Growth Stocks : Timber, Which Has Long Beaten the S&P; 500, May Soon Be Open to Direct Investment
Looking for an investment that keeps growing, regardless of recessions or stock market turmoil?
Have you considered trees?
Long overlooked as an asset except by forest-products companies, timberland has beaten common stocks and corporate bonds over the last 35 years, according to the Hancock Timber Resource Group, a unit of the Boston insurance giant John Hancock Mutual Life Insurance Co.
Financial engineers in Boston, on Wall Street and elsewhere are developing ways for investors to put their money directly into America’s 350 million acres of private timberland.
Timberland has produced annually compounded returns of 13.65% since 1960, compared with 10.74% for the Standard & Poor’s 500-stock index and 7.58% for long-term corporate bonds, Hancock says. And the risk has been lower for timber than for the S&P; 500.
The New Hampshire Retirement System, a $2.8-billion pension fund, has notched 12.6% average annual returns in its timberland portfolio over the five years it has invested in it, according to finance director J.P. Singh.
Timberland accounts for about 4.5% of the fund’s assets and is regarded primarily as a “risk-diversification tool,” like other alternative investments such as oil and gas partnerships and venture-capital pools, Singh said.
For dampening risk, it’s hard to beat timberland, Singh said, because its cycles tend to run counter to those of stocks and bonds. “In 1994, when bonds were out of favor, timber was doing great,” he said.
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So where do you sign up?
You don’t--at least not yet.
For the moment, direct investment in timberland is predominantly confined to major pension funds, college endowment funds and other huge repositories of wealth that can cope with the biggest drawback of owning a forest: illiquidity--the extreme difficulty of quickly converting square miles of trees to cash.
Hancock, with a $2.5-billion portfolio, claims to have 60% of the market for such direct investment. It has 23 clients, the largest of which is the California Public Employees’ Retirement System (CalPERS). The land is split between the Pacific Northwest, the Southeast and the Northeast, and its forests range from pulpwood trees to board-timber trees.
Hancock’s goal is to open the field to individual investors by forming a corporation investing in timberland that would sell stock to the public. However, tax considerations make it impractical now to use a corporate structure. Hancock is hoping legislation will be passed to eliminate the tax disadvantages.
Real estate investment trusts (REITs) and limited partnerships are possibilities, but each requires distribution of capital gains annually, making it difficult to retain profits and buy more timberland.
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Meantime, small investors can buy stock in forest-products companies such as Weyerhaeuser Co. and International Paper Co. But such firms make their money mainly by manufacturing lumber and paper products rather than by buying and selling timberland.
Beyond a few limited partnerships--Plum Creek Timber Co., to name one--there are few “pure plays” in timberland, according to Richard N. Smith, managing director and business strategist for the Hancock group.
Smith, a native of coastal Maine whose earlier career was with his family’s forest-products company, said pension funds are appropriate investors for timberland because their long-term orientation lends itself to optimal forest management.
The need for high short-term returns can lead to over-aggressive logging, with poor long-term consequences, both environmentally and from an investment standpoint, Smith said.
“The problem is, most people want to manage for current cash flow and they’re not willing to sit on the land in down markets,” explained industry analyst James Flicker of Lehman Bros. “If you’re a mill owner, you’ve got to have wood to run through your mill, and you’re got to buy it in good markets and bad.”
Pension funds, by contrast, without an eye fixed on the next quarter’s profit statement, can sit out periods of weak prices. “You don’t need to harvest until the peak economic moment, and you can store it on the stump in the meantime,” Smith said.
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Although Hancock itself doesn’t produce paper or lumber, it does harvest its land and supplies the wood to manufacturers under long-term fiber contracts. Smith said the fund is careful to limit such contracts to about 20% of its holdings so that it is not forced to over-cut.
Smith touts the approach as environmentally beneficial. He said that when Hancock’s portfolio gets large enough, it hopes to get involved as an intermediary in land swaps to take pressure off environmentally sensitive forests, such as the virgin old-growth forests of the Pacific Headwaters in Northern California.
Maxxam Inc., the Houston-based parent of Pacific Lumber Co., last month agreed to sell thousands of acres of its Pacific Headwaters and Elk Head timberland for $300 million plus additional land to the California and federal governments, a deal that is meant to solve a long-running controversy over Pacific Lumber’s logging in the redwood and Douglas fir forests.
Because government budget constraints don’t always make such agreements possible, third parties with large timber reserves might someday help resolve such conflicts through cashless exchanges of land, Smith said.
“Often there’s no funding, so barter is definitely the way to go,” said Jack Lynn, a spokesman for the Conservation Fund, an Arlington, Va.-based environmental organization.
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HOW TIMBER STACKS UP
Timberland has performed well compared with better-known types of assets, with volatility comparable to that of the S&P; 500 stock index and corporate bonds. Annual compounded returns over the last 35, 20 and 10 years for seven classes of investments plus the consumer price index:
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ASSET 1961-1995 1976-1995 1986-1995 Timberland 13.65% 15.89% 20.08% Commercial Real Estate * 8.38 3.15 Standard & Poor’s 500 10.74 14.59 14.84 Small-Cap Stocks 14.43 19.57 11.91 International Stocks * 15.14 13.95 Long-term Corporate Bonds 7.58 10.54 11.25 U.S. Treasury Bills 6.09 7.28 5.55 Consumer Price Index 4.71 5.23 3.48
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* Data only available from 1976
Source: Hancock Timber Resource Group
