Wealth Manager - the site for professional investment managers

Register to get unlimited access to Citywire’s fund manager database. 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 Big City Bright Future

Big City Bright Future

Big City Bright Future, the brainchild of BlackRock, is a three-week work experience programme for school leavers looking to forge a career in the City.

Play Kames' Ennett: Trump good for US high yield, but beware Europe

Kames' Ennett: Trump good for US high yield, but beware Europe

Kames Capital’s head of high yield David Ennett believes the changing political landscape will be a positive for the US, but negative for Europe in 2017.

Play Philip Milburn: why inflation won't run out of control

Philip Milburn: why inflation won't run out of control

Kames bond fund manager views inflation as more of 'scare' than a 'problem' and is positioning his portfolios accordingly.

Read More
Your Business: Cover Star Club

Profile: from Batman Live to commodity beta

Profile: from Batman Live to commodity beta

Charteris may be a family affair, but the company is not at any risk of turning sentimental

Wealth Manager on Twitter