01 February 2016
The prospects for a burgeoning housing market recovery in the US mean that now is "an extremely attractive moment" to invest in forestry, according to one fund manager.
The Pictet Timber fund has the potential to benefit from an upswing in the valuation of timberland, particularly in the US, where supply constraints and growing demand from US housebuilders are predicted, according to Christoph Butz, co-manager of the fund.
Pictet Timber claims to be the only fund actively investing in listed timberland equities worldwide. The fund had $469 million of assets, as of the end of 2015, and a further $700 million was invested in segregated accounts under the same strategy. The fund invests across the entire forestry value chain, but the biggest single driver to which it is exposed is US housebuilders, said Butz.
He argued that more than 90% of homes in the US use wood, but new home construction "has fallen off a cliff after the financial crisis".
Only about a million homes a year are currently being built in the US, compared with 1.6 million on average , he said. Meanwhile, a strong US job market suggests that more homes will be built.
"We have underbuilt, meaning there's enormous catch-up potential," he said. With almost 50% of the fund geared up to this driver, "this is the strongest single factor and the biggest single bet we are placing".
The North American timberland companies in which the fund is invested, such as Weyerhaeuser, Plum Creek Timber, and Rayonier, also have the potential to profit from the growing export trade to China, he argued.
And a pine beetle epidemic in British Columbia will dent supply to the North American market. This means that companies growing trees in the south of the US, to which the fund has exposure, will "profit disproportionately" from the increasing demand.
"This could be time for very attractive high prices," said Butz. "It's an extremely attractive moment [to invest].
"The recovery in the US may be put off for a year or two, but we have to get back to [a strong level of housebuilding] because you can't have people living with their parents forever. When things normalise, these companies are well positioned to benefit."
Butz added that forestry holdings are currently traded "at a huge discount to private equity valuations", as much as 20% to 40% below the "real inherent value of the forest".
"At some point in time, this unsustainable discount between the inherent value of the forest and the value that's ascribed has to close," he added. "The current discounts are clearly attractive and compelling."
Launched in 2008, Pictet Timber invests in a range of companies, including timberland owners, sawmills, housebuilders, and pulp and paper manufacturers. However, its exposure to paper producers is relatively small because which it considers this "a low value use for wood".
Fundamentally, the fund considers that forestry will have a key role to play in the transition to a low-carbon economy, as a sustainable source of energy, construction products and as a carbon sink.
"Forests represent a resource that will be ever scarcer," said Butz.
However, the performance of the fund was disappointing last year. It was down 6.2% in 2015, compared with a fall of 0.9% for its benchmark, the MSCI World.
Last year's performance was blamed on the timberland and wood products sectors, partly as a result of weaker demand from China.
However, since inception, the fund has outperformed its benchmark, with a 10.6% return, compared with 10.3%, and Butz is bullish: "Over the longer run, we think that these strong drivers will play out at some point over time. We think that, as the recovery continues to unfold, it will be reflected in higher prices for logs and lumber."