In the press... FT - The Investment Advisor. February 2011
FT - The Financial Advisor. February 2011
Matthew Pickard, Managing Director of Ethical Forestry, highlights what to look out for when investing in forestry
Many investors may not be familiar with investing in timber as an alternative asset class. Can you explain exactly how it works?
Matthew Pickard: The biggest misconception is investing in timber is a new concept. In fact, a lot of the British Empire was founded on timber investments and hedge funds have been investing in timber for years. The problem has always been for the smaller-cap UK investor. Unless you had a few million pounds to invest, you just haven’t been able to. My aim was to make it available to the small-cap UK investor, whether that is through a straight investment or through a pension fund.
What starts off sounding like a complex process is actually very simple. If you invest in Ethical Forestry, we take your funds and plant trees on our own plantations in Costa Rica. You have direct ownership of those trees – they are your direct asset. You could go there and harvest them if you wanted to. Those trees are managed and maintained by us depending on the species you have chosen, for up to 12 years.
The trees are initially planted close together to encourage them to grow tall and straight. After four years some of those trees will need to be harvested to make room for the remainder to grow bigger; a natural selection process. Any time a tree is harvested, it is milled into planks and sold on the open market. The investor gets the proceeds from the sale of that timber. Ethical Forestry over see this whole process for investors from seed to saleable timber. It’s basically a commodities trade, but the nice thing is you ultimately have a direct asset that you have control over.
What is the risk-return profile of this type of investment? What time scale should investors look to invest over?
Matthew Pickard: If you are looking for a three year, quick turnaround investment, timber is not right for you. It is not suitable for everybody. If you’re looking for a longer term investment, it is definitely worth looking at. It is a single asset class, so for that reason alone the FSA would deem it to be high risk. If you look at it as part of a balanced portfolio though, you really have to look at exactly what those risks are.
While the primary risks are natural, I would urge anyone looking to invest in timber to do their due diligence. You need to check that any company you invest in owns the plantation and has a care management team in place as there are a lot of people out there who are retailers for someone else. It is also wise to choose to grow timber in a country that is a stable and has a democratic government, this is why we chose Costa Rica. Costa Rica has strong trade links with the USA. It is reassuring for investors to know that several high tech corporations such as Intel, Proctor & Gamble and GSK are established there.
Because it is a long term investment, investors need to ensure the security of that investment not only now, but for the next 10-12 years. You need to ensure your plantation is well-managed, has permanent forestry staff and has no secured loans. In that respect we are unique as we own our plantations and have our own staff monitoring them twenty four hours a day, seven days a week.
In terms of returns, we work on the principle of a minimum investment of £18k securing returns of close to £100k.
We create bespoke investments for clients from £18,000 to over £1 million depending on their investment criteria. Comparing it with something like gold, where you buy a bar of gold and in 10 years time it is likely to have gone up in value, but you still own one bar of gold. With timber, not only is the price of the timber going up in value, but you are getting more of it, so you have a double growth profile.
How does the “ethical” in the title of the company come through in the proposition itself?
Matthew Pickard: The land we buy that we plant trees on was once rainforest at some time in the past. It was slashed and burned, perhaps for cattle grazing. The Costa Rican government is very strict on natural forest, so when you buy a plantation you may have 40-50 per cent of it that is rainforest and you can’t touch that.
What we do with the remainder is plant it with trees for investors. After all those trees have been harvested on the behalf of investors, we then replant that land and put it into an ethical trust. That basically means that land can never be commercially felled. What we are not doing is just recycling the land. We are ultimately helping establish some of the wildlife corridors between different national parks. The final aim is to end up with rainforest where there was none to start with.
The land we are buying from locals has usually been in their families for generations. As foreign investors, we want to be involved in the local communities. As part of our land acquisition ethos, we aim to work with the families by offering them jobs, support the local communities and have taken up projects helping local schools. This is not just for now, it is for the long term.
What is the outlook for this type of investment?
Matthew Pickard: If you look at the growing demand for timber from countries like China and India, it is absolutely incredible. The Chinese government predicts that total demand will reach 350 million cubic metres by 2015. Domestic output is forecast to be just 200 million cubic meters, so there is already a shortage of 150 million cubic meters by 2015. And that’s just the Chinese side.
The World Wildlife Fund predicts that India’s demand will rise from 58 million cubic meters in 2005 to 153 million cubic meters in 2020. Domestic supply is projected to increase from 29 million cubic meters to 60 million cubic meters, another huge shortfall. And this in on top of the usual global demand for timber. The supply gap is just going to get bigger and bigger.
