn that it is key to ensure your forestry stocks are protected. Mr Donnell’s US Trust firm only invests in Pacific Northwest, Northeast and Southeast US stocks that will not fall victim to issues such as insect and disease woes. For example, forests located in British Columbia and the US Rockies have suffered greatly due to problems with the Mountain Pine Beetle, which damaged vast tracts of trees. Tracking down areas and timber types that are less likely to be affected by this sort of issue is essential to successful timber investment.

The other good news for potential and existing timber investors is the belief that climate change will not have a negative impact on timber investments. “Timber is an asset class [investors] will gravitate toward when they are uncertain and nervous […] The same thing is true with climate change. If we end up with new regulations on carbon, the forest land owner will participate in the profitable carbon sequestration [returns],” Mr Donnell added.

GWD Forestry spokesman James Barrett said: “It is clear that forestry investment is increasingly becoming a top focus of many high-net worth investors across the globe, thanks to its strong projected returns, sustainability and solid long term investment potential.”

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