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Originally published Sunday, January 8, 2006 at 12:00 AM

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Timber investments grow with patience

It's an investment that grows in mountains and swamps, maturing from a tiny pine cone to top-price pine. For big institutions and wealthy...

Dow Jones Newswires

NEW YORK — It's an investment that grows in mountains and swamps, maturing from a tiny pine cone to top-price pine.

For big institutions and wealthy individuals, timber has long provided attractive returns and a natural hedge against rising inflation.

Investing in tracts of land studded with Southern pine, cherry or oak is unlike placing money in any traditional asset.

Deep profits come when trees are harvested for pulp or lumber. Since timber price swings have little to do with the movements of the financial markets, investors have turned to the woods as a "hard asset" to diversify portfolios and soothe inflationary fears.

Piece of the forest

Small investors want a piece of the forest. Increased interest, however, hasn't quite opened the doors to timberland. Even top players like J.P. Morgan Private Bank, which caters to clients with $25 million or more in assets, have difficulty pinpointing ripe opportunities for investing in timber.

"We like timber; we just have trouble finding the right way to get there," says Jack Caffrey, an equities strategist at the firm. "There remains a gap between what seems to be on paper very interesting and compelling, and what remains very hard to access."

J.P. Morgan has a farm and ranch unit within its private-client services group, inherited through its Bank One purchase in 2004, which has a focus on timber management. But the bank also is searching for new opportunities in timber investment, perhaps through a partnership, Caffrey said.

Small group

Most institutional and other qualified investors get access to timber through a small number of timber-investment-management organizations in the United States.

Called TIMOs, the organizations function much like private-equity firms, creating pooled funds that invest in timber properties. TIMOs such as Global Forest Partners, Hancock Timber Resource Group and Grantham Mayo Van Otterloo manage billions of dollars in timber properties.

Endowments such as Harvard University's and big pension funds like California Public Employees' Retirement System have favored timber for its stable returns.


J.P. Morgan, for instance, expects timber to generate average total returns of 9 to 12 percent, based on the past 15 years' performance of the NCREIF Timberland Property Index, a closely followed benchmark.

Timber distributions are taxed at preferential long-term capital gains rates, as long as they are properly classified.

Despite the difficulty, small investors have made modest inroads. Bart Valley, chief investment officer for financial-planning firm Abacus Planning Group in Columbia, S.C., invested about 15 clients in timber, some with investments as low as $50,000.

"Really compelling"

"Timber, we thought, was really compelling, because it really is a physical, biological investment," he says.

"The great thing about trees is that the older they get, the more valuable [they get]. It's a piece of the portfolio that really behaves quite differently than anything we have."

The firm spent two years researching the asset class, liking timber's low volatility and reliable returns. But access remained the tough part.

Valley wasn't keen on two publicly traded timber real-estate-investment trusts, Seattle-based Plum Creek Timber and Rayonier, based in Jacksonville, Fla., which generally are the only options small investors have.

"You are getting exposure to timber, but because it's publicly traded REITs, you are still taking on correlation to the stock market," Valley says.

Valley found Timbervest, an Atlanta-based firm that manages more than 500,000 acres of timberland with a market value in excess of $700 million.

Pool of small investors

Timbervest typically requires a minimum investment of $1 million. But with extra interest in timber, the firm this time allowed a pool of small investors working with wealth managers to get a piece of its new $250 million fund.

Small investors "haven't had a way to get into timber," said Joel Shapiro, Timbervest's chief executive. "This is a direct investment."

Timbervest plans to use the money raised through the new fund to buy 30 purchase units, or roughly about 150 tracts of timber.

Its strategy is to buy diverse lots, with trees of different ages and species, in a mix of timber-producing regions in the United States, from the Southeast to the Pacific Northwest.

The company tries to search out lots that are within 50 to 100 miles of mills, to save on transportation costs when trees are harvested.

Investors can expect lower yields in the range of 3 to 5 percent in the first few years, and returns of 10 to 14 percent on an annualized basis over a 10-year period, Shapiro says.

"It's very hard to lose money [in timber]," he said.

"It doesn't mean you are going to make a lot of money, but it's a nice, conservative place to invest."

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