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Timber! Phaunos fund axes dividend for two years

Timber funds have proved a huge disappointment but one, Phaunos Timber, is struggling to carve a future. Is it too late?

Timber! Phaunos fund axes dividend for two years

Phaunos Timber (PTF ), a Guernsey-based investment company named after the Roman god for forests, has its work cut out if it’s to survive a continuation vote in two years’ time.

With shareholders having lost more than a third of their money over five years, Phaunos, which invests in tree plantations around the world, needs to pull something out of the woodwork fast if it’s to get the chance to seek investors’ backing at the annual general meeting in 2016.

Although that’s some way off events are conspiring to make time seem short for the trust’s board, led by Sir Henry Studholme, who is also chairman of the Forestry Commission for England and Scotland.

Last week the £141 million trust, which does its business in US dollars, revealed losses last year rose to $55.4 million (£33 million) from $43.2 million (£25.6 million) in 2012, a loss per share of 10.32 cents.

Falls in the Norwegian krone and Brazilian real against the dollar and more realistic assessments of its younger plantations, which saw $40 million written off an investment in Green Resources in east Africa, more than offset improved demand for timber in the US and China. Net asset value plunged to $419 million (£249 million) from $488 million.

While these were paper losses, Phaunos lost real money too with net operating losses of $9.5 million narrowing from a deficit of $12.3 million in the previous year.  

As a result Phaunos scrapped the annual dividend for 2013 and said it was unlikely to have enough cash to pay one next year.

The lack of cash means there is no money to buy back shares and do something about the yawning 43% discount to NAV at which the shares trade, having slipped a further 10% this year.

Studholme, who is temporarily in executive control while a strategic review is undertaken before proposals are put to shareholders this summer, is determined Phaunos should have a future.

‘Personally I believe there is a great value for investors to have access to a quoted timber fund,’ he said.

At the end of last year Phaunos terminated an expensive contract with its previous manager FourWinds Capital Management and brought most of the staff in house to save costs. It is looking to sell non-core holdings and make the portfolio less risky.

The question is whether it can do enough to avoid the fate of Cambium Global Timberland (TREE ), the only other timber closed-end fund in the UK, whose performance has been even worse than Phaunos. Shareholders ordered TREE to be felled last year but have been warned the exit process could take up to four years.

Innes Urquhart, investment trust analyst at Winterfloods, is unconvinced Phaunos can pull though although he sees the board is now focused on shareholder value.

‘The fund currently trades at a 43% discount to its NAV and on the face of it this represents a value opportunity. However, in our view there is still considerable work to be done to ensure the validity of the assets in the portfolio,’ he wrote in a note to investors, adding, ‘we believe performance will have to improve markedly if the fund is to pass its continuation vote in 2016.’

This wasn’t how it was meant to be in 2006 and 2007 when PTF and TREE were launched. As an ‘alternative’ to shares and bonds, timber was meant to provide a stable, non-correlated source of returns linked to the global economy. The financial crisis got in the way, however, and the funds never gained momentum.

There are other ways of investing in timber. For example, iShares has a Global Timber & Forestry exchange-traded fund and Swiss investment group Pictet has a Timber open-ended fund (that unlike the closed fund can issue new shares or units). These are entirely different sort of funds, though, investing indirectly in the shares of companies linked to forestry and timber rather than the soft commodity itself. Both have also produced positive returns, something which seems beyond the likes of PTF and TREE at the moment.

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