Forestry Investments – A Review of Timber Investments for Retail Investors

We all use timber on a daily basis, in our houses, our furniture, our floors and our roofing, and institutional investors, hedge funds and pension funds have been investing in timber as a long-term growth asset and inflation hedge for decades. However, as more investors discover the little-known fact that timber investments have generally outperformed stocks, bonds, and commodities over the long run, there are now many opportunities for the smaller investor to participate in this alternative asset class.

The demand for timber is growing in line with an ever-expanding population, as the human race multiplies in number we require more timber for construction, yet at the same time, fundamental limits to the supply of natural forests limit the amount of timber we can grow and harvest for our own use.

Deforestation has destroyed 1/5th of the world’s forests since 1950, and new global legislation is in place to protect the forests that remain as they play a vital role in carbon sequestration and the ecosystem.

This imbalance between supply and demand creates an outstanding opportunity for investors to acquire assets in short supply and profit from undeniable fundamental trends of population growth and resource scarcity.

Investment Performance

The vast majority of return on investment generated by timber is derived from the biological growth in size of the timber source, from seedling to sapling to fully fledged tree. On average, a single tree’s volume of wood will increase by between 2% and 8% every year depending on species, age and climate. On a very basic level, this gives the tree owner more timber to sell as time passes, and hence generates a greater return in the long-term.

Aside from this basic observation there is more to consider, as trees yield a greater sale price when they grow into bigger product classes. As an example, a small tree would only be suitable for paper products or biomass for fuel, where a larger tree can be harvested for sawn-timber which will fetch dramatically higher prices per tonne and can be used for products such as plywood or telephone poles.

A study by Professor John Caulfield of the University of Georgia found that biological growth counts for more than 60% of total financial returns, whilst increases in the price of timber, and capital appreciation of the land account for the remainder of returns generated from a timber plantation.

This goes to show that it is an effective strategy to lease land on which to grow timber, as well as purchase outright as only 6% of profits are derived from capital appreciation in the value of the land. This also shows that fluctuations in the price per cubic metre or tonne of timber have limited influence on the overall performance of timber investments. The majority of return is generated from the growth in the size of the tree itself.

The standard benchmark for timber is The NCREIF Timberland Index, which increased 18.4% in 2007, versus a 5.5% rise for the S&P 500. In the long-term, the Timberland Index has outperformed all major asset classes including, large-cap stocks, International equities and corporate bonds.

Whilst small-cap equities have outperformed timber in the long-term, after factoring in risk (as reflected in the Sharpe Ratio), timber has exhibited the highest risk-adjusted returns of any major asset class. When compared to the S&P 500, timber has displayed a low risk characteristic. Since its 1987 inception, the NCREIF Timberland Index has fallen in only one year: – 5.25% in 2001, at the same time, the S&P 500 has fallen four times, including -22.10% in 2002.

One of the main reasons investors, especially large institutional investors, turn to timber, is the fact that the asset displays low to zero correlation with other assets, especially those linked to financial markets. It has been demonstrated over a long period of time that adding timber to a portfolio of investments has the effect of improving overall risk-adjusted returns. This low correlation reflects the fact that the primary driver of returns-biological growth-is unaffected by economic cycles.

Institutional Investor in Timber

In 2007, Jeremy Grantham, Chairman of Grantham Mayo and Van Otterloo, a Boston-based firm that oversees $60bn in assets, predicted the impending financial crisis, one of very few Investment Managers to do so.

At a conference in June 2007 Mr. Grantham announced that equities were overpriced to such an extent that the market was as risky as he has ever seen it. “The next few calendar years,” he warned, “look like a black hole as overpriced markets, dangerous leverage and a gigantic hedge-fund business collide with the house-building phase of the US presidential cycle, plus the contraction phase of a long interest cycle.” His prediction? He said he could see the Standard & Poor’s index falling 38% over the next two years.

He went on to say that Investors should allocate capital to timber investments as a stable and predictable asset with a low risk profile where returns are generated outside of any market. It is the only asset class in existence that has gone up in three out of the four major market collapses of the 20th century. It should be noted that Jeremy Grantham holds 20% of his personal investment portfolio in timber assets.

Institutional investors have recognised the benefits of timber investments for some time, Pension funds such as Calpers, led the way in the 1980s, however it was the big university endowment funds such as Harvard and Yale that saw the true potential and invested heavily in a move to diversify their portfolios globally. In 2009 the Harvard Endowment Fund invested $500m in forestry and carbon credits in New Zealand.

PKA, the DKK 114bn (€15.4 bn) Danish collective pension scheme for employees in the public social and health sectors, raised its forestry investments to about €335m by the end of 2007, raising its commitment to timber from 1.5 to 2% of total assets.

ABP, the €211bn Dutch pension fund made its first timber investment in 2007 with a $60m (€40m) allocation to the Global Solidarity Forest Fund (GSFF), which will develop three sustainable forestry projects in the Republic of Mozambique, in south-eastern Africa, and Angola.

Both the £1.5bn (€2.1bn) UK Environment Agency pension fund, the £31bn Universities superannuation Scheme and the £3.6bn London Pension Fund Authority are reviewing whether to inject money into forestry investments.

European Investment Bank (EIB), the € 26.3bn Ilmarinen Mutual Pension Insurance Company and seven medium-sized Finnish pension funds have all invested in timber via the Dasos Timberland Fund.

Massachusetts Pension Reserves Investment Management Board (Mass PRIM) decided to make a $500 million timber investment just three years after selling a $700 million section of its timber portfolio.

More recently there has been a spate of new timber investment by major asset managers, not least the $1 billion takeover of Canadian timber business TimberWest by two large asset management firms acting on behalf of institutional pension funds.

At the time of writing this report in December 2010, there looms the prospect of a second round of quantitative easing (QE2) by both the US Federal reserve and possibly the Bank of England too.

QE2 should help to shore up the US housing market. Construction accounts for roughly 70% of the total value of timber resources and as the US property market recovers, inflation will rise as houses increase in price once more.

One such asset is timber which has a proven history as an excellent hedge against rising prices.

The US housing market (construction accounts for roughly 70% of the total value of timber resources and QE2 should help to sure up the US housing market. As the US property market recovers, inflation will rise. As house increase in price once more.

Timber as an asset class presents unique characteristics. The performance of forestry assets is driven primarily by the natural growth rate of trees independently from the macro economy. As a tree matures its size and usefulness increases and subsequently so does the price. In a difficult economic climate timber companies have no need to discount their crops because if simply left to grow the value of the asset only increases.

This makes timber much less volatile in the long run and more resilient in difficult times compared to most other commodities as the investment is backed by the underlying real asset value of timber. Timber is recognised as an inflation hedge as trees grow in size, and therefore value each year. If inflation were 3% and your trees grow in size (value) by 5%, you have grown your wealth in real terms ahead of inflation.

As the rate of inflation increases, so to do timber prices, as well as the volume of timber you have to sell. This creates a double-buffer for investors and makes timber investment an ideal balancing tool to diversify portfolios.

There are a number of different opportunities for retails investors to participate in timber investment in various forms. In this section we will focus on direct investment within commercial timber plantations, although the reader should be aware that there are other, market-linked opportunities such as forestry funds and listed timber companies.

The basic premise of all of the investment offerings from various companies that we have researched remains relatively static, in that investors are usually invited to purchase either a lease on a plot of land within a commercial timber plantation, therefore owning cropping rights to any timber produced within their plot or woodlot. An alternative to this is where investors are offered direct ownership of a fixed number of trees.

The cost for plots varies from project to project between £5,000 (GBP) to £22,500 (GBP) depending on the size, location and species of timber being grown.

Sometimes, annual fees are required from the investor to service the costs of on-site management, and of course the occasional thinning that is always required within a commercial plantation.

With other projects, sufficient management fees for the period of time up to the first harvest are paid up-front by the vendor and held in escrow, fees for future harvests are deducted from the revenue of each preceding harvest, therefore creating an investment where no further cash input is required from the investor.

With some projects the land is leased by the forestry company and investors enjoy a sub-lease, with others the land is owned outright by the forestry business and investors have a direct lease and the land held in trust in favour of investors until their lease expires, this mitigates the risk of the forestry business ceasing to trade in the future and the investor left with a sub-lease with a business that no longer exists.

Emerging Technology Is Changing How You Can Do Business

I love technology, and we’re fortunate to be living at a time when most of us are experiencing the great evolution of technology. For instance, we have cars that are out on our streets driving themselves. We have incredible advances in medicine and have eradicated diseases. And, as the U.S. shifts from government to public and private partnerships, I’m sure that we’re going to see incredible achievements in the space industry as humanity seeks to create a society that will thrive beyond the boundaries of Earth. The success of the reusable rocket by SpaceXin 2017 is a step in the right direction. However, technology can also be straightforward and affect our daily lives and businesses.

Zoom Room

In my company, one of the technologies that have fundamentally shifted how my team, client and our vendors relate to each other and work is Zoom. Zoom is one of the top video and web conferencing platforms on the market.

I love the technology because my team is spread out across the U.S. and even in Europe. Every single week we’re getting online with prescheduled or unscheduled Zoom meetings in our conference room, which we now call the Zoom room. People can join us at a moment’s notice from anywhere they have internet access using their desktops, tablets or smartphones.

OWL Labs

After using Zoom for a couple of months, we went one further for one-touch conferencing, which is supported by OWL Lab 360 degree camera and microphone. What does that mean? It means that attending one of our video conferences is a much more dynamic experience.

Instead of seeing a flat look into the conference room, which is not only dull but can have people outside of the Zoom room miss subtle body language or even missed discussion points, the OWL Lab camera and microphone follows the speaker. That means that the moment someone begins to speak, the camera and microphone immediately rotate and focus on that individual, making the discussion much more animated and dynamic. If you want to see what we’re doing and how it works, take a look at the OWL Labs experience.

What People Are Saying

Our team loves the technology, and everyone is pleased to get on a conference call because it is the next best thing to having people actually in the same room. In addition, the technology is regularly used for screen shares, and productivity has increased exponentially.

However, as an entrepreneur and businessman, one of the best compliments we’ve received come from our clients and partners. Quite simply, they’ve been wowed, and we’re always getting new comments about how “forward thinking,” “ingenious” and “practical” we are in our use of technology.

I’m a big believer that you have to embrace all of the resources at your disposal and in the modern era, that includes technology. One of the best things you can do for yourself and your business is to embrace technology, even something as simple as the platforms you use for video conferencing.

Speech Recognition Technology and Medical Transcription Services

:An Overview:

Speech is now not confined solely to the human race, or even living beings on a broader perspective. It has extended to the World of Technology; specifically Computers and Software. Speech Recognition Technology [SRT], little known until recent times, is an area that has been constantly growing over the years. SRT has opened new windows of panoramic dimensions to human kind.

Speech Recognition Technology – Defined:

A technology wherein a machine or program identifies spoken words and phrases and converts them to readable format. In more simpler terms, voice/speech is converted to text format.

The Beginning:

Speech Recognition Technology, as we know it today, did not just bloom overnight. It is the work of over 30 years. The very first implementation of Speech Recognition was designed and displayed by IBM during the 1964 New York World’s Fair. It was called the IBM Shoebox; and typically sized too. This device only recognized spoken digits from 0 to 9. Over the years, Software companies have delved upon the benefits and the profits that can be reaped from developing SRT, and they have come a long way since. Now many noted companies have come up with different versions of this technology, offering various features.
While Speech Recognition has progressed vastly, the downside is that it has been a long and laborious road this far. It calls for training and updating of Software to work flawlessly; and it is currently far from perfect. There is so much more to go before it can be said that SRT is without any imperfections.

Speech Recognition Technology – In Health Care and Medical Transcription:

An area where this technology has caught on to a great extent is the Medical Transcription Industry. Speech Recognition is of two types: Front End and Back End.

  • Front End: As the doctor dictates into the machine, the words are automatically generated and displayed. This text can be edited directly, the report finalized, and signed by the doctor immediately. But there are few Front end users due to time constraints faced by doctors and practitioners.
  • Back End: Also called Delayed or Deferred Speech Recognition. The written draft is generated by the Software and sent to the Medical Transcriptionists for editing and proof reading. This is more convenient for doctors as it requires less time spent reading the proofs.
  • EMR: Speech Recognition can be applied in Electronic Medical Record systems of hospitals, clinics, etc. Searches, queries, and even filling up of forms can be made simpler and faster with voice rather than using the keyboard.

Advantages:

Speech Recognition Technology can be advantageous to both Medical Transcriptionists as well as doctors in a number of ways. A few advantages are:

  • There is not much typing involved as the first draft is generated by the software
  • Requires only editing of the machine-generated text
  • Faster turnaround of reports
  • Saves time in completion of reports
  • Stat reports can be completed and returned quicker than by using the conventional method of typing

Drawbacks:

Being a technology that has not entirely been perfected, SRT has a few drawbacks.

  • It cannot fully distinguish words spoken with heavy accents
  • Homophones (words which sound the same but may have different spellings and meanings) can cause spelling errors
  • Incorrect grammar is bound to occur in the generated texts
  • Punctuation rules are not likely to be followed at all times
  • Multiple speakers cannot be clearly differentiated
  • Background noise and disturbances may cause misspellings

Question of the Hour:

A niggling thought in the minds of many Medical Transcriptionists is whether Speech Recognition Technology poses a threat to their livelihood. This is a baseless fear, keeping in mind the drawbacks of SRT. No report will be complete until a human eye has scanned it. Machine-generated documents can only be 60%-70% error-free. It demands well-trained and professional Medical Transcriptionists to read through and edit the reports. A mistake, even a tiny one, can result in unpleasant situations for many. And one cannot rely on mere machines to do the job 100% without errors. In conclusion, Speech Recognition Technology is certainly one of a kind. While it has not yet reached the peak of perfection, it is still quite an aid to the healthcare industry, specifically Medical Transcription. And there is certainly no danger of software or machines or even technology entirely taking over man’s work; technology is just merely helping out!