Into the forests and back to the office

In late October I travelled to the US and Canada on a business trip that was exclusively dedicated to timberland investments.

I had an opportunity to meet with a number of investment managers and some investors into the asset class, tour the timberland both in the South and in the Pacific Northwest, and collected a dearth of data, both from conversations and in print.

It would take a multi page report to describe everything I learned, but I just wanted to outline some topics that I felt were of particular interest, and draw some parallels with other alternative asset classes.

1. Timberland values held much better and stayed almost unchanged much longer, than most other asset classes. The illiquidity and the lag in third-party appraisals is partially to blame (or praise?), but the values started to come down a little during 2009. The most important factor that managers cited was the decline in dicount rates. The decline was attributed to the very thin timberland transactions market, as owners/investors were reluctant to sell at lower prices, and to several liquidity-driven deals, in which owners/investors had to sell to replenish their cash. Ironically, in some cases they needed the cash because they could not get it from the "liquid" investments such as hedge funds.
2. The near-term outlook for timberland investments seems to be positive. The basis for such thinking is the expectation of economic recovery, decreasing timber supply and strong underlying fundamentals that are believed to prop up housing starts, and thus increase demand for timber. The window for the buy-on-dip opportunity was estimated differently by several managers I met, ranging from about half a year to several years.
3. I found an unexpected parallel, when I was talking to a fixed income FoHF manager some time after returning from the trip. He also referred to the unprecedented investment opportunities that were presented by very large spreads in the beginning of 2009, when the market became very thin. We were both suprised to discover similarities when I explained to him the logic behind the current investment case for timberland. I guess, for all its talk of low correllation, timberland is influenced by the economy in a similar way any other investment product is.

And finally, the picture below shows me standing in the shade of a mature Douglas-Fir stand in Pacific Northwest. These are the trees every investor can only dream of...