Friday June 01, 2012
by Nicholas Vardy, editor Global Guru
In a world where Facebook dominates the financial headlines, boring old trees hardly seem like a red-hot asset class.
And yet, value investing legend Jeremy Grantham believes that timberland is the best long-term investment there is. According to Grantham, timber has risen steadily in price for 200 years and has returned an average of 6.5% a year over the past century.
Grantham calculates that stumpage prices -- the value of all the wood on the stump -- have beaten inflation by 3 percentage points a year over the past century.
The price of wood also has grown at a remarkably consistent rate throughout the years, rising through two World Wars, the rise and fall of the Soviet Union, and 9/11. Timber has been also the only asset class to rise during three out of the four market collapses of the 20th century.
Recent historical returns on timber have been even more impressive. From 1971 to 2010, an investor in timber saw average annual returns of more than 14%.
That's enough to turn $10,000 into more than $1.5 million. During one of the worst-ever bear markets in stocks between the late 1960s and about 1980, timber never had a losing year.
Take a long-term view and it is easy to see why timber is so sexy. After all, trees grow through bear markets. Trees grow through bull markets. Trees grew through the financial meltdown of 2008. Trees remain blissfully unaware of the "Great Recession," the jobs picture and political gridlock in Washington.
And unlike other agricultural commodities, where the crop is ripe just once and then you have to harvest it, you don't have to harvest timberland every year. In a bad year -- say, when timber prices are low -- you can always "bank it on the stump."
Over the past few decades, top university endowments and pension funds have plowed $40 billion into timberland. The Harvard endowment has about a 9% weighting in timber, including $500 million in New Zealand forestry.
My investment firm, Global Guru Capital, allocates the same percentage to this unconventional asset class.
So how can you profit from investing in timber? My favorite way is through the Guggenheim Timber ETF (CUT), formerly called the Claymore Beacon Global Timber Index.
With U.S. stocks making up just over 40% of the total holdings, the Guggenheim Timber ETF has a more international focus than some rival timber exchange-traded funds. Beyond the United States, Japan makes up about 15% of the ETF, which also has large allocations to Finland, 8.8%; Sweden, 7.8%; and Canada, 7.4%.
As a listed ETF, CUT is hardly immune from Mr. Market's mood swings, and it has pulled back sharply in the recent market correction.
But if you believe in the asset class as much as Grantham and Harvard do, investing timber is the single best way to watch money grow on trees.
Learn more about this financial newsletter at Nicholas Vardy's Global Guru.