Friday December 21, 2012
by Nicholas Vardy, editor Alpha Investor
Timber is a longtime favorite of some of the top investors in the world. Value investing legend Jeremy Grantham believes that timberland is the single best long-term investment. And last year, the Harvard Endowment Fund had about a 10% weighting in timber and has increased its weighting for the coming year.
The best way to invest in timber is through the S&P Global Timber & Forestry Index Fund (WOOD), an exchange-traded fund.
Taking a long-term view as they do, it is easy to see why Grantham and Harvard are so enthusiastic about timber. After all, trees grow through bear markets. Trees grow through bull markets. Trees simply grow through everything.
The price of timber has grown at a remarkably consistent rate throughout the years, increasing in price by an average of 6% every year for the past century, including during two World Wars, the rise and fall of the Soviet Union and 9/11.
Between 1971 and 2010, timber boasted average annual returns of over 14%. In 2008, while the S&P 500 fell 38%, the value of timberland rose 9.5%. If there is a way for you to protect yourself against a crash in financial markets, timber is it.
Timber offers higher returns than the overall stock market. Timber also offers substantial downside protection and has a history of performing well during inflationary times. That’s a hard combination to beat.
Global timber supply is falling. Thanks to a combination of urban development, agriculture and illegal logging, 10% of the world’s forests have disappeared in the last 25 years. At the same time, there has been a surge of demand for timber from across the globe, primarily from Asia, specifically Japan, South Korea and China.
The most straightforward way you can invest in managed timberlands is by buying an exchange-traded fund such as the S&P Global Timber & Forestry Index Fund, which tracks the performance of forestry and timber firms worldwide.
A big chunk of WOOD — 44.52% — is invested in companies based in the United States. But an even bigger portion is invested in global stocks. Japan accounts for 9.29% of the ETF, while there are large allocations to Canada (9.28%), Brazil (8.78%), Finland (7.63%) and Singapore (7.47%).
WOOD’s three top holdings — together accounting for 22.88% of its portfolio — are U.S.-based timber companies that you can invest in individually, as well: Weyerhaeuser, Rayonier and Plum Creek Timber.
From a technical perspective, S&P Global Timber & Forestry Index Fund has broken out recently to the upside and is now in a solid uptrend. Don’t worry; there is plenty of upside left.
Learn more about this financial newsletter at Nicholas Vardy's The Alpha Investor.