06/23/2016 9:00 am EST
Timber is a longtime favorite of some of the top investors in the world, including value-investing legend Jeremy Grantham and the Harvard University endowment, states Nicholas Vardy, editor of The Global Guru.
In Grantham’s view, timberland is the single best long-term investment there is. According to his firm’s research, timber has risen steadily in price for 200 years and has returned an average of 6.5% a year during the last century.
Looking ahead, his firm predicts a 4.8% return for timber over the next seven years. That compares with a negative 2.3% return for large-cap US stocks (after inflation) over the same period.
Grantham is not alone in his enthusiasm. According to the most recent reports available on its Policy Portfolio, the Harvard Endowment Fund has about a 10% weighting in timber.
Taking a long-term view, it is easy to see why Grantham and Harvard are so enthusiastic about timber. After all, trees are indifferent to bull markets and bear markets.
Trees grew through two World Wars, the Great Depression, the rise and fall of the Soviet Union, 9/11, the “Great Recession,” and the uncertain long-term impact of global quantitative easing. Trees simply grow through everything.
Timber also has been the only asset class that has risen during three out of the four market collapses of the 20th century. During one of the worst-ever bear markets in stocks from the late 1960s until about 1980, timber never had a losing year.
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 has other advantages. Unlike other agricultural commodities, where the crop is ripe just once, 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.”
Timber is also a real asset that performs exceptionally well during times of inflation. Much like gold and silver, timber serve as a store of value.
The easiest way you can invest in managed timberland is to buy an exchange-traded fund (ETF) such as the iShares Global Timber & Forestry ETF (WOOD).
This ETF tracks the performance of forestry and timber firms worldwide. A big chunk of WOOD -- 44.95% -- is invested in companies based in the United States.
But an even bigger portion is invested in global stocks. Canada accounts for 11.53% of the ETF, while there are large allocations to Brazil (10.13%), Finland (9.9%) and Japan (9.89%).
From a technical perspective, iShares Global Timber has underperformed the S&P 500 since 2010 -- largely thanks to its 56.05% weighting on foreign stocks.
But it has recently crept back above its 200- day moving average -- suggesting that it may have resumed its upward trend.
Timber’s recent half decade of underperformance also suggests that returns to the sector should revert to their historical mean, providing the potential for enhanced outperformance.
By Nicholas Vardy, Editor of The Global Guru