It seems like the market has returned to its old ways. News and headline risk seems to be driving market returns and broad indexes seem to whipsaw up or down each day. To put it bluntly, volatility has come back with a vengeance. Those huge price swings are a major issue when it comes to long term returns- not to mention being able to sleep well at night.
To that end, funds like the PowerShares S&P 500 Low Volatility (Nasdaq:SPLV) try to mitigate the price movements of the market and smooth out its volatility.
However, there is another way to get smooth, market beating returns without doing much beyond letting your investment grow. For investors, timber could be one of the best anchors for your portfolio.
Rising Values Over The Long Haul
While it is boring, timber is pretty exciting in terms of what it can do for your portfolio. Raw timberland and forest ownership have been great places to position long-term money over the years, as they have historically outpaced inflation. Part of the reason stems from the fact that when prices for lumber are low, companies can withhold harvesting logs. When prices rise, they not only profit on the higher log price, but they make more money per tree since the forest has grown. This renewable asset base has made timber an ideal investment for long-term investors who have decades to wait.
Adding in the fact that timber has a low correlation to other asset classes and the potential for market beating returns, and you start to really appreciate what owning some timberland can do for your portfolio.
According to the National Council of Real Estate Investment Fiduciaries' (NCREIF) Timberland Index, timber has managed to squash all other asset classes over the last 30 years or so. Looking at average returns from 1987-2009, timberland managed to post a 12% annual return. That hefty return managed to outperform the venerable S&P 500 as well as investment grade bonds and the broad commodity iShares S&P GSCI Commodity-Indexed Trust (NYSE:GSG). More importantly, the NCREIF index managed to do this with lower volatility as well.
Going forward, those sorts of long term returns should continue as demand for raw lumber rises further, while supplies remain tight. Various governments continue to ban the logging of old growth forests and many already-logged forests in nations like Brazil have been converted to agricultural or pasture land. Yet, global demand for timber is skyrocketing. China alone saw its demand for lumber surge 35% as its housing market took off.
Planting A Forest
Typically, timberland investing was restricted to large pension funds and institutional investors. However, investors now have the ability to add the asset class to their portfolios quite easily. A prime way is through the iShares Global Timber & Forestry ETF (Nasdaq:WOOD).
The ETF offers a broad way to play the entire spectrum of timber firms within one ticker. Currently, WOOD tracks 26 different global forestry-related firms -including Northbrook, Ill. paper products manufacturer KapStone (NYSE:KS) and Spokane, Wash. forest products REIT Potlatch (NYSE:PCH). The fund charges 0.48% in expenses and has a five-year annual return rate of over 15%. Likewise, the Guggenheim Timber ETF (NYSE:CUT) also provides a broad timber play as well.
The only downside to the two ETFs is that they also include plenty of paper and container firms. That makes them less of a pure timber play. For that, investors should focus on the timber real estate investment trusts (REITs) like Atlanta's CatchMark Timber (NYSE:CTT). While not 100% timberland owners- as they own saw mills and other tree-based side businesses- they are significantly more correlated to the asset class than the previously mentioned ETFs.
One of the best could be industry stalwart Weyerhaeuser (NYSE:WY). The Longview, Wash.-based firm owns nearly 7 million acres of timberland in the U.S. and manages an additional 14 million in Canada. Likewise, Seattle rival Plum Creek Timber (NYSE:PCL) owns roughly 7 million acres. Together both firms are some of the largest timberland owners on the planet. What’s more is that both pay some pretty hefty dividends. The duo yields 3% and 4.2%, respectively.
Finally, midcap non-REIT players like Poulsbo, Wash.-based Pope Resources (Nasdaq:POPE) and El Dorado, Ark.'s Deltic Timber (NYSE:DEL) could be buy-out targets for larger firms looking to add acreage to their timber portfolios. If that doesn’t happen, investors are still treated to timber's long term outperformance- albeit on a smaller acreage scale.
The Bottom Line
Volatility is back with a vengeance in the stock markets and one of the best places to hide from that force is in the forest. Timberland investing has managed to produce stable and steady returns for decades. The previous picks- along with Jacksonville, Fla.'s timber REIT Rayonier (NYSE:RYN) –make ideal ways to add a swath of timber to your portfolio.