Money Does Grow on Trees

 | Oct 05, 2011 | 10:00 AM EDT  | Comments
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In world where the latest iPhone release dominates the headlines, boring old trees have become a surprisingly hot asset class.

Value investing legend Jeremy Grantham believes that timberland is the best long-term investment there is. According to Grantham, timber has risen steadily in price for 200 years and has returned an average of 6.5% a year over the past century.

Over the past few decades, top university endowments, pension funds and even newfangled "Timber Investment Management Organizations" have plowed $40 billion into timberland. The Harvard endowment has about a 9% weighting in timber, including $500 million in New Zealand forestry.

Take a long-term view as Grantham and Harvard do, and it is easy to see why timber is so sexy. After all, trees grow through bear markets. Trees grow through bull markets. Trees grew through the financial meltdown of 2008. Trees remain blissfully unaware of the "Great Recession," the jobs picture and political gridlock in Washington. And unlike other agricultural commodities, where the crop is ripe just once and then you have to harvest it, 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."

The price of wood has also grown at a remarkably consistent rate throughout the years, rising by an average of 6.5% every year for the past century, including two World Wars, the rise and fall of the Soviet Union, and 9/11. Timber has been the only asset class to rise during three out of the four market collapses of the 20th century. Grantham calculates that stumpage prices -- the value of all the wood on the stump -- have beaten inflation by 3 percentage points a year over the past century.

Recent historical returns on timber have been even more impressive. From 1971 to 2010, an investor in timber saw average annual returns of over 14%. That's enough to turn $10,000 into more than $1.5 million. During one of the worst-ever bear markets in stocks between the late 1960s and about 1980, timber never had a losing year.

Yes, demand for wood in North America collapsed after the housing bust of 2008. But despite the slowdown in the U.S. housing market, global wood consumption was up 20% in the first quarter of 2011, compared to the same period last year.

There has been a surge of demand from across the globe, primarily from Asia, Japan, South Korea and China. Last year, Japan imported wood raw material and processed wood products worth more than $10 billion. This already-huge demand is set to go through the roof, as Japan continues its post-earthquake rebuilding efforts.

Higher demand translates into higher prices. Global timber prices rose an average of 20% in the first quarter of 2011 even as log exports to Asia from the West Coast of the United States reached 14-year highs.

With U.S. stocks making up just under 30% of the total holdings, the Guggenheim Timber ETF (CUT) has a more international focus than some rival timber ETFs. Beyond the United States, Japan makes up about 18% of the ETF, while there are large allocations to Canada (9.5%), Finland (9.2%) and Sweden (8.5%).

As a listed ETF, CUT is hardly immune from Mr. Market's mood swings. But if you believe in the asset class as much as Grantham and Harvard do, it's a lot easier than going out and buying some uncultivated timberland -- and then spending a lot of time and money cultivating it.

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