Investing in trees might at first not seem the quickest route to wealth. Yet timber investments increasingly leverage their clear connection to sustainability and their long-term real asset investment characteristics. Timber investments can serve as a hedge against inflation, and as a commodity that can benefit from strong economic growth.
Although certain wood funds have a decent track record of healthy returns, at least one investment advisor has argued the sector is ill-suited for retail investors, as investments can be illiquid, may generate only sporadic income, and often involve currency risk.
Pictet Asset Management’s Timber fund, managed by senior investment manager Christoph Butz, is one example of a forest products-oriented fund. The fund’s strategy is to invest in listed companies that own forestland assets, Butz explained. The fund also invests in companies that use wood to produce for example building materials, such as lumber - sawn wood - or structural wood panels, as well as in companies that produce wood pulp, the input material for paper products such as tissue and personal care products, paper-based packaging materials and printing and writing papers.
The Pictet fund offers an investment into real assets and industries using a renewable raw material source, Butz said. Other funds active in this area include Timberland Investment Resources LLP, timber funds offered by Hamburg-based Aquila Capital, and Sydney-based sustainable forest investor New Forests. Blackrock’s iShares Global Timber & Forestry Ucits ETF also offers an opportunity to invest in timber.
Deforestation concerns
Responding to concerns about deforestation and greenwashing, Butz explained that some forests are simply off-limits for Pictet: “Some forests, and I am thinking above all of the Amazon or other tropical forests or some boreal forests, should just be protected forever. Full stop.”
Forests found in certain jurisdictions without the necessary quality assurance framework for sustainable forestry management are also excluded. “I don’t want to practice ‘name and shame’ here, but that’s why we’re not investing in Malaysian, Indonesian or Russian companies today,” said Butz.
Quality assurance is done through various certification schemes. “The forests, plantations that we, our companies own or manage are for the most part certified according to internationally-recognized sustainable management standards, such as the Forest Stewardship Council (FSC), the Pan-European Forest Scheme, or the Sustainable Forest Initiative.”
Following Russia’s invasion of Ukraine, the FSC has cancelled its certification of wood from Russia. Before Russian exports were sanctioned, the country’s exports of mostly birch wood accounted for 30 percent of all wood used for pulp production. Industry officials recently warned of increasing pulp shortages on world markets.
“We foresee the continuity of a significant restriction in supply of market pulp for the next months,” Leonardo Grimaldi, executive officer at Brazil’s Suzano SA, one of the world’s biggest pulp producers, said in a conference call with investors last week. “We are also watchful for the magnitude of the effect of the restriction on Russian wood for European pulp producers.”
The contrarian view
Not everyone in the investment community likes forests as an investment. Caroline Shaw, the former head of asset management at the UK’s Courtiers, is well known for her unchanged list of “10 reasons not to invest in timber and forestry”, published in 2018 and updated in 2021.
Shaw’s reasons focus on how unsuitable this sector is for retail investors. Such investments, she argued, are illiquid, their income is sporadic and dependent on the timber price, growth can take years (“literally!”), minimum investment amounts can be high, typically starting at £100K, diversification is difficult, there are currency risks and costs.
Timber ETFs don’t give you exposure to the timber price, liquidity ‘illusions’ exist, the timber price is volatile/data is opaque and infrequent, valuations are subjective and finally, at least in the UK, tax breaks are conditional, Shaw argued.
Considering these arguments, Butz said that Pictet’s timber fund is the only actively managed fund investing in listed companies along the timber value chain. However, there are two ETFs out there, claiming to pursue a similar approach, he said.
The S&P Global Timber and Forestry is a concentrated “beast” with just 25 stocks. “It is less diversified and ‘racier’ than our balanced and more diversified approach - we have 60 companies in the fund -, and it is only rebalanced twice a year,” said Butz. “The other product is the MSCI Timber IMI, which is even more diversified than we are, but also not actively managed . There is no financial analysis of stocks and opportunistic adding or reducing of holdings in the fund, just mechanical rebalancing usually twice a year, he said, and they invest in stuff like pure plastic packagers, that we would not want to have in our fund which is based on wood as a renewable resource.
US-based value investor Jeremy Grantham nevertheless notes that timber has been one of the most consistent investments over time, having risen 3 percent above inflation for more than 90 years. Research done by Grantham’s Boston-based GMO shows that timber has risen steadily in price for 200 years and has returned an average of 6.5 percent a year during the past century.
Indeed, Pictet’s Timber-I USD fund has turned in strong performances of over 20 percent per year in the past five years, apart from a sharp 20 percent downturn in 2018.
Natural carbon absorption
While on one level the very idea of forest investment reeks of sustainability, Butz offered a more comprehensive rationale based on photosynthesis for how the sector plays a key role in fighting climate change. He explained that sustainable forestry management allows for carbon dioxide absorption as the trees grow. Then the trees are harvested, with new ones being planted in their place. The harvested trees are turned into products, where during their lifetime, they store the carbon (i.e. in a wooden building). This displaces fossil-fuel intensive materials such as steel or cement.
“The regulators’ increased focus on reducing emissions,” explained Butz, “results in increased demand for raw materials and products that are produced utilising renewable raw materials, and aim at reducing the use of fossil based materials.”
‘Harvests are like coupons’
The production of wood-based products is cyclical in nature, with end-use products affected by the level of economic activity. “Owning the forestland itself is in essence more like owning a very long duration bond, where the annual harvesting can be seen as the coupon, representing the income,” Butz explained. “Since the base of this asset is the forestland, it also has an element of inflation hedging, as no more land is being produced.”
Economic activity is one of the two main factors driving demand for forest-derived products. The other one, he explained, is the size of the middle class In a particular economy, as the larger that is, the higher the demand for such things as tissue products and food packaging materials.
Pictet Timber-I USD fund:
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