Last night CAIA Canada tipped its hat to another curriculum component with its 2010 Timber Talk in the aptly oak-paneled dining room of the Cambridge Club in downtown Toronto. Speaking was Tim Cayen, Director of Business Development with Hancock Timber Resource Group and Eva Greger, Managing Director with GMO Renewable Resources LLC.

Both participants gave very cogent and convincing arguments for inclusion of timber in institutional portfolios. For one, it provides cashflow (either from harvesting—which generally ranges from 3-5% yield—and sale of the land or rights).

Timber/timberland also displays low correlation to financial assets such as bond and stock indices. Trees continue to grow no matter what the market (so long as they have sun and rain) and price spikes, while exciting to day-traders, have a muted effect on long-life assets such as timber. As well, assuming a stated dividend is not required, timber investors can simply let a stand grow during depressed markets—which mitigates forced sales and could lead to even more value as the trees might have another, more profitable, use.

Finally, timber is a good inflation hedge as its output (e.g., lumber) is traded daily and virtually all sale contracts are based on spot price. Inflation, especially in the last few decades, has exhibited fat tails (especially in positive observations) and a more noted positive skew—and current monetary policies might only exacerbate this situation. Given that investors are short inflation on their liabilities, timber seems a natural asset class to investigate and invest in.

Timber demand generally is expected to increase, with muted or negative growth in developed countries (such as Japan) out-weighed by brisk demand in emerging markets including China and India and rebounds in newly-emerged economies such as South Korea (which now has developed status according to FTSE).

Indeed, this USD 120 billion investible-universe industry kept the audience in rapt attention and generated many in-depth questions—proof positive, at least, of timber’s growing interest for institutional investors.

In related news, don’t forget to register for our semi-annual Congratulations and Commiserations night on Wednesday, June 9th at the Cambridge Club from 5:15PM-7:15PM. We’ll be featuring The Macallan whisky tasting experience, for those who enjoy in the oaken-cask-aged nectar. (Other refreshments will be on hand, should anyone prefer another beverage.)

James Burron
CAIA Canada Chapter Executive