Over the past few decades, institutional investors such as insurance companies have been big investors in timber property.
Why? Timber has been one of the consistent investments of value investor Jeremy Grantham since it’s risen 3% more than inflation for more than 90 years.
The fact is that timberland has beaten the stock market over the long run and with less volatility.
The returns on timber also hold up well in bad economies and bear markets. During the Great Depression, timber gained 233% while the price of stocks fell more than 70%. More recently, when the S&P tanked by 38% in 2008, timberland rose by 9.5% based on the Timberland Index.
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Here is another reason a timber investment is a great shock absorber for your portfolio: It has a very low correlation with most asset classes, meaning it zigs when other asset classes zag.
Modern Forestry & Steady Growth
We have certainly come a long way from the cut-and-burn practices used by the timber barons of the 19th century. Forestry, in America anyway, is now a sophisticated, sustainable, and scientific business.
A unique characteristic of timberland is that it functions as both a factory and a warehouse. In other words, timber can be grown and then “stored on the stump.”
This gives owners the flexibility of harvesting trees when timber prices are up, and delaying harvests when prices are down. One reason for timber’s steady growth is that timber prices tend to follow population and economic growth. Emerging market nations like China and South Korea are key drivers of growing demand for lumber products.
It may be a good time to add some timber assets to your portfolio right now.
What are the options for individual investors considering diversifying into the timber trade?
A Timber ETF or Timber REIT
For a conservative global approach, I recommend the Invesco Timber ETF (CUT). CUT is a basket of companies in all aspects of the timber, lumber, and paper business. This ETF is very international with U.S. stocks making up well under 50% and is trading at well under book value.
This ETF is less of a direct play on timberland but rather an investment in the stocks of large forest products conglomerates like International Paper.
For more bang for your buck, I suggest you go with real estate investment trusts (REITs) that directly own and manage timberland. REITs were originally created in the United States in the 1960s as a vehicle to allow investors to buy and sell shares in managed real estate portfolios.
Timber REITs can be listed on a stock exchange, or they can be privately run for clients of Timber Investment Management Organizations (TIMOs). John Hancock is a big player in this area with many institutional and high-net-worth clients.
Timber REITs must pay 90% of funds from operations to shareholders in the form of dividends. Therefore, they are a favorite of income investors.
The Rayonier REIT (RYN) intrigues me as a somewhat speculative pick. The company’s stock is down about 2% in the last year, but it has a good cash position and offers a 3.4% dividend yield.
Timber is a great addition to any global portfolio and a proven hedge against inflation, plus, it’s an asset that offers excellent diversification.
The Cabot Explorer recommends that you add some timber to your global portfolio.
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