Wealth Manager - the site for professional investment managers

Register for full access to Citywire’s Fund Manager database, news and analysis. Registration is free and only takes a minute.

Alan Brierley: Money grows on trees with Phaunos Timber

Timber has delivered exceptional returns for investors, with a high degree of consistency, over the long term. Given its low volatility, defensive characteristics and low correlation with other investments, we believe timber has a key role to play in improving portfolio diversification.

Since its inception in 1987, the compound annual growth rate of the NCREIF Timberland index is 14.7%, compared with 8.6% for the S&P 500.

The Sharpe ratios of these indices are 1.24 and 0.34 respectively. Over the past 22 years, this index has only fallen in one year, with just five negative quarters out of 90. Underlying returns have been lowly correlated with those of other asset classes.

One of the main characteristic of trees – namely that they grow regardless of underlying economic conditions – has been a key driver of these impressive returns. Meanwhile, when timber prices fall (as they have done in the past year), the manager can simply defer harvesting, with value ‘stored on the stump’. Indeed, returns are compounded by in-growth, the process where trees turn into higher value products as they mature. With recent actions by the authorities likely to reignite inflation, timber has proved to be an effective hedge against inflation over the long term.

Phaunos Timber gives investors exposure to the global timber market. The managers have a rigorous due diligence programme and since the launch of the company at the end of 2006 they have adopted a conservative approach towards new investment. Being a cash buyer in these capital constrained times should work in their favour as they look to become fully invested. At the end of June, the total portfolio commitment was $698 million, of which $212 million had been drawn down.

The aim is to construct a highly diversified portfolio by region, species and age and the focus is on the less developed markets of Latin America, China and Africa, where Phaunos is more likely to access prime properties in a less competitive environment. There has been a bias towards younger plantations, which offer the greatest value in the long term.

Somewhat inexplicably, the market cap is currently less than cash on the balance sheet. Although the fundamentals of this emerging alternative asset class are compelling, an anomalous rating makes Phaunos an even more attractive investment.

Alan Brierley is head of Investment Companies Research Collins Stewart

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.
Citywire TV
Play Investment Pulse: the highs and lows of 2014

Investment Pulse: the highs and lows of 2014

This week's Investment Pulse looks back at some of the biggest stories of the year as well as looking forward to 2015.

Play Inside ETFs: Why the US bull-run still has legs

Inside ETFs: Why the US bull-run still has legs

Global equities suffered a sharp sell-off in the third quarter but exchange traded fund investors are continuing to back the US to outperform in 2015

Play Paul Niven: I won't rip up the Foreign & Colonial Trust history book

Paul Niven: I won't rip up the Foreign & Colonial Trust history book

The newly appointed manager of the Foreign & Colonial trust talks about his plans for UK's oldest investment company.

Your Business: Cover Star Club

Manchester wealth firm hires Coutts director for London launch

Manchester wealth firm hires Coutts director for London launch

Former Coutts director Tony Robinson has joined Chartered Wealth Management to head the company’s newly opened London office.

Wealth Manager on Twitter