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The benefits of investing in real assets

Forest wood treeds sunlight

Lisa Best works for Global Forestry Consultants Ltd, trading as Global Forestry Investments

One of the main benefits of investing in forestry is that unlike stocks and shares timber growth is not affected by economic circumstances.

Whether the stock market goes up or down, trees will continue to grow. This makes timber the ideal asset class for long-term investors who are seeking stable and consistent growth. Timber growth is driven by the world's requirement for energy and housing.

As the world's population continues to grow, currently at the rate of 80million people per year, and the overall standard of living increases, there will be a greater demand for timber. This is already evident in China where there has been huge population acceleration, an increase in the standard of living and a timber deficit.

It is expected by the UN Food and Agriculture Organisation, (UN Food and Agriculture Organisation, 2012)  that by 2030 the global demand for wood and fibre will almost double, making timber a strong investment choice.

Forestry has proven returns on investment, not just in the short term but in the long term too. One of the reasons that forestry performs so well is because it is driven by biological growth. So if the markets are not performing well at the time you want to sell, you can delay the harvest to ensure that the wood is sold later at a favourable price.

Driving value

Ultimately timber can provide capital preservation and the investor does not have to take the spot price at the end of a growing season, simply choosing to let the trees grow for another season and adding value to the investment. This means that no matter how volatile or bearish the overall markets are, trees will continue to add volume to the investment portfolio, the primary driver of value.

Like other real assets, one of the main attractions of investing in forestry is that it is very much uncorrelated to global equities. Whether global stock indexes go up or down, your real asset returns will not automatically follow them.

Another reason to invest in real assets, like forestry, is to diversify your investment portfolio away from traditional assets

The safest things to invest in are physical; this can be anything from gold to vintage wine to stamps. The point is that unlike equity they are tangible assets. Share prices can plummet in a matter of minutes but if you invest in timber, it will still be in the plantation in the morning.

So while their value may increase or decrease, tangible assets will not disappear or fluctuate in size. This can be hugely reassuring from an investor's point of view and at Global Forestry Investments we encourage investors to visit the plantation to see their real assets.

Another reason to invest in real assets, like forestry, is to diversify your investment portfolio away from traditional assets. There are a lot of pension funds that have a requirement for real assets.

The more diverse the investments you have the higher the probability of one of your investments increasing in value. In addition, if your assets are too similar and the market drops, then the value of your entire portfolio will be hit.

With forestry in particular, it is possible to diversify your investments within the different types of timber available. This diversity is a rare opportunity within the investment world.

For example, younger trees are less hardy and more susceptible to pests, so land which has younger trees growing on it will be less expensive to acquire. This is not just because the trees have less value due to less growth, but because there is a higher risk associated with them. This means that there is potentially a greater profit.

Long-term risk

Additionally, a variation of tree ages will provide investors with various times for thinnings and final harvest, allowing the fund to plan for regular income whilst the capital appreciation builds. When used in combination with traditional assets like stocks and bonds, this can potentially reduce overall portfolio long-term risk while increasing upside potential.

When investing in timber, it is important to research what timber commodity is right for you as an investor as well as what geographical region you want to invest in. Of course particular assets will attract different types of investors but you need to consider the returns that you are aiming for, the risks you will tolerate and what end market suits your needs.

There is currently great interest in investing in eucalyptus whereas, in the past, teak has always been the big forestry hardwood commodity. 

Timber by definition tends to be a long term growing product with teak having a twenty five year growth cycle. Eucalyptus on the other hand has a much shorter growth cycle of around seven to fifteen years, depending on the intended use, which in part explains the shift in investor behaviour.

Teak has some particularly strong benefits; it is a hard wood and able to withstand all types of weather conditions and its high oil content also means that there is a reduced fire risk. Ultimately it comes down to investor preference.

Within our organisation, we offer investors the chance to invest in both teak and eucalyptus. Our Belem Sky plantation in Para, Brazil consisting of 300,000 teak trees provides investors with an immediate dividend because the teak trees are 8 years old and ready for the first thinning cycle.

Unsurprisingly this has been a hugely popular plantation to invest in and has now completely sold out.  The thinning process strips out the weaker trees to allow the stronger ones to grow and reach full maturity.

However, smaller, less mature trees are used for products such as laminate flooring and so provides a good pay out for what is ultimately a long to medium term investment.

To anyone considering investing in forestry or other real assets, I would strongly advise looking at the figures. From 1973-2002, timber returned on average 15% annually as an investment, while stocks only returned 11%.

Furthermore, in the last year alone, timber has largely outstripped the FTSE 100 and Dow Jones Industrial Average and outperformed all other real assets over the last 100 years.

Lisa Best works for Global Forestry Consultants Ltd, trading as Global Forestry Investments. For more information on Global Forestry Investments, please visit www.globalforestryinvestments.com

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