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Characteristics

Timberland investments are attractive for several different reasons, but observing the north american market over the last decades, five attributes stand out as more distinctive:

 

1. Biological growth acts as the main return driver:

  • Biological growth:
    • Between 65% and 75% of the total return.
    • Highly predictable when proper forestry management and genetic materials are employed.
    • Independent from all other drivers, from market behavior and from the economic outlook.
  • Increase in timber prices:
    • Between 25% and 35% of the total return.
    • Historical data show that timber prices have consistently trended above inflation over the last century.
  • Increase in timberland prices:
    • Between 2% and 5% of the total return.
    • In the short-term, increases in timberland prices can be an important return driver, especially on investments in frontier regions. In the long-term, however, these returns tend to decelerate and stabilize under 5% p.a.
 Source:  IWC

 

2. Flexibility to adjust harvests according to fluctuations of timber prices:

  • A unique characteristic of timberland is that it functions as both a factory and a warehouse. The timber can be grown and then “stored on the stump”
  • Timber is also a renewable resource that increases in value as trees mature:
  • Larger diameter trees are disproportionately more valuable than smaller ones
  • Example:  from firewood, to pulpwood, and then to different grades of sawn wood

 

3. Non-correlation with other asset classes:

  • Historical data show that timberland returns move independently from the returns of other investments, constituting a valuable portfolio diversification tool.

 

Correlacao_ENG

Sources:  Forest Research Group. NCREIF Timberland Index compared with other US market indices.

 

4. Consistent positive correlation with inflation:

  • Timberland is recognized as an effective inflation hedge, as its returns tend to trend along the consumer price index.

Inflação_ENG

Sources:  Forest Research Group. NCREIF Timberland Index compared with other US market indices.

 

5. Attractive risk-return relation:

  • North American timberland investments delivered high historical returns, relative to their risk profile, resulting in a Sharpe Ratio superior to those of other traditional asset classes.

 

Risk_Return_ENGSharpe_ENG

 Sources:  IWC and Bloomberg

 

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